If you haven’t considered setting up a trust, you might want to. Trusts are key tools in estate planning and can support long-term care planning, providing clear asset protection and care coordination to ensure your wishes are met.
Trusts help families control how assets are managed during life and how they will be distributed after death. There are different types of trusts, and while some terms are often used interchangeably, there are key differences between them.
Below, we’ll discuss living trusts, distinguish between revocable and irrevocable trusts, and determine the role trusts play in planning for your long-term care needs. The right trust can help reduce stress, preserve wealth, and simplify care decisions, providing peace of mind for you and your loved ones should you become incapacitated or pass on.
What Is a Living Trust?
A living trust is a legal arrangement that allows individuals to manage and distribute their assets during their lifetimes and to determine how they will be distributed after death. Money, real estate, cars, and other personal property can be transferred to a trust, which is then managed by the grantor (the person who set up the trust) or a designated trustee.
Living trusts offer many benefits and are typically created to avoid costly probate after you die. Instead of the court distributing your assets, your living trust outlines how you want them to be distributed, and they are passed directly to your beneficiaries.
This allows for faster asset transfers and helps your estate maintain financial privacy throughout the process. Living trusts are private. They do not become part of the public record after your death, unlike wills, so you never have to worry about your financial records being disclosed publicly.
Trusts can be structured in two different ways.
- Revocable trusts can be modified or revoked by the grantor at any time. This could be a good option if you are worried about your living circumstances changing or you simply want the option to change your trust.
- Irrevocable trusts cannot be changed once they are set up. This could be a good option if you are looking for more asset protection. Creditors cannot access assets in a trust.
There are pros and cons to each type of trust, and which is right for you depends on your planning goals.
What Is a Revocable Trust?
A revocable trust is a trust that can be changed. It allows the grantor to modify, add, or remove assets as long as the grantor is living. This can also include adding or removing beneficiaries, adjusting trustees, and more.
Because it is changeable, the grantor always has access to their assets. As a result, they would not be shielded from long-term care or Medicaid costs. That means that you would have to use your assets to pay for your care before Medicaid would kick in. It still qualifies as your property under a revocable trust, so if you’re looking for asset protection, a revocable trust may not be for you.
Revocable trusts are best suited for individuals who are concerned about control and flexibility. They may not be worried about long-term care needs yet, or they may believe their estate can cover the cost of care without trouble.
Keep in mind that revocable trusts are only revocable while you’re living. Once you pass away, they are automatically converted to irrevocable trusts. This ensures the trust’s assets will be distributed according to your wishes, since you are no longer alive to consent to any changes.
Irrevocable Trusts and Asset Protection
On the other hand, irrevocable trusts cannot be easily changed once they are established. Once you set it up, your assets become legally separate from you (the grantor).
They are no longer part of your personal property, which means they would not be considered when it comes to the value of your estate. They cannot be factored into Medicaid planning, which is why irrevocable trusts are popular for protecting estates from long-term care expenses.
You will not be required to spend down assets in an irrevocable trust because they no longer belong to you. Irrevocable trusts are often used in Medicaid planning to preserve eligibility for benefits. Additionally, they can also protect estates from creditors. Your assets cannot be touched, even if you file for bankruptcy.
Irrevocable trusts are best suited for individuals seeking greater asset protection, control, and flexibility. You don’t have to worry about draining your accounts to pay for your long-term care needs.
Revocable vs. Living Trusts: Key Differences
While many people use revocable and living trusts interchangeably, there are actually a few key differences that you should keep in mind.
First, a revocable trust is a type of living trust. Not all living trusts are revocable, but all revocable trusts are living trusts. As long as you are living, you can make changes to the revocable living trust.
- A living trust describes when the trust takes effect. It is only effective during your lifetime – while you are living. Once you pass, it will become an irrevocable trust because you are no longer able to consent to any changes.
- Revocable trusts refer to whether or not you can change or dissolve the trust after creating it. If you have a revocable trust, you can make changes as long as you are of sound mind. You still have access to your assets, so they can be factored into your finances when it comes to long-term care.
Many living trusts are revocable, just in case you need access to your assets. However, that may not be the best choice if you are planning for long-term care needs. Irrevocable living trusts offer stronger protection, allowing you to take advantage of Medicaid without draining your estate.
How Trusts Fit Into Long-Term Care Planning
Trusts can be an essential part of your long-term care planning. They help families plan for both current care needs and protect the estate’s future financial security.
The type of trust you want depends on many different factors, including your ultimate goal. Generally speaking, revocable trusts prioritize flexibility. You can still control where your assets go during your lifetime and retain full access to them. They are often used to help skip probate, distribute assets quickly, and protect financial privacy.
All assets in a revocable trust are factored in when it comes to your income and estate, so if you are looking to take advantage of Medicaid, the value of the revocable trust will work against you. You will need to spend it down before you qualify, which is not an attractive option for those looking to preserve their estate.
On the other hand, irrevocable trusts emphasize protection. While you lose some of the control over your estate, it becomes protected from creditors, Medicaid, and other groups who may think they have a claim to your financial resources. You no longer own the elements of their irrevocable trust, so it cannot be used to settle your financial affairs.
The right living trust can help you balance care access with asset preservation, so be sure to consult with an estate planning professional and LTC insurance professionals to understand your options.
When to Consider a Trust for LTC Strategy
It is never too early – or late – to start thinking about your personal long-term care strategy, and a trust can be an essential part of that. A trust may be right for you if:
- You’re preparing for potential nursing home or in-home care costs. Depending on where you are seeking care, the type of care you need, and any additional services you require, the cost can quickly add up and drain your savings.
- You want to ensure your estate passes smoothly to your heirs. You don’t have to worry about probate, and unlike wills, the contents of the trust will not be disclosed publicly.
- You want to take advantage of Medicaid. You should set up a trust before applying for Medicaid, since certain transfers may have look-back implications that could disqualify you from coverage.
The cost of long-term care will only increase over time, and a trust may be a good option if you are looking to protect your estate without compromising the quality of care you receive.
Working with Professionals
Long-term care can be tricky to navigate, so you must engage with the proper professionals to help you understand your options.
- Estate planning attorneys can determine the type of trust that best suits your long-term care goals.
- Financial and insurance advisors can help integrate trusts with long-term care policies.
Coordinated planning with all these professionals will help ensure you remain compliant, meet eligibility requirements, and protect your financial future.
Conclusion
Trusts are powerful tools that can complement your long-term planning. They help balance control, asset protection, and readiness for long-term care.
Revocable and irrevocable living trusts serve different yet complementary purposes. It all comes down to what you are prioritizing: flexibility or asset protection. If you’re not sure, connect with experienced professionals like Lavine LTC Benefits to help you navigate your options.
Consulting with an experienced professional ensures your plan supports both your care and your legacy. Contact us today for a free consultation. We can help you understand your options, provide recommendations based on your financial circumstances, and help you secure your financial future while gaining peace of mind.
Your care doesn’t have to cost your estate, and we can help with sharing ideas about long-term care planning benefits.