Traditionally, basic estate planning focuses on avoiding the unnecessary delay and expense of a court-supervised conservatorship in the event of mental incapacity, avoiding the unnecessary delay and expense of a court-supervised probate in the event of death, and minimizing estate tax. A basic revocable living trust is usually the best vehicle for addressing all of these concerns.
While it is important to avoid conservatorship, avoid probate, and minimize tax, an advanced trust can take advantage of many more planning opportunities. Below is a description of some of the additional planning opportunities that a more comprehensive trust can provide.
Preserving a Beneficiary’s Eligibility for Public Benefits:
Many public benefits, such as Medi-Cal and SSI, are “means-tested,” meaning that a recipient of such benefits must be below a certain asset threshold. There are two key concerns with respect to “means-tested” public benefits: (1) qualifying for benefits; and (2) preserving benefits that one already has.
In qualifying for public benefits, there is often certain planning that can be done to qualify for public benefits, including rearranging and gifting assets. In the event that the person who needs public benefits no longer has the capacity to make financial decisions, an advanced trust can include provisions that specifically authorize the successor trustees to engage in this kind of strategic planning on the person’s behalf. Most basic trusts do not include such provisions which would often require court-intervention in order to allow for such planning.
Once a person has public benefits, preservation of those benefits is paramount. The benefits recipient must make sure that his/her assets are below a certain threshold at all times. Receiving a direct inheritance can instantly eliminate the recipient’s eligibility for public benefits. An advanced trust can include a “standby Special Needs Trust” that will be used to hold the beneficiary’s inheritance if the beneficiary is receiving means-tested public benefits. The Special Needs Trust can be drafted in such a way as to allow the beneficiary to use and enjoy the inheritance without interfering with the beneficiary’s eligibility for the public benefits.
Provide a Degree of Asset Protection:
Basic trusts often provide for “outright distributions” after the Trust-Makers pass away provided that the beneficiaries are responsible adults. Once the beneficiaries receive their inheritances, their inheritances are vulnerable if the beneficiaries develop creditor problems in the future. For example, a beneficiary could receive a health care bill that exceeds insurance coverage or become involved in an automobile accident and be sued.
An advanced trust can provide that the inheritance will be kept in trust for the beneficiary for his or her lifetime and can be structured in a way to provide the beneficiary with a strong degree of control as well as a strong degree of asset protection.
Provide a Degree of Divorce Protection:
A beneficiary’s inheritance is separate property. However, when a beneficiary receives an inheritance “outright and free of trust,” the beneficiary often will co-mingle the inheritance with the beneficiary’s spouse. If they subsequently divorce, half of the inheritance can be lost to the divorcing spouse.
An advanced trust that provides for the inheritance to be kept in trust for the lifetime of the beneficiary can make it less likely that the inheritance will be co-mingled with the beneficiary’s spouse and therefore making it less likely that any portion of the inheritance will be lost in the event of a subsequent divorce.
Maintain Flexibility Without Court Intervention:
Often, the original Trust-Makers are the only parties who have the power to modify the trust. In the event of incapacity and after death, the terms of the trust are frozen. While this is typically desirable with regard to substantive provisions such as how the trust is to be divided upon the death of the Trust-Makers and the identity of the trustees, this can be a problem with regard to the tax and administrative provisions of the trust as the law can change and the beneficiaries’ circumstances can change. Basic trusts typically do not allow for the modification of a trust once the original Trust-Makers have lost mental capacity or have died. In such circumstances, a court-petition might be necessary in order to keep the trust current.
An advanced trust can include “Trust Protector” provisions that allow for the appointment of an independent third party who would have limited authority to make modifications to the tax and administrative provisions of the trust without court involvement, saving considerable time and expense.
Trusts can be very powerful vehicles for the efficient management and distribution of assets in the event of incapacity and upon death. However, most trusts only focus upon a limited number of planning opportunities. An advanced trust can provide much more flexibility and protection for the Trust-Makers as well as the beneficiaries. It is worth exploring these additional planning opportunities as they can provide a much more comprehensive plan for the beneficiaries.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California 93950 and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney-client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.