A Will is only effective after death and does not provide any authority to preserve and manage assets in case of disability, disease or incapacity. Instead, various types of trusts may be used during the grantor’s lifetime in order to preserve assets and ensure that, even if the grantor becomes incapacitated at a later time, the assets will be managed and expended in a manner consistent with the grantor’s intent. Further, upon the grantor’s death the Trust can ensure assets are distributed to the beneficiaries designated by the grantor. Below are four common trusts that can be used to plan for incapacity.
Revocable Living Trusts
A Revocable Living Trust is a complete Will substitute. It can provide for the management of your assets both during your lifetime and for the proper disposition to your beneficiaries upon your death. You may change or revoke the terms of the trust at any time and may designate anyone you like – a professional manager, your spouse, an adult child, an attorney, or even yourself - as Trustee. This type of trust is also useful if you become incapacitated and/or incompetent, because the Trustee or successor Trustee will be able to manage your assets and provide for your needs without the time, expense and other burdens associated with the court intervention that may otherwise be required.
In other words, having your assets owned by a revocable living trust can substantially reduce the risk that a costly court guardianship proceeding will become necessary if you become disabled. You can establish detailed instructions for how your successor trustee is to handle and manage your assets upon your disability. By avoiding guardianship, you will not only save on the associated fees, but you will avoid family conflict, save time and preserve continuity of the management of your assets that would be lost with a guardianship proceeding.
Planning Tip: If you name yourself the initial trustee of your revocable trust, it is critical that a successor be named to assume the role of trustee in the event of the your incapacity. It is also critical to provide a provision in the trust which defines “incapacity” for purposes of the Trust and the steps that will be required to appoint a new trustee.
Standby Trusts
A popular estate-planning technique combines the common Power of Attorney with a Standby Trust. This technique is ideal for clients who wish to plan for disability or incapacity but who are unwilling to relinquish present control. The standby trust is created, executed and funded but only with nominal assets. The power of attorney is also executed, providing the agent with authority to transfer the client’s assets to the trust in the event of incapacity or disability. The planner should consider using a springing power of attorney for this purpose.
Planning Tip: In New York, the authority to create and fund trusts is not clearly conveyed by the typical short-form Power of Attorney. If broader authority is desired, the power of attorney may include not only the power to fund a trust, but also to create one. Such a provision, combined with the proper gift-making authority, will enable the agent to make gratuitous transfers into a trust on the principal’s behalf, thereby accomplishing a number of planning goals. Whichever form is used, the Power of Attorney must clearly define “incapacity” and “disability”.
Supplemental Needs Trusts
If the grantor is concerned with preserving assets for the use of a third party, such as disabled child or disabled spouse, without jeopardizing that party’s eligibility for government benefits, then a Third Party Supplemental Needs Trust may be appropriate.
If the grantor is concerned with preserving assets for his or her own use without jeopardizing eligibility for government benefits, a First Party Supplemental Needs Trust may be appropriate.
Planning Tip: The primary difference between the First and Third Party SNT is that the first party trust must include a payback provision for DSS, upon the death of the beneficiary, to the extent that DSS has paid out benefits on behalf of the beneficiary.
Medicaid Asset Protection Trusts
Private Long-Term Care Insurance is the optimal way to plan for home care or nursing home care, but if you can’t buy insurance due to health conditions, or personal income and resources are not sufficient to pay for long-term care insurance, the planning tool to consider is a Medicaid Asset Protection Trust. You can retain the income for yourself, and preserve the principal of the assets (the assets held by the Trustee) for your spouse, children or other beneficiaries. When properly drafted, the trust will provide asset protection (to qualify for Medicaid benefits) along with significant tax benefits, including avoidance of gift taxes, and a reduction of capital gains taxes.
Planning Tip: In order to avoid Expanded Estate Recovery in New York, the Grantor can not have any right to trust principal. If the Grantor retains the income for himself or herself, once he or she starts receiving Medicaid benefits, any income over the requirement will be paid back to DSS. Retaining the right to change Trustee is not considered the right to income or principal.
By: Philip A. Di Giorgio, Esq.
Read Bio
Comments
Post has no comments.