Can You Avoid Common Trust Mistakes?

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The initial inquiry of McHugh & Macri through our Client Profile is to determine a client's estate and tax planning needs. Reduced to basics, estate planning is the need for a will, a power of attorney and a health care directive/living will to assure that your "legal house is in order." If the estate is subject to Federal estate taxes, the necessary tax planning will be incorporated into the estate planning. This is the beginning, not the end, of the need for planning.

We next concentrate on life care planning to minimize income and gift taxes on investments while you are alive and to implement asset preservation planning to protect your lifetime estate from medical spend-down for long-term health care costs.

While estate taxes can take 40 percent and income taxes up to 38 percent, long-term care cost is referred to as the "100 percent tax" since it can exhaust your entire nest egg and estate.

The above estate, tax and lifetime planning needs use specialized trusts to achieve asset preservation.

Tax/Estate Trust Planning

To avoid or minimize estate taxes, McHugh & Macri will use "qualified disclaimer" trust provisions to allow establishment of a credit shelter and/or a marital trust for the benefit of the spouse and children. There may be a need for spend thrift trusts for potential beneficiaries who are financially irresponsible; a need for disability trusts for the special needs/care of disabled children or beneficiaries; minor trusts for underage beneficiaries to allow the money to be used for limited purposes until they reach a mature age and the funds are released.

Most tax and estate planning advisers stop there with the tax techniques and leave the residuary of the testamentary estate to the surviving spouse, without addressing the 100 percent tax noted above. Without further protection, the will is the same "sweetheart will" we see on a daily basis whereby one spouse passes the entire estate to their sweetheart/surviving spouse.

Consider these complications beyond saving taxes: What if the surviving spouse is disabled, in a long-term care facility or on public benefits? The inheritance received must be spent on the medical care/facility cost of the surviving spouse and will disqualify him or her from public benefits/Medicaid. This forces the entire inheritance to be spent down on medical care before the beneficiary could again qualify for public benefits. That inadvertent effect does not need to happen.


Life Care Planning

Once the client's testamentary estate is protected, trusts should be used for lifetime planning. Qualification for Medicaid public benefits continues to allow transfers by an individual, typically to the same beneficiaries/children as the will and their establishment of a living SBT as described above. While transfer planning is subject to the Medicaid five-year look-back, the penalty need not be five years and certain "sole benefit of" (SBO) trusts are not subject to the Medicaid look-back penalty, provided the funds are paid out over the beneficiaries' lifetime. Further, the amount that is transferred to an SBO trust is not countable should the parent or grandparent or the beneficiary need future Medicaid or public benefits, provided the trust meets the complicated rules imposed by Medicaid law.

Another example of a lifetime trust is a special-needs trust (SNT) funded by a claimant after an auto accident, malpractice or court award. This is a self-funded trust with the recipient's own funds. Although the trust provides the benefit of not being countable should the recipient seek public benefits, the trust requires that upon death any balance must repay any public benefits paid, unless the trust has fully paid out during the beneficiaries' lifetime.

While these "legal zoom" techniques are available, they will not be found in form books or on LegalZoom on the internet. A certified elder law attorney has the knowledge and expertise to "dot the i's and cross the t's" necessary to do the trust right ... the first time.

Common Trust Mistakes

  • Trusts have too many rules that impair my access to the funds — In fact, subject to conforming with certain legal provisions, you make the rules for the trust.
  • You need a revocable trust to avoid the high cost of probate — This is the mantra of trust mills selling "one size fits all" trusts that insert your name into the boilerplate documents. The usual cost of probate in N.J. counties is under $200. The cost of a revocable trust is $2,000. Not a wise investment!
  • McHugh & Macri's mantra — "Preserve your assets ... without losing control." How? By use of the appropriate tailored trusts described above.

Don McHugh and Vince Macri are two of 450 attorneys nationwide who are certified in elder law (CELA) by the National Elder Law Foundation.

For more information, contact our East Hanover lawyers online.