A trust is a part of your estate plan which controls how your property is used by you during your life and after your death. Think of it as a container which can hold assets with a manager to oversee investments, distributions, and taxes. Different kinds of trusts achieve very different estate planning goals, but they all have some things in common.
A trust is created by a “trustmaker” whose money and/or property fund the trust. It is created to achieve one or more specific estate planning objectives, and it has terms which help to ensure that objectives are reached. The terms are contained in a document called a trust declaration and in the Tennessee Uniform Trust Code. These terms govern who benefits from the trust assets now and in the future. A trust is overseen by a trustee, who manages the investments and must follow the terms set forth in the trust and in our law. The trust preserves and/or protects property for a beneficiary, who will eventually receive part or all of that property or the benefit of the assets. Sometimes the trustmaker and the beneficiary may be the same person.
Trusts can help people to achieve many different goals. Not all trusts are the same; it is very important to choose the right kind of trust to suit your particular circumstances and meet your specific goals. There are two general types of trusts: revocable and irrevocable trusts.
Revocable Living Trusts
The revocable living trust is a wonderfully flexible tool for estate planning, particularly if you own real estate in other states besides Tennessee. This kind of trust can make your assets easier to manage, particularly if you become incapacitated or disabled during your life, and can reduce the inconvenience and expense of probate administration at your death. Assets properly titled to the trust pass through this trust rather than your probate estate when you die. You have the added protection of asset management and high levels of fiduciary duty under a trust if you become ill or otherwise disabled. Living trusts are revocable and amendable. Separate tax returns are not required as long as the trust remains revocable, and there is generally no tax consequence to using the revocable living trust. Often in living trusts, the trustee and the beneficiary are the same person (or husband and wife).
Benefits of a Revocable Living Trust:
- Control your property, perhaps years after your death
- Amend the trust easily
- Manage assets while you are living, especially if disability arises
- Avoid probate and its costs, delays, and publicity
- Protect families with children by prior marriages
Limitations of a Revocable Living Trust:
- Does not help to qualify for Medicaid, Veterans Assistance, or other public benefits programs
- Does not protect assets from claims of creditors
Irrevocable trusts serve different purposes than revocable trusts. There are various types of irrevocable trusts, each of which achieves specific goals. In elder law, irrevocable trusts are typically used to assist an individual in qualifying for public benefits, such as Medicaid, TennCare, SSI or VA Aid and Attendance. These trusts include special needs trusts, qualified income or “Miller” trusts, and asset protection trusts. Irrevocable trusts allow the trustmaker to preserve funds for his or her own care or to pass a legacy to their loved ones. Below are the irrevocable trusts commonly used in planning for public benefits.
Special Needs Trusts
There are two main types of special needs trusts (SNTs) which can be established for the benefit of an individual with a disability – third party and first party trusts. Third party trusts contain money or assets of a third party for the benefit of a person who is disabled. First party trusts contain money or assets belonging to the person with the disability. Below is a brief description of some of the SNTs which we most often use for our clients at Elder Law of East Tennessee.
First Party d4A Trust. A d4A trust gets its name from federal law 42 USC 1396p(d)(4)(A). This type of trust is limited to people who are under the age of 65. It must be established by a parent, grandparent, conservator, or court, not the individual with special needs. This type of trust is ideal for individuals with a disability who need to put assets into a trust to qualify for Supplemental Security Income, Medicaid/TennCare benefits, Qualified Medicare Beneficiary programs, and other benefit programs that are income and asset tested. This kind of trust is self-settled, which means that it is funded with the beneficiary’s own money or assets (such as injury settlements or inheritances) rather than someone else’s assets.
First Party d4C/Pooled Trust. A pooled trust is ideal for individuals with a disability who need to put their assets into a trust to qualify for Medicaid benefits while preserving those assets for their own use throughout their lifetime. This trust can be established by a parent, grandparent, conservator, court, or the individual with the disability and/or his attorney-in-fact. A pooled trust is usually self-settled (that is, funded with the beneficiary’s own money, often money which is gained from an injury settlement or an inheritance). If a pooled trust is funded with money belonging to someone other than the beneficiary, it is called a third-party SNT and is typically not subject to payback requirements. What makes a pooled trust different from other kinds of trusts is that the trustee is a nonprofit organization. When an individual joins a pooled trust, their trust, while maintaining a separate “identity,” is grouped with other people’s trusts for the purpose of investment and management.
Third Party Trust. The third party trust is typically created by a parent or grandparent for the benefit of a disabled dependent, child, or grandchild. The assets in the trust are provided by a third party during life or at death, and the beneficiary with a disability gets the benefit of the trust for his or her lifetime. Because the trustee cannot be compelled to make a distribution to the beneficiary, the trust is not “countable” as an asset for the disabled party. Benefits should continue for the person with a disability without a problem when the trust is properly drafted. At the death of the beneficiary, if funds remain in the trust, the funds are passed to other beneficiaries either by the initial trustmaker’s instructions in the trust or by a power of appointment in the beneficiary. The state is not entitled to any payback from this type of trust.
Sole Benefit Trust. The sole benefit trust is another type of third party trust, but it is for the benefit of both the third party and the special needs beneficiary. This kind of trust is generally established by a person who wishes to qualify for Medicaid/TennCare benefits and who has a child or grandchild with a disability. The elder can fund the trust for the family member and qualify for benefits without imposition of a penalty. This is one of the third party trusts that has a payback provision or will be paid out during the beneficiary’s lifetime, and that makes it unusual for a third party trust.
Miller/Qualified Income Trust
A Miller Trust, also known as a Qualified Income Trust (QIT), is used by people who are trying to qualify immediately for Medicaid benefits but whose income is too high to meet the strict financial qualifications. The trust holds excess income so that the applicant can receive benefits. Funds held within a Miller Trust can only be used to pay for certain needs, including the medical expenses of the beneficiary, health insurance premiums, spousal support for a current spouse, and minimal monthly bank charges. This type of trust has a payback provision so that Medicaid/TennCare may reclaim all of the funds in the trust up to the amount which Medicaid ever spent on the beneficiary after his or her death.
Asset Protection Trusts for Public Benefits
For those who wish to plan ahead to meet the financial qualifications for Medicaid/TennCare or VA, there are two types of trusts which can be used to achieve this goal. They are the Family Asset Protection Trust (FAPT) and Veterans Asset Protection Trust (VAPT). Both of these types of trusts require advance planning.
Family Asset Protection Trust (FAPT). A Family Asset Protection Trust (FAPT) is a type of trust used by people with resources who want to plan for the eventuality of needing Medicaid/TennCare benefits in the future but who do not need to become immediately eligible. This kind of trust enables the individual to qualify for Medicaid/TennCare after a five-year waiting period for transfers of assets has passed. That means that a person who establishes a FAPT typically must wait five years after funding it before applying to become eligible for Medicaid/TennCare benefits. There are some exceptions to this approach, however.
A FAPT may hold a variety of assets, including homes and all accounts except IRAs. All of the income generated by this trust is payable to the trustmaker for life. The trustmaker will also have the lifetime right to reside in the residence owned by the trust. Trust funds can be withdrawn by the other beneficiaries named in the trust, who are usually the trustmaker’s adult children.
Veterans Asset Protection Trust (VAPT). A Veterans Asset Protection Trust (VAPT) is very similar to a FAPT, with only a couple of notable differences. The most significant difference is that it is more restrictive. The income from the trust is not paid to the trustmaker; it is paid to the income beneficiary, usually the adult child(ren). This permits the trustmaker to exclude this trust as an asset for purposes of applying for VA pension, including the Aid and Attendance allowance.
Unlike in the Medicaid/TennCare rules, currently there is no lookback period to qualify for VA benefits, although that may change at any time. That means that for the time being, once a VAPT is established and fully funded, the applicant can immediately apply for VA benefits. However, this may change in the near future. The VA has proposed rules to introduce a three-year lookback for transfers of assets.
Before establishing a trust, it is vital to have a clear understanding of your goals and to ensure that creating the trust will not undermine your other estate planning objectives. Not all trusts are appropriate for all needs. If you need help getting started with your trust or thinking about which type of trust might be right for your unique situation, get in touch with us at Elder Law of East Tennessee. We will guide you through the process of setting up a trust to fit your unique circumstances and will ensure that it will work with your other estate planning documents to accomplish your goals.