- Asset Protection Planning
- Business Succession Planning
- Charitable Giving
- Disability and Special Needs
- Elder Law
- Executor and Trustee Responsibilities
- Financial Powers of Attorney
- Inheritance Planning
- Lifetime Gifts
- Medical Directives
- Planning for Minors
- Retirement Accounts
Four Things a Living Trust Does Not Do
There are so many benefits of a revocable living trust that people sometimes think it will do everything they want. Here are four things a living trust will not do:
- It does not control medical decisions. A living trust is not the same as a living will. Although the names are similar and they are both legal documents, they do very different things. A living trust lets you keep control of your assets. A living will lets you keep some control over medical decisions, but it is very limited—it only lets others know how you feel about life support in case of terminal illness. In addition to a living will, you should consider executing a healthcare power of attorney (also called an advance directive or healthcare proxy). The healthcare power of attorney lets you give legal authority to another person to make healthcare decisions for you if you are unable to do so.
- It does not protect your assets from creditors while you are living. Because a living trust is revocable (meaning you can change or cancel it), you still have control of your assets and have access to them at all times. Even the Internal Revenue Service considers a revocable living trust to be a “non-event” because you can put assets in and take them out at any time. If you still have access to your assets, so do your creditors. However, you can choose to draft your trust so that after you die, assets that remain in your trust for your beneficiaries are protected from their creditors, including divorce proceedings. If you are concerned about asset protection, talk to your estate planning attorney as soon as possible about your options.
- It does not help you qualify for Medicaid. Medicaid is a federally funded healthcare program that was created primarily to provide healthcare services for the poor. It may also pay for an unlimited number of days of nursing home care, which makes it appealing to some people who are not poor. To qualify for Medicaid, you can only have a limited amount of assets and receive a certain amount of income.
Some people think putting their assets into a revocable living trust will help them qualify for Medicaid because the assets are no longer titled in their individual names. But because a living trust is revocable, you still have control of your assets and have access to them. As a result, assets in your living trust are considered available and counted if you apply for Medicaid. Thus, transferring your assets to a living trust will not help you qualify for Medicaid. There are other ways, such as through the use of an irrevocable trust or lifetime gifting, to qualify for Medicaid benefits, but these methods typically require years of planning and that you give up control of a large portion of your assets. If you are interested in qualifying for Medicaid, talk to an estate planning attorney who specializes in elder law and Medicaid matters.
- It has no effect on your income taxes during your lifetime. You must still report any income you earn each year and pay any taxes due on that income. As long as you are living, you continue to use your own Social Security number and file the same income tax returns. (A separate Tax Identification Number and separate tax return for your trust are required only after you die.) Some irrevocable trusts may be able to save income taxes.
Many of the deficiencies of a trust can be overcome with the assistance of an estate planning attorney and the execution of additional estate planning documents, such as health and financial powers of attorney and a living will. Furthermore, the many benefits of a trust far outweigh a trust’s few shortcomings. Thus, you should still consider creating a trust after you have discussed the advantages and disadvantages with your estate planning attorney.