Blog Author: Stephen C. Hartnett, J.D., LL.M. (Tax), Director of Education,
American Academy of Estate Planning Attorneys, Inc.
This is another in a series of blogs on the basics of estate planning.
Trusts are incredibly useful tools. But, like other useful tools, they do not fit every circumstance. They must be used appropriately. For example, a hammer is an exceptional tool to use when looking to drive a nail into a wall. But, if you hit the nail with a glancing blow, the nail will bend and you’ll end up with a difficult situation. Here are a couple common errors with the use of trusts, and how they could be avoided.
The first mistake with the use of trusts is not using the right type of trust. There are many different types of trusts. By far the most common type of trust is a Revocable Living Trust, often called an “RLT.” An RLT is a great solution for most situations. It can provide for management of your assets during incapacity, avoids probate at death, etc. But, it may not be the right solution for every situation. For example, if someone is looking to qualify for Medi-Cal/Medi-Cal in the future, the assets in the RLT will be considered available resources, just as if those assets were owned outright. A special irrevocable trust could be used if one wished to qualify for Medi-Cal. Such a Medi-Cal trust could limit the transferor’s rights in the assets to income only, or the transferor might not be a beneficiary of the Medi-Cal trust at all. While a Medi-Cal trust is not the right solution for everyone, it can remove the assets from consideration for Medi-Cal and allow the transferor to qualify for Medi-Cal, if the transfer is made far enough in advance of the Medi-Cal application. Consult with a qualified elder law attorney to determine what type of trust is appropriate. Each type of trust has its strength. The key is choosing the right type of trust for the situation.
The second mistake with the use of trusts is not funding the trust properly. An RLT is a great tool, but only if it is funded. If the RLT is unfunded, it may just be a worthless piece of paper. If there is a Pour-Over Will, which transfers the assets to the RLT upon death, the assets would be subject to probate and only then would be distributed according to the terms of the RLT. But, if there is no Will, the unfunded assets would pass pursuant to the one-size-fits-all system enacted by the legislature of the state of residence, the system known as “intestacy.” An RLT should be funded appropriately to maximize its usefulness during incapacity (to avoid needing a conservatorship) and death (to avoid a probate).
An upcoming blog will look at other mistakes in the planning process and how to avoid them.
The Litherland Law Firm is a member of the American Academy of Estate Planning Attorneys. If you would like to learn more about the importance of estate planning, we invite you to attend one of our free estate planning seminars.
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