24th Jun 2016
There tends to be quite a bit of confusion regarding Trusts, and what they actually do. There are many benefits to a Revocable Living Trust, but here are four things that it does not do.
- It does not control medical decisions. A living trust is not the same as a living will. The names are similar and they are both legal documents, however they are very different tools in estate planning. A living trust lets you keep control of your assets. A living will lets you keep some control over medical decisions, but it is very limited—it only lets others know how you feel about life support in case of terminal illness. A better document is a health care power of attorney (also called an advance directive or health care proxy). This lets you give legal authority to another person to make all health care decisions for you if you are unable to do so.
- It does not protect your assets from creditors while you are living. The reason it does not protect your assets from creditors while you are living is because a living trust is revocable (meaning you can change or cancel it), you still have control of your assets and have access to them at all times. Even the IRS considers a revocable living trust to be a “non-event” because you can put assets in and take them out at any time. If you still have access to your assets, so do your creditors. However, after you die, assets that remain in your trust for your beneficiaries are protected from their creditors, including divorce proceedings. If you are concerned about asset protection, talk to your attorney as soon as possible about trusts specific to asset protection and all of your other options.
- It does not help you qualify for Medicaid. Medicaid is a federally funded health care program that was created primarily to provide health care services for the poor. It also pays for an unlimited number of days of nursing home care, which makes it appealing to some people who are not poor. To qualify for Medicaid, you can only have a limited amount of assets and receive a certain amount of income. Some people think putting their assets into a revocable living trust will help them qualify for Medicaid because the assets are no longer titled in their individual names. This is not the case for Medicaid as mentioned previously. Because a living trust is revocable, you still have control of your assets and have access to them. As a result, assets in your living trust are “available” and counted if you apply for Medicaid—so transferring your assets to a living trust will not help you qualify for Medicaid. If you are interested in qualifying for Medicaid, talk to an attorney about a Medicaid trust. It is important to note that there is a 5 year look back period for Medicaid, so you have to plan early.
- It has no effect on your income taxes. You must still report any income you earn each year and pay any taxes due on that income. As long as you are living, you continue to use your own social security number and file the same income tax returns. (A separate tax identification number and separate tax return for your trust are required only after you die.) Some irrevocable trusts may be able to save income taxes. If you are interested in this, talk to your estate planning attorney.
A revocable living trust is an extremely valuable tool, but there are numerous options available for your estate planning needs. Contact us to set up a free consultation.