Trusts are sets of rules that govern or otherwise affect assets. Certain trusts can be changed, and those trusts are called revocable trusts (because if the trust can be changed, the trust can also be revoked or terminated). Trusts that cannot be changed are called irrevocable trusts.
Traditionally, trusts have served four main purposes. Up until a few years ago, trusts were necessary to avoid or decrease estate taxes, but now everyone gets that same ability to decrease taxes with or without a trust.
Trusts have always and still do help people avoid probate (upon their deaths) for assets that are in their trusts. Also, trusts can set up rules that dictate heirs’ uses of assets years and decades after the trust maker’s death. Finally, trusts have been used as ways to “gradually” distribute assets or money over time to people who might struggle if the money was distributed to them all at once or who may have creditors who would seize the money if it was readily available.
A trust (a rulebook) can be created by someone while alive. These trusts are called living trusts.
If someone’s last will and testament includes rules on asset or money use (and does not just provide for immediate distribution of the asset or money to the heir without conditions), those rules are obviously also a trust. These trusts are called testamentary trusts, because they are included in a person’s last will and testament. Assets in testamentary trusts must be “accounted for” and reported to the local probate court and approved by that court at least every two years and usually more frequently than that.
Only a small number of specially prepared trusts shield assets from being considered “available” for calculating Medicaid or other government program eligibility that might pay for nursing home care. Those trusts are irrevocable trusts, often called “Medicaid trusts.” Those trusts usually provide that the trust creator is the owner of the assets in the trust but cannot use the assets. A trustee (usually somone other than the trust maker) manages the trust, and the people who may ask to use the assets of the trust may be people other than the trustee.
The assets in an irrevocable Medicaid trust can be likened to a car. I may own the car, but I cannot use the car myself under any circumstance. My brother could be the trustee who could decide who actually could use the car, but the people who could use the car might be limited to my nieces and nephews.
Why would someone go through the rigmarole of this arrangement? Why not just give the car to the nieces and nephews? There are two main reasons why this routine is used. First, if the car would be subject to capital gains taxes upon its sale, then I would want to own the car on my death in order to increase the car’s cost basis. Second, my nieces and nephews might have creditors who would seize the car if they owned it.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.