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trust

Many people think that trusts are only for the ultra-wealthy. It has been our experience that most people think wills are “easier” than trusts to create and manage unless their family has complex requests or lots of property.

In practice, we have found some very good reasons why everyday people may prefer a trust over a will. Over the following sections we’ve laid these reasons out for you to consider in your own life:

1) Money Management

When a will is used to transfer assets (such as during the probate process), the heirs in that will receive lump sum inheritances– unless there is a “testamentary trust” built into the will, that is. To be clear, this process works well if the recipient is responsible with their finances. However, lump sum payments can be disastrous for the recipient if they are not financially savvy or disciplined. Consider, for example, a child who is under the influence of cults or con artists. We’ve also seen situations with beneficiaries who were addicted to drugs or gambling, or who simply wanted to live an outsized “big spender” lifestyle. Big boats, fancy cars, long vacations, and other big-ticket items can quickly eat up an inheritance.

Here’s the good news: you don’t have to just name such a loved one as the beneficiary of your will and hope for the best. A living trust with a spendthrift clause could be the ideal solution.

With this system, there is no loss of control of your assets. You act as the trustee while you are alive and well. You will also designate a trusted person (or a professional trustee) to become the trustee after you are gone.

Let’s say you’ve included a spendthrift clause in your trust. Then you pass away. What happens now? Your trust becomes irrevocable. The beneficiary has no direct access to undistributed assets. Creditors of the beneficiary would “step into their shoes” in a legal sense, meaning they also do not have direct access.

Creditors would be able to go after distributed resources, but you can instruct your trustee to provide limited distributions on a monthly basis in order to plan ahead for this possibility. This means that, in addition to the creditor protection, your beneficiary is not be able to squander large amounts of money in a single action. Given that people tend to mature over time, you could even allow for larger lump sum distributions when the beneficiary reaches certain age thresholds!

2) Special Needs Planning

Most people with disabilities rely on Medicaid as a source of health insurance. They also get a small amount of income through the Supplemental Security Income (SSI) program. These are need-based benefits, meaning that you cannot qualify for them if you have significant assets in your name.

Let’s say someone who is receiving need-based benefits receives a large payment from a will. Unfortunately, that payment could cause loss of eligibility for their programs. A supplemental needs trust provides a potential solution to this issue. How?

The trustee that you empower is able to use the trust assets to improve the beneficiary’s quality-of-life in specific ways. However, the crucial part of this trust is that the beneficiary’s eligibility for government benefits remains intact.

3) Nursing Home Asset Protection

Medicare will not pay for a stay in a nursing home, and these facilities are extremely (even prohibitively) expensive. Medicaid does cover the custodial care that they provide, but you cannot qualify if you have significant assets in your name. How do you mitigate this?

If you convey assets into an irrevocable income-only Medicaid trust, you could accept distributions of income that has been generated by assets in your trust. You would not be able to touch the trust principal itself, but that principal also would not count if you apply for Medicaid to pay for long-term care.

Please keep this in mind, however: timing is key. You must fund the trust at least five years before you submit your application for Medicaid coverage.

4) Providing Incentives

You can use an incentive trust to guide a loved one toward positive behavior. Think of it as the “carrot” in the carrot and stick approach. In this trust declaration, you instruct the trustee to distribute assets if your beneficiary meets incentives you have laid out.

Let’s consider a common incentive that we see in our practice: regular distributions if your beneficiary stays in college. You can even provide a dollar-for-dollar match of income earned on the job after graduation!

Schedule a Consultation Today!

If you would like to work with an Austin, Texas estate planning attorney to put a plan in place, we are here to help. You can schedule a consultation by calling us at 512-258-9455. Alternatively, you can fill out our contact form if you would rather send us a digital message.

Would You Like to Know More?

If this article has inspired you to increase your knowledge on estate planning, please feel free to browse our articles on Medicare and nursing homes, major estate planning mistakes, or a quick explanation of intestate distribution.

Regina Slaton Schauer
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