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Living Trust

Living Trusts are extremely useful and flexible estate and financial planning tools. They are a mechanism to efficiently and effectively transfer property to your family, friends, and/or charities upon your death. In many regards, a Living Trust performs many of the same functions as a Last Will and Testament. However, the important difference being that property left through a Last Will and Testament must be administered through the onerous court process known as probate. Through the court-administered probate process, a deceased person’s will is deposited with the court, an opportunity is given to challenge the will and/or the nomination of the executor (or, as is sometimes referred to, the “personal representative”), debts and taxes are paid, and then the beneficiaries receive their inheritance.

In contrast, Living Trusts avoid probate. Because a trust is recognized as a separate legal entity, distributions can be made by a Trustee to named beneficiaries with minimal involvement from the courts. The courts maintain little or no control over the Trust's assets, and do not tie up the assets in a lengthy (and often costly) probate process.

The Parties Involved

The Living Trust document itself names three different parties. The individual (or couple) that establishes the Trust is named the Grantor or Trustor. The Trustee is the person named by the Trust as the controller of the Trust's assets (and in many cases, the Trustees are the same people as the Grantors). And last, the Beneficiaries are the heirs that will benefit from the Trust once the Grantor's have passed away. 

Do You Need A Living Trust?

Before going any further, deciding whether you need a Living Trust involves asking yourself the following questions...

1. Do you want to avoid Probate? 
2. Do you wish to avoid conservatorship? 
3. Do you wish to minimize estate taxes? 
4. Do you need to provide protection for a handicapped child or disabled relative? 
5. Do you plan to leave an inheritance to children from a prior marriage?

If you answered "yes" to any of these questions, a Living Trust may be a wise decision for you.

Funding Your Living Trust

Once established, almost anything can be placed in a trust: bank accounts, stocks, bonds, real estate, life insurance proceeds, and personal property. In "funding" the trust, you simply change the name or title on your assets to the name of your Trust. Many people worry about losing control of assets; however, you as the Trustee effectively retain control.

The Trust Is There For You

Because the Trust is essentially controlled by one individual (the Trustee), that person can carry out your wishes when you're not able to. For instance, if you have children from a previous marriage and wish to leave them an inheritance, specific instructions to the Trustee will ensure that they receive what you had requested.

If you're institutionalized or unable to care for yourself anymore, the Trust can still function and make distributions as needed. The Trustee has a fiduciary responsibility to see that your requests are fulfilled exactly. He or she can even provide care and protection for disabled relatives or handicapped children in accordance with your wishes.

Does a Trust Protect My Assets From Medicaid?

Consider this hypothetical: Five years ago, Mary, a widow, prepares a revocable living trust, placing all of her assets into this trust. Mary is the sole beneficiary during her own lifetime. She subsequently develops alzheimers and other sever disabilities that render her legally incapacitated and requiring skilled nursing facility care. Her daughter, Susan, seeks to apply for Medicaid benefits for Mary in order to pay for the high costs of the skilled nursing facility. On the application Susan leaves off the assets of the trust, believing that the trust protects those assets from being attached by Medicaid. Is she correct?

No. This is a common mistake and assumption we see. A Revocable Living Trust, by itself, does nothing to protect assets from Medicaid claims or liens. In fact, the trust will be considered an available resource and must be spent down before Mary will be eligible for Medicaid benefits. For example, if the trust contained $60,000 in assets, this amount must be spent down to less than $2,000 (assuming no other assets) before Medicaid will step in.

Mary should have contacted a qualified Medicaid Attorney in her County to plan her estate. Susan should now investigate what other options are available to preserve and protect the trust assets to the greatest extent possible.