Both revocable living trusts and asset preservation trusts can be useful parts of an estate plan. These types of trusts have some common features, but there are also important differences to keep in mind.
At a basic level, a trust is a legal entity that can hold and manage assets on behalf of the trust’s beneficiaries. The trust document sets out how the trust will be managed, names the trustee and any successor trustees, and lists the beneficiaries of the trust. A trustee is the person, or entity, that carries out the instructions of how to manage the trust.
A revocable living trust is a trust where the trust creator serves as trustee of the trust and reserves the right to modify or revoke the trust. The trustee can also freely move assets in and out of the trust. The trust creator can also name successor trustees in case of the death or incapacity of the trust creator.
In an asset preservation trust, also known as an asset protection trust, neither the trust creator, nor the trust creator’s spouse can serve as trustee. Typically, an adult child, other close relative, or trusted friend serves as trustee. The trust creator can still specify how the trust will be managed, who will serve as trustee, and name successor trustees. Unlike in a revocable living trust, neither the trust principal nor proceeds from the sale of trust principal can go back to the trust creator or their spouse in an asset preservation trust. Income generated by trust principal, however, can be distributed to the trust creator and their spouse.
One major commonality between these trusts is that they allow for trust assets to be managed for and distributed to trust beneficiaries while avoiding the potentially lengthy and expensive probate process. Through the instructions in the trust document the trustee can specify when and how beneficiaries receive distributions from the trust. One cautionary note is that in order for the trust to manage assets, the assets have to be transferred from the name of the trust creator to the trust. In order to avoid probate, the assets have to be transferred to the trust before the death of the trust creator.
Another benefit of both trusts is the ability of the trust to ensure the sound management of trust assets in case of the trust creator becoming incapacitated. Since the trust creator cannot be the trustee of an asset protection trust, this protection against incapacity is built into an asset preservation trust. A competently drafted revocable living trust should also name successor trustees to allow for a potential incapacity.
An asset preservation trust has two major advantages that do not apply to revocable living trusts. First, an asset preservation trust can, under certain circumstances, keep assets from counting against Medicaid asset cap when applying for coverage of nursing home expenses. This protection allows for an individual to receive the Medicaid nursing home benefit while still passing on the assets in the asset preservation trust to the trust beneficiaries. An additional use case of the asset preservation trust is that the trust assets are protected from the trust creator’s creditors.
Whether or not an individual would benefit from having a revocable living trust, an asset preservation trust, both, or neither is a question that depends on each individual’s specific circumstances. Individuals should meet with an experienced, local elder law attorney to work out what works best for their estate plan. Trusts should only be drafted by an experienced elder law attorney and tailored to the needs of a specific client in mind. The attorney will make sure that any trust will be legally valid in the client’s home state and can fulfill the client’s wishes for their estate plan. The attorney can also guide the client to make sure any trust operates according to the client’s wishes into the future.
To discuss how a revocable living trust or an asset preservation trust could fit into your estate plan, please call Martha C. Brown & Associates at (314) 962-0186.