Myths & Realities of Living Trusts

There are over 100 seminars each year in Connecticut on the topic of revocable or “living” trusts. This has resulted in a lot of confusion over exactly what a revocable trust can do and what a revocable trust can not do. It is important that any person considering creating a revocable trust know the truth and misconceptions about them.

Myth: A revocable trust can shelter my assets if I need Medicaid benefits.

Many people think that if they place their assets in a trust, they can protect those assets and create eligibility for Medicaid benefits because the assets are owned by the trust and not the individual. This is not true in the case of revocable trusts because the person creating the trust has the ability to revoke or dissolve the trust and have the property returned to them at any time. Assets owned by a trust that you can revoke or dissolve, or have other certain powers over, will not be protected from long term care expenses.

Truth: A revocable trust can cost less to administer than most other alternatives.

A revocable trust is commonly used to take certain administrative procedures that ordinarily are carried out in the court system and transfer responsibility for those procedures to a Trustee who is either a family member or a professional. Some of these procedures are distribution of property upon death, management of property upon disability, and management of property for beneficiaries under age 18. When these steps are supervised by the courts, there are accompanying costs. When these steps can be handled by a Trustee, there can be significant savings in many cases.

Myth: Only wealthy families can benefit by using a revocable trust.

An estate of $1 million or more is not required to benefit from the streamlined administration of a revocable trust. It is not uncommon for attorney fees alone to be in range of 3% of the estate in probate administration cases. With this in mind, people with an estate of $200,000 or more should compare the potential administration costs of using a revocable trust and not using a revocable trust before making a decision.

Truth: If I have real estate in two different states, I should consider a revocable trust.

Real estate in two different states opens a person up to administration in two different states which increases the administration costs. In order to avoid two administrations while at the same time retaining control over your real estate, a revocable trust is a common recommendation.

Myth: A revocable trust can avoid all administration procedures and costs.

A revocable trust moves the administration process out from the supervision of the probate court, it does not eliminate the administration process. The Trustee has the obligation to inventory or gather the assets, file and pay any required inheritance or estate taxes, account for financial transactions during the administration period, and then distribute the assets according to the terms of the trust instrument.

Truth: I can change the terms of the trust if I choose to.

A revocable trust is not etched in stone. It is a flexible document that the creator can change at any time with one exception, the creator cannot increase the duties of the acting Trustee without the Trustee’s consent. In the majority of cases, the creator of the trust is also the Trustee so this is not a significant concern.

Myth: Everyone should have a revocable trust.

A revocable trust is not a universal estate planning solution. It does provide certain advantages, but it can have disadvantages if used in the wrong situation. You should be confident you understand the advantages and disadvantages of using a revocable trust in your personal situation before making a decision.

Truth: A revocable trust offers more privacy than a Will.

Probate administration is a very open process because it is a judicial process. If you are uncomfortable with the public nature of probate administration, then you can secure more privacy by using a revocable trust rather than a Will.


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Estate Planning - Beyond the Documents

When most people think of estate planning, they think of paper. All too often we get caught up in the "product" and lose sight of some other important issues. One of the most common oversights is a careful review and coordination of the estate planning documents with the actual financial accounts and assets.

An attorney can prepare the greatest estate plan in the world, but if the client's assets are not properly positioned to work with the estate plan - disaster can strike. Let's look at one example, annuities. Annuities have three components that we're concerned with: 1) an owner, 2) a beneficiary, and 3) an annuitant.

In some cases, a client comes to me where for any number of reasons they may not be the owner of an annuity of which they are the annuitant. Some people do it for asset protection, some people do it for tax purposes - it happens. Now let's imagine we put in place an estate plan that uses a trust to funnel and distribute all of the client's assets among various beneficiaries. If I blindly instructed the client to make the trust the beneficiary of his annuity we have a big problem, a situation commonly referred to as - TRIANGULATION.

Triangulation occurs in an annuity when the owner, beneficiary, and annuitant are three different parties. So what does it mean? The typical effect of a triangulation has a huge impact on who receives the annuity upon the client's death. Normally, an annuity is paid to the designated beneficiary as everyone expects. With triangulation, the annuity is usually not paid out to the designated beneficiary. A clause in the annuity contract will dictate who receives the annuity, in most cases, it ends up reverting back to the owner. Obviously, when the client came to me this was not his goal.

This is just one example of the importance of approaching your estate plan beyond the documents.

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Think Twice Before Giving Away Your House

Transferring ownership of the family house to children is a popular strategy throughout Connecticut for some families looking to qualify for Medicaid nursing home benefits. In some cases, when part of a well thought-out plan designed specifically for the family involved, this strategy has worked. In other cases, when this decision is hastily made without proper advice, the strategy can be disastrous.

Liability. Let's assume you've made your children owner of your home. Part of what you have done is put your residence within the reach of your children's creditors. If they are ever in an accident, get into financial trouble, or get divorced, your house is now in jeopardy.

Taxes. Under the current estate and income tax rules, when your children inherit your residence they will receive a step-up in basis that serves to eliminate the capital gain built into your house. If you gift your house to your children, they will not get the full benefit of this step-up in basis and will almost certainly be subject to capital gains tax on a portion of the sale when they sell the property.

Should you give your house to your children? I don't know enough about you. Should you carefully consider the ramifications of such a significant step? Absolutely.

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How to Choose a Trustee

Say you've decided that you'd like to use one or more trusts to provide management, investment expertise, and perhaps tax savings.

The perfect trustee (if there were such a creature) - would have all of the following characteristics: competence, the ability to act without conflict of interest and in the best interests of the beneficiaries, an understanding of your objectives and knowledge of your beneficiary's needs, knowledge of the subject matter of the trust, experience, availability and willingness to serve, and proximity to your beneficiary. Obviously no trustee will meet all these criteria. A good trustee will satisfy many or most of them.

COMPETENCE. A competent trustee should be able to understand the nature of his or her specific duties, select a course of action to take, recognize the limits of his or her knowledge and capabilities, and have the maturity to secure professional assistance where and when needed.

ABILITY TO ACT IN THE BEST INTERESTS OF THE BENEFICIARIES. To fulfill his or her fiduciary responsibilities, a trustee should make all decisions in the best interests of the beneficiaries. In addition to following the terms of the trust while maintaining impartial and absolute loyalty to the trust beneficiaries, the trustee must have the objectivity and fortitude to make difficult and, perhaps at times, unpopular decisions. For instance, a trustee must assess the beneficiary’s maturity and capability of running a family business, whether it is the type of business in which the beneficiary should invest, and what the effects of saying “no” will have on this beneficiary, and “yes” to the others.

UNDERSTADING OF YOUR GRANTOR'S OBJECTIVES AND KNOWLEDGE OF YOUR BENEFICIARIES' NEEDS AND CIRCUMSTANCES. Before making any important decisions, the trustee must understand your priorities (as to which preference or whose interest should take precedence) and goals as well as the financial needs of the beneficiaries. The trustee must also be aware of any special needs of a beneficiary. For example, a child might be physically or mentally challenged and require special care and treatment. These considerations must be incorporated into the overall financial and trust planning.

KNOWLEDGE OF THE SUBJECT MATTER OF THE TRUST. An individual trustee may be able to manage the few periodic and routine administrative duties if most of the trust assets consist of mutual funds. If the bulk of the trust assets consist of listed securities, the trustee should work with, or have access to a good investment advisor. Alternatively, a bank or trust company with a competent investment department that can handle the trust assets more effectively should be considered as a trustee (or co-trustee). However, if the trust assets mainly consist of a family-owned business or a unique piece of real estate, it would be helpful if the trustee has experience working or dealing with the business or assets (or similar ones of its kind) in question.

EXPERIENCE. The job of a trustee is often difficult, time-consuming and multifaceted. It is wise to select someone who, because of background and experience, is familiar with the duties and responsibilities that he or she will be asked to undertake. Consider choosing professional trustees to act as sole trustees or, often better yet, as co‑trustees. These persons or entities could share the trusteeship with family members or long-time friends who might have a close and caring relationship to the beneficiaries, but who lack the background and experience (and perhaps time and inclination) to perform the important functions required of trustees without assistance.

AVAILABILITY AND WILLINGNESS TO SERVE. Not only are a trustee’s duties difficult and time-consuming, but they can often extend over long periods of time. Obviously, you are imposing a tremendous obligation when you appoint someone as a trustee to handle, supervise, and manage the trust assets for young beneficiary(ies).

PROXIMITY TO BENEFICIARY. Your sister in California might otherwise have been an excellent choice as trustee – except that your grandson (the trust beneficiary) lives in Florida and has ongoing needs that must be attended to on a regular basis. In this case, it might be more practical and beneficial to appoint someone locally, perhaps to serve with your sister as a co‑trustee, so that there is a co-trustee nearby to make sure that the beneficiary’s needs are met on a timely and regular basis.

CONCLUSION

It is exceptionally important to be aware of the characteristics of a good trustee and employ them as criteria in the trustee selection process. A wise choice will significantly enhance the probability that your objectives will be accomplished with the least costs and conflicts.

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9 Questions to Ask BEFORE a Loved One Enters a Nursing Home

1. Is a nursing home necessary or are there alternatives?

I have never once had a client say they were looking forward to going into a nursing home. Yet, often there are alternatives that people simply do not know about. Talk to your physician, social workers, and other professionals to see if there are assisted living, home health care, or other alternatives for you.

2. How do I find the right nursing home?

The best way is to take a systematic approach. If this is not possible, at the very least, shop around (use a Nursing Home Evaluation Form from this office). Personally visit each nursing home you are considering (make unannounced visits) and ask for recommendations.

3. Once I find the right nursing home, how can I get in?

Surviving the admissions process is not always easy. Be up front with the nursing home’s admissions director, be prepared to tell them all about your situation, including your finances.

4. Who will pay for my care…me, Medicare, Medicaid?

Again, it depends upon your personal situation and a knowledge of this difficult area of the law. You also have to be sure to take advantage of the special protections available for your spouse, if he or she will not also be in the nursing home. A good Elder Law attorney can help you through this entire process.

5. Can they make my kids pay for my care?

Not if you handle the admissions process properly. Just be careful not to sign everything that is put in front of you without a thorough understanding of all the documents.

6. Once I get in, how can I get the best care there?

The key here is to have a proper care plan in place. That is a plan developed by the nursing home staff professionals (and you) to determine exactly what kind of care you will get. Putting a proper care plan in place is perhaps the most important step you can take…the care plan is part of your contract. If you feel that you can not be the best advocate for yourself, then it is important to get help from an Elder Law attorney or a geriatric care manager or another health professional.

7. Can I be moved around the facility, from room to room, once I am admitted?

There are several protections for you under Federal and State law. Often, people are moved without proper notice, and even without proper authority. Spend some time learning about your rights as a resident, or work with someone who will be an advocate for you.

8. What are the nursing home’s duties to me?

Ask them for a copy of their duties under the Nursing Home Reform Act. Because of a previous history of inadequate care, in the late 1980s Congress passed laws which outline the minimum standards for health, safety, and resident rights in nursing homes. Chances are you will be surprised and pleased to learn of all your rights…but it is necessary that you take the time to learn your rights. If you would like, contact us and we can send you further information on your rights as a nursing home resident.

9. Is there someone who can help me with all of this?

You can get help from many professionals…from an Elder Law attorney to a geriatric care manager, to social workers. Be sure to deal with a professional who understands the broad range of issues that arise when you or a loved one goes into a nursing home. Find an attorney dedicated to helping you find the right nursing home, get the best care there, and showing you how to pay for it without going broke.

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Guide to Connecticut Nursing Homes

Division of Assets and Medicaid Planning
How to Pay for the Nursing Home without Going Broke

One of the things that concerns people most about nursing home care is how to pay for that care.

There are basically three ways that you can pay the cost of a nursing home:

1. Long Term Care Insurance – If you are fortunate enough to have this type of coverage, it may go a long way toward paying the cost of a nursing home. Unfortunately, long term care insurance has only started to become popular in recent years and most people facing a nursing home stay do not have this coverage.

2. Pay with Your Own Funds – This is the method many people choose at first. Quite simply, it means paying for the cost of a nursing home out of your own pocket. Unfortunately, with nursing home bills averaging around $9,000.00 per month in Connecticut, few people can afford a long term stay in a nursing home.

3. Medicaid – This is a primarily federally-funded and state-administered program which pays for the cost of the nursing home if certain asset and income tests are met.

Since the first two methods, (long term care insurance and paying with your own funds) are self-explanatory; we will concentrate on Medicaid and Medicare.

What About Medicare?

There is a great deal of confusion about Medicare and Medicaid.

Medicare is the federally-funded health insurance program primarily designed for older individuals (i.e. those over age 65). There is a limited long term care component to Medicare. In general, if you have had a hospital stay of at least three days, and then you need to go into a skilled nursing facility (often for rehabilitation), then Medicare may pay for a while.

Typically, in that circumstance, Medicare will pay the full cost of the nursing home stay for the first 20 days and will continue to pay the cost of the nursing home stay for the next 80 days, but with a deductible that is $124 per day in 2007. Often times your Medicare supplement will pay the cost of that deductible. So in the best case scenario, Medicare may pay up to 100 days. In order to qualify for these 100 days of coverage, however, the nursing home resident generally must continue to “improve.”

While it is never possible to predict at the outset how long Medicare will cover the rehabilitation, it may fall far short of the 100 day standard. But even if Medicare does cover the 100 day period, what then? What happens after the 100 days of coverage has been used?

At that point, you are back to one of the other alternatives…long term care insurance, paying the bills with your own assets, or Medicaid.


This is an excerpt from our Guide to Connecticut Nursing Homes. The full Guide includes valuable information to help you select and pay for nursing home care without going broke. If you want to receive your FREE copy of the complete Guide, fill out this form or contact our office.

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Related Posts: Medicaid Principles - The CSPA
9 Questions to Ask BEFORE a Loved One Enters a Nursing Home

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