They say that the only constant is change, and this reality can affect your estate planning efforts. Your original actions will reflect your mindset and your family dynamic at that time, but as life goes on, circumstances can change in many different ways.
With this in mind, we will look at the matter of trust revocation in this post.
Revocable Living Trusts
The most commonly used trust is the revocable living trust, and the name is self-explanatory to a large extent. This type of trust will go into effect while you are still living, and yes, you can dissolve or rescind a living trust.
If you want to make relatively minor changes, you can attach an amendment that includes the adjustments that you want to make. When the changes are more significant, you can execute an entirely new document called a trust restatement.
In addition to the revocable living trust, there are also irrevocable trusts that you cannot dissolve, and you cannot act as the trustee. Generally speaking, you can’t make adjustments, but there are some exceptions to this rule.
A power of appointment can be given to the beneficiary or trustee when the trust declaration is being established. This can allow for changes in accordance with the terms that are set forth in the trust agreement.
An irrevocable trust can be written with verbiage that allows for an independent trust protector. The protector could be summoned to examine the facts that surround a proposed change that is potentially permissible via the terms.
There could alternately be a provision that would allow for modifications as a response to certain triggering events. Charitable trusts often contain provisions that allow modifications to adapt to relevant changes in tax laws.
Why would you want to create a trust that is so restrictive if there is an alternative? When you establish an irrevocable trust, you are surrendering incidents of ownership in a legal sense, and this could be beneficial under some circumstances.
One reason why people use these trusts is to develop a financial profile that will allow for Medicaid eligibility. Medicare does not pay for a stay in a nursing home, and these facilities are very expensive.
Medicaid will pick up the tab if you can gain eligibility, but you can’t qualify if you have more than $2000 in countable assets in your name.
If you convey assets into an irrevocable income-only Medicaid trust, you could receive distributions of the earnings, but you would not be able to reach the principal. The assets in the trust would not count if you apply for Medicaid with one important stipulation.
There is a five-year look-back period, so you have the fund the trust at least five years before you apply for Medicaid coverage.
Another reason why people use irrevocable trusts is to gain estate tax efficiency. This tax carries a 40 percent rate, and it is potentially applicable on transfers that exceed $11.7 million.
You can use a supplemental needs trust to provide an inheritance to a person with a disability who is relying on Medicaid and Supplemental Security Income.
After your death, it would be an irrevocable trust, and the beneficiary would not be looked upon as the owner of the assets. As a result, benefit eligibility would not be negatively impacted.
The trustee would be able to use the funds to improve the life of the beneficiary in many different ways.
A successor beneficiary who you name in the trust agreement would become the beneficiary after the death of the initial beneficiary. Medicaid is required to seek reimbursement from the estates of beneficiaries, but assets that remain in a third-party trust would be protected.
If someone with a disability comes into money, they could establish an irrevocable supplemental needs trust. However, since it would be a first party trust, Medicaid would be able to attach the remainder.
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We are here to help if you are ready to work with an Overland Park, Kansas estate planning attorney to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 913-262-2000.