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Elder Law Update Trusts: Does My Aging Mother Really Need One?

When clients come into our office, the first question they often ask is, “Do I need to set up a trust for my loved one?” The answer depends on the circumstances.

Frequently, clients are interested in setting up a trust in order to safeguard their assets from various creditors. Holding property in a trust in and of itself does not automatically protect assets. It is the selection of a given type of trust in a certain set of circumstances that may provide protection. Generally speaking, most people set up a revocable living trust (RLT) as part of their traditional estate plan. RLTs provide no asset protection and, in fact, they can have a negative impact in particular circumstances.

Nevertheless, RLTs can sometimes be useful, especially in the two scenarios that are described below. In these scenarios, the RLT is used to fund a separate trust that is designed to take effect after death for either an ill spouse or disabled child or third-party.

  1. When a Spouse is Ill: Providing for the creation of a “special needs trust” (SNT) for your spouse under your will can benefit a surviving spouse who has a chronic disease such as Alzheimer’s. The SNT under your will is funded by a “pour-back” from your RLT to your will time of your death. This testamentary SNT allows you to leave assets for your institutionalized spouse which can be used to pay for services that are not covered by the Medicaid program. Money remains in trust until the institutionalized spouse needs certain goods or services as specified in the SNT. At that time, a qualified trustee will use the assets for the institutionalized spouse. The beauty of this arrangement is that these SNTs are not considered “countable” assets that are subject to a Medicaid spend-down by the institutionalized spouse. Therefore, that spouse is allowed to keep these assets in trust without forfeiting her or his ability to qualify for Medicaid at the same time. This is a huge benefit for surviving spouses who have special needs as a result of Alzheimer’s, dementia, or other debilitating diseases.
  2. When a Child (or Other Third Party) is Disabled: We find that when parents are worried about leaving their disabled child behind, they are troubled by the fact that the intended inheritance for this child may be spent down in order for the child to be eligible for governmental benefits. For many parents this is a real concern. However, parents can set up a third-party SNT, again funded at the parent’s death, through their RLT for their disabled child, or any other disabled beneficiary (cousin, nephew, grandchild, friend, etc.). This SNT will contain assets that are not considered “countable” assets for purposes of governmental benefits, and at the time of the death of the disabled person, the assets are not subject to claw-back by the state of Illinois. This can be a huge benefit. This type of SNT can also be set up during the lifetime of the parent.

Thus, while you should always consider trusts as part of your estate plan, remember that not all trusts are the same. Often, a trust must contain provisions to target specific situations or concerns in order to be useful for the family.

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