Many common misconceptions about trusts and their function

Published Apr 30, 2017 at 9:00am

Whether meeting groups during estate planning seminars or clients individually, I’ve found there is a general misunderstanding of trusts and their function.

Far too many people think trusts are for “others” when they may be ideal candidates for a trust to protect their assets and avoid probate when they pass away.

The following are the most common misconceptions I’ve encountered:

“I don’t want to lose control of my assets. Doesn’t someone else control the Trust?”

Answer: No.

Whether you are setting up a Revocable or Irrevocable trust, you can be the trustee and it is your choice to pick other co-trustees, if any, who control the trust.

That person may be your spouse, child or other person(s) to serve as a co-trustee with you.

You also choose who your successor trustees are; i.e., those persons who will take over the trust if you become incapacitated and upon your death.

“Trusts are for rich people. There is no point in creating one if I’m not a millionaire.”

Answer: False.

Generally, if you own property, have life insurance or have other assets which total more than $150,000 (including life insurance and real property), you are a candidate for asset protection.  

The type of trust you set up will of course vary depending on your age, general health and amount and type of assets.

For instance, a healthy person between the age of 18-55 with a large amount of life insurance or other assets would be a good candidate for probate avoidance and tax protection using either a Revocable Living Trust or a Will containing a Testamentary Trust.  

However, a person over age 55 who has health issues or fears the potential for nursing home care would be more of a candidate for an Irrevocable Medicaid Trust to protect assets from ever escalating nursing home costs, in addition to probate and tax avoidance.

“Can’t my children or beneficiaries obtain assets from the trust?”

Answer: Generally no, unless you specifically name them as a Trustee with that power.

However, most often, the Trustmaker (the person creating the trust) retains control over what assets, if any, may be gifted during that person’s lifetime.

The Trustmaker can also impose various restrictions on assets being distributed after death by such things as making the minimum age for minors to inherit 25 or 30 years-old.

If no age is established, an 18-year-old stands to inherit at death which can be a recipe for your hard earned assets to be quickly dissipated.

Also, if you know a beneficiary is financially irresponsible, suffers from a disability, physical ailment or has drug, alcohol or gambling issues, you can impose further restrictions on your assets or appoint additional trustees to oversee funds going to that person.

“I don’t want to put all my assets into a trust and not have money to live and enjoy retirement.”

Answer: You don’t need to!

A well-crafted estate plan will balance and factor in your expenses, goals and future needs and wants. You also retain more flexibility depending on the type of trust you set up.

A Revocable Living Trust generally allows you to continue to use and access any assets, as these Trusts are primarily set up for tax and probate avoidance as opposed to nursing home protection.  

An Irrevocable Medicaid Trust, on the other hand, is designed to insulate your assets from nursing home costs, but it also restricts you from taking the principal assets back
directly.

Therefore, these trusts should be set up to leave enough assets outside of it so you can have an active retirement and maintain whatever hobbies or pursuits you currently enjoy.

We refer to these assets left outside of the trust as “mad money”, which is in addition to any pension, Social Security or IRA monthly income you have.

Generally, the primary assets to go into an Irrevocable Medicaid Trust are more passive, such as real estate, life insurance and other funds not relied upon for everyday living, enjoyment and retirement.  

Misconceptions aside, the important thing to keep in mind when meeting with an estate attorney is that Trusts should be crafted and customized to suit your individual needs.

You should be wary if an attorney offers a “one size fits all” or “simple” type of Trust.

Everyone has different degrees of assets, unique
family situations or health
issues.

Trusts should be carefully crafted to address all of these situations while giving you peace of mind that your assets will be protected and your loved ones provided for when you are gone.  

• About the author: James S. Rizzo is an attorney with the law firm of Hilton Estate & Elder Law, LLC, with offices in Rome, Utica, Boonville and Lowville, NY.

He has more than 20 years of legal experience and currently concentrates in Estate Planning matters, including Wills, Powers of Attorney, Health Care Proxies, Revocable and Irrevocable Trusts, Asset Protection, Nursing Home/Medicaid planning and related Litigation issues.

He can be reached at (315) 624-9600 or jsr@hiltonlawny.com for a confidential, free initial consultation. Visit us on the web at: www.hiltonlawny.com.