By Howard S. Krooks
We hear a lot about trusts these days. Everyone seems to want one. But for the financial advisor and consumer alike, a trust may not be for everyone. There are a variety of trusts that can be established, and they serve a multitude of distinct purposes. As a financial advisor, what are the considerations that go into deciding whether a revocable trust is right for your clients? We’ll analyze that very question in this article.
Types of Trusts
The first thing that must be determined is whether a revocable or an irrevocable trust should be established. The difference between the two is dramatic, and very important for the advisor and client to understand.
A revocable trust is just that – revocable. That means that the trust can be amended or modified by the person who created the trust (known as the grantor or settlor) at any time during his/her lifetime. This can be significant as time goes by, leading the grantor to decide to make any number of changes within the trust document. Such changes might include: a) changing who will serve as successor trustee after the grantor is no longer able to serve, b) changing, adding or removing previously named beneficiaries (children may fall in and out of favor with parents, long time friends may be friends no longer, or have passed on), c) adding or removing provisions for the disposition of specific tangible personal property, such as an item of jewelry or art work, d) adding or removing a specific devise of cash – for example, the grantor may wish to increase or decrease a cash bequest of $50,000 previously granted, or e) a grantor may wish to change an outright bequest upon death to one which requires a longer payout to a named beneficiary through the use of “subtrusts.”
An irrevocable trust, on the other hand, is set in stone once the trust is executed and does not permit the grantor to make any of the above changes. There are, however, a number of different ways that many of the above changes can still be made within an irrevocable trust – but not by the grantor him/herself. The use of independent persons, who may be a trustee, a trust protector or an independent special trustee, to make such changes can often be found in the irrevocable trust. These changes are vested in a person other than grantor, and that is what still distinguishes the revocable trust from the irrevocable trust. Further, with an irrevocable trust, once the assets are placed into the trust, there are limitations on how and when assets can be removed from the trust – which is not generally the case with a revocable trust, where assets can readily be accessed and removed by the grantor.
Many people seek to execute a revocable trust in order to avoid probate. Probate is the process whereby a person’s last will and testament is submitted to the probate or surrogate’s court so that the court can declare the will as the valid will of the now deceased testator. The instructions contained in a valid will that has gone thorugh probate must be followed by the person named as the executor or personal representative (as it is known in some states). Why avoid probate? A number of reasons may be important to your clients. First, probate files are matters of public record, and in order to avoid making financial matters public, a trust can keep these matters private. Second, probate rules may result in a longer process for the administration of one’s estate, causing delay in the distribution of assets to one’s heirs. A trust may result in a quicker disposition of one’s assets, especially when real property is held.
Planning for Incapacity
Planning for one’s incapacity is an important function of a revocable trust. One might ask why this is necessary of a client already has a durable power of attorney and health care advance directives – can’t the agents under those documents handle matters of incapacity? The answer is, yes they can, but they will do so without any written set of instructions or guidelines. It is not common for one to express his/her wishes with regard how to spend one’s money in the advance directives. Rather, these instructions are contained in a revocable trust, and in great detail. Thus, if a person who later becomes incapacitated wishes for a trustee of a revocable trust to spend trust assets on an aide while they are in the hospital, or to spend as much money as possible to keep them at home rather in a facility should they need long term care, these instructions are contained in the revocable trust and not in advance directives.
Asset Protection and Medicaid/SSI Benefits
Often times, when a client comes to see me, and when we begin discussing trusts as an option for their estate planning needs, they proudly display their estate planning binder and tell me they already have a trust. I ask them whether the trust was designed to protect their assets in the event they need to access Supplemental Security Income (“SSI”) or Medicaid benefits to pay for long term care in a skilled nursing facility and the confidently say “yes.” But they are surprised when I tell them, upon reviewing the trust, that their trust does NOT protect their assets. In fact, every single asset contained in the revocable trust (maybe with the exception of the homestead, which is exempt for Medicaid and SSI purposes) is fully countable for Medicaid and SSI purposes, which in most states means one cannot have more than $2,000 in assets.
In order for assets to be protected vis-à-vis Medicaid and SSI, the assets must have been placed into an irrevocable Medicaid Asset Protection Trust at least 5 years before the need for Medicaid and SSI arises. Thus, it is vitally important to know what kind of trust your client has, or needs if they are beginning the estate planning process, so that their goals are properly achieved.
The Need to Fund the Trust
This may seem obvious, but let me assure you that it is not, at least to clients, many of who are going through the estate planning process for the first time. Once a trust is signed, it must be funded. What does that mean? It means that assets do not pick themselves up and walk themselves into the trust all by themselves! Countless clients of mine have consulted with me, told me they already have a trust, and when I ask them if the trust is funded, they give me deer in the headlights looks in response. They were never told by their prior attorney that they needed to retitle assets in order for the assets to be transferred into the trust. And, if assets are not transferred into the trust, then they remain outside the trust, essentially rendering the trust useless. The process of funding a trust is vitally important. As an advisor, you can add great value to your clients by asking the question upon learning that they have a trust which assets are titled in the trust and which assets are not in the trust. You can tell by looking at the actual statement for each asset (or deed in the case of real property), and not the client’s “recollection.”
As a financial advisor, becoming more familiar with trusts, how they operate, and the differences among them, will enable you to become more valuable to your clients as you begin to analyze these documents on behalf of your clients, and raise important questions they may not have considered previously.
Howard S. Krooks, JD, CELA, CAP, is an elder law and special needs planning attorney with Elder Law Associates PA, practices in New York and Florida. He is a past President of the National Academy of Elder Law Attorneys, a Past Chair of the New York State Bar Association Elder Law Section, and currently serves as the Secretary of the Florida Bar Elder Law Section.