Uses of Trusts

There are various reasons for setting up a trust. Some of these reasons are:

  • To avoid probate.
  • To avoid death taxes.
  • To protect property from creditors.
  • To protect property from Medicaid.
  • To specify when and under what conditions a beneficiary gets to use the trust property.

Types of Trusts

Trusts fall into two basic categories: testamentary and inter vivos.

A testamentary trust is created by your Will, and it does not come into existence until you die.

In contrast, an inter vivos trust is established during your lifetime. You create it now and it exists during your life.

Testamentary Trust

A testamentary trust is a trust created by a Will. Such a trust has no power or effect until the Will of the donor is probated. Although a testamentary trust will not avoid the need for probate and will become a public document as it is part of the Will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used to provide for the care of a disabled child.

Inter Vivos Revocable Trusts

Revocable trusts are often called “living” trusts. With a revocable living trust, the donor maintains complete control over the trust and may amend, revoke, or terminate the trust at any time. This means that the donor can take back the funds put into the trust or change the trust’s terms. Thus, the donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.

Revocable trusts are generally used for the following purposes:

Asset Management. They permit the named trustee to administer and invest the trust property for the benefit of one or more beneficiaries.

Probate Avoidance. At the death of the donor, the trust property passes to whomever is named in the trust. It does not come under the jurisdiction of the probate laws and its distribution need not be held up by the probate process. However, the property of a revocable trust will always be included in the donor’s estate for tax purposes.

Inter Vivos Irrevocable Trusts

An irrevocable trust cannot be changed or amended by the donor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. For instance, the donor may set up a trust under which he or she will receive income earned on the trust property, but bars access to the trust principal. This type of irrevocable trust is a popular tool for Medicaid asset protection planning.

Special or Supplemental Needs Trusts

The purpose of a special or supplemental needs trust is to enable the donor to provide for the continuing care of a disabled spouse, child, relative, or friend. The beneficiary of a well-drafted special or supplemental needs trust will have access to the trust assets for purposes other than needs provided for by public benefits programs. In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income or Medicaid. A special or supplemental needs trust can be created by the donor during life or as part of a Will.

Medicaid Asset Protection Trust

For our clients who are in good enough health that they don’t expect to need nursing home care in the next five years, it is very wise to consider an asset protection trust. The purpose of such a trust is to protect the client’s home and, possibly, other real estate and/or some financial assets from Medicaid, including Medicaid estate recovery. Putting the home in a trust does not adversely impact the client at all because the client retains the right to live there for as long as they choose, as well as all the tax benefits of home ownership.

It is best to establish and fund your trust sooner rather than later because Medicaid has a five year “look back” period. Five years and one day after the trust is established, the assets in it are safe, and the client can get Medicaid benefits without spending down the assets in the trust. If the client unexpectedly needs nursing home care before the five years have passed, the trust can be modified, provided, however, that the client can still manage their own affairs (which is usually not the case if they are in a nursing home) or the client’s power of attorney document includes the necessary trust powers.

Call (610) 446-9626 or contact us here to schedule a consultation.

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Levandowski & Darpino

Levandowski & Darpino, LLC has been dedicated to helping people in Southeastern Pennsylvania with their Elder Law needs for over 20 years. You will receive nothing but knowledgeable, compassionate legal guidance and representation from Henry and Maria.

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