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Middle America: Is a Trust Right for You?

By Todd Campbell – Sep 18, 2016 at 12:02PM

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Trusts can offer flexibility to everyday families, allowing grandparents and parents to have control over how their estate is to be distributed to beneficiaries.

Source image: Getty Images.

Trusts were once thought to be useful only to the uber-rich, but they are increasingly being used to help middle-class Americans, too. Because a trust spells out the do's and don'ts associated with leaving money and property to beneficiaries, setting up a trust can make a lot of sense, especially in the following scenarios.

Special needs

If you have an adult child with a disability and you're not sure who will care for that child when you're gone, or if an inheritance will jeopardize his or her disability income, then it may be worth discussing a special needs trust with a lawyer.

A special needs trust can provide specific financial support to the child and can shield an inheritance from consideration by government programs like Medicaid and Supplemental Security Income when determining your child's eligibility.

Importantly, a special needs trust can also protect your child with special needs from uncertainty regarding caregivers after you're gone.

Tom Torr, a founding partner of Cocheco Elder Law Associates, PLLC, who specializes in elder law in New Hampshire, says that an advantage of special needs trusts is that they allow children with disabilities to stay on government benefits and still receive money "for supplemental care or special needs not covered by government programs, like extra clothing, trips with other family members, buying a TV or similar appliance."

A special needs trust allows money from it to be used for the child's benefit, without it turning upside down support programs you've already established for your child.


Image source: Getty Images.

Minor children

If your children are under 18 and you worry about who will care for them after you die, you might want to spell out who you'd like to raise them and how you'd like any inheritance left to them to be managed and spent.

Trusts can be set up to hold assets like IRAs that, if passed on directly to minors, could cause headaches. They can also be designed to trickle out assets to beneficiaries at various ages so that there's less risk that your 401(k) savings, accumulated over many years, are spent all at once on a vacation to Las Vegas.

"Trust funds can be an incredibly useful tool for middle-class families," says Torr. "A trust allows you to state not only who should inherit but when they should inherit those assets."

According to Torr, parents choose staggered distribution dates so their children receive partial distributions when they turn 25, 30, and 35, for example. A trust can also be useful if you worry about infighting among your heirs.

"A trust gives you greater protection than a will against legal action from anyone who is unhappy with the distribution of assets and decides to challenge it," adds Torr.

Image source: Getty Images.

Medicaid eligibility

Medicare won't pay for a nursing home (it can cover short-term rehabilitation if it follows a hospitalization), but Medicaid will pay for it -- if you qualify.

Financial services company Fidelity estimates that American couples will spend more than a quarter of a million dollars on healthcare during their retirement, and if they end up in a nursing home because of failing health, their savings could quickly disappear, forcing them to rely on Medicaid to foot the bill.

The average nursing home costs $7,700 per month, according to insurance company Genworth, and most Americans haven't set aside nearly enough money to pay that expense for long. In 2013, the Federal Reserve found that the average American's retirement savings totaled less than $60,000.

Clearly, many Americans will need to rely on Medicaid; however, qualifying for Medicaid isn't easy. Medicaid rules vary from state to state, but the program can force you to draw down your savings to as little as $2,000 before it'll begin picking up the tab. Furthermore, if Medicaid does pay for your nursing-home care, it can place a lien on your home to recoup its expenses. Such a lien could quickly erase any gain on the sale of your home that would otherwise go to your heirs.

While a trust won't protect your savings from Medicaid's qualification rules, it may offer some protection to your homestead. If you transfer your home to an irrevocable trust and five years pass before you apply for Medicaid, then your home can escape the risk of a Medicaid lien.

Transferring the home to an irrevocable trust means giving up your control over it, but if you worry that you could be forced to leave your home before you're ready, Torr says, you can include a life-lease agreement that allows you to remain in your home even after you've given control of it to the trust.

According to Torr, a Medicaid asset protection trust may be appropriate in these cases:

  • You are concerned about preserving assets for your spouse or other family members.
  • You may require Medicaid benefits for long-term nursing-home care in the future, even if currently health is not an issue.
  • You do not have long-term-care insurance, or have not taken any other steps to cover long-term nursing-care costs. 
  • You have people you trust, such as adult children, who can serve as trustees.

Tying it together

Trusts are not do-it-yourself projects and can be expensive. They can cost thousands of dollars to set up, and there are ongoing expenses associated with them, including accounting fees. Trusts' high costs mean that they won't be right for everyone, but in situations like the ones outlined here, it may make sense to discuss your options with an attorney who specializes in them.

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