Ryan E. Melsky, Esq.

Gagliardi & Melsky, LLC

Clients often ask whether they need to create a trust as part of their estate plan. At its basic level, a trust is a writing that documents the placing of assets, such as real estate or money, into the hands of a Trustee for the benefit of one or more beneficiaries. The person placing the assets into the trust, known as the “Settlor” (sometimes known as the “Grantor”), may also be the Beneficiary in some cases; in other words, you are permitted to place your assets into trust for your own benefit under certain circumstances.

The trust document describes the purpose of the trust, the responsibilities of the Trustee, and how the assets are to be handled before and after the death of the Grantor and beneficiaries.

Trusts serve various functions. One of these functions is to serve as an “asset protection” device. By “asset protection,” we mean protecting your asset (again, typically your home and your money) from potential creditors, which may include a government agency. For example, if you intend to apply for Medicaid benefits, you must “spend down” your assets to a minimal amount before you qualify. In addition, there is a five-year “lookback period” with Medicaid, meaning that your assets have to be out of your ownership for five years to be excluded from your available resources to pay for long-term care. Thus, if you learn today that you will soon need to live in a care facility, and if you transfer your home to your children tomorrow, this will not protect what is likely your most valuable asset from the Medicaid analysis.

On the contrary, if you place your home in an irrevocable trust today, and if the home is in that trust for five years before you apply for Medicaid, it will not be considered a countable asset during your Medicaid application process. This is because when you place your home in an “irrevocable” trust, you no longer own it. Rather, the home is held by your Trustee, in trust.

Thus, even though you will still be living in your former residence, and even though you will be paying all bills and maintaining the property, you no longer own it. The trust—complete with its own Tax ID number—“owns” the property. Some people are not comfortable with this aspect of an irrevocable trust. But it may be the right decision should you wish to preserve this asset later in life, thereby protecting it from creditors, long-term care costs, and keeping it within your estate when you die.

Trusts may also prove valuable when the Settlor wants to “protect” an asset for its intended beneficiary. This preservation function often comes into play in two main instances: 1) with a beneficiary who is too young to handle a sudden influx of wealth, and 2) with a beneficiary who has some cognitive limitations or who has substance abuse issues. For example, if you want to give money to a grandchild, but that grandchild is still very young (say 18 years old), you may not be comfortable giving that 18 year-old $200,000 outright. Or, as another example, if you plan on gifting $50,000 to each of your three grandchildren (“gifting” is also an estate planning strategy), but one of your grandchildren has a history of substance abuse or poor financial decision-making, you may want to place that grandchild’s monetary gift into a “revocable trust.”

This way, your Trustee makes the decision when to spend the trust monies for clothing, education, maintenance, care, and even leisure. Otherwise, that $50,000 may disappear in one trip to the casino. The Trustee therefore serves as the official “gatekeeper” of those very valuable funds, making certain that they are protected, preserved, and used only for their intended purposes when necessary. And as the name implies, you may “revoke” this trust at any time.

Unlike irrevocable trusts, however, revocable trusts do not have much utility as asset protection devices outside of this scenario. The law is often of the opinion that if you can revoke the trust at any time, the assets in the trust are yours, not the trust’s.

In addition to the above-mentioned drawbacks (i.e., loss of asset ownership with an irrevocable trust and lack of asset protection from outside entities with revocable trusts), trusts typically cost more than Wills because they are more complex and because they require greater expertise to draft. Also, those wishing to establish a trust must designate a Trustee and an alternate Trustee who must be willing to manage the trust over the course of many years, as opposed to the Executor of the Will, who typically administers an estate for less than two years.

In weighing these and various other pros and cons of establishing a trust, some clients take the “let-the-chips-fall-where-they-may” approach, meaning that the asset protection function of trusts simply is not important enough to the client for them to establish a trust. Whereas they do not want their most valuable asset to be depleted to pay for elder care, or whereas they do not want their 18-year old grandchild to squander a large monetary gift in a short time, they simply are not concerned enough to pay for a trust and then tie those assets up in the trust for a number of years simply for “asset protection” purposes.

However, if protecting your assets from creditors and for vulnerable beneficiaries—both while you are living and even after you have died—is important to you, you should consult with an attorney who specializes in estate planning so that you may present specific questions relevant to your situation in order to make an informed decision regarding whether a trust is right for you.