Before we drill down to modifying a revocable living trust, we should explain some of the benefits these trusts provide. Many people think a last will is the right transfer device for anyone who is not a multimillionaire, but this is a total misconception.
Probate/Succession
The distribution process is not as simple and straightforward as it may appear to be on the surface when a last will is utilized. If you were to create a last will, you would name an executor in the document to serve as the administrator. This individual or entity could not distribute the assets independently without supervision.
Under Louisiana state laws, the will is probated in court. This process is also referred to as “opening the succession” of the deceased individual. During this process, the court would determine the validity of the will and otherwise supervise the administration of the estate. This time-consuming process will take nine months to a year in most instances.
Since the inheritors do not receive anything during this interim, the time lag is inconvenient at best and problematic at worst, and this is not the only negative. Significant expenses will present themselves during the succession period, including legal fees, court costs, the executor’s payment, accounting charges, liquidation expenses, and incidentals.
This is a public proceeding, so anyone with an interest in how the assets were distributed can access the records. Parties can also step forward to present estate challenges. They are often without merit, but nonetheless, this can slow down an already lengthy process and create a lot of headaches for the rightful inheritors.
Efficient Estate Administration
These drawbacks are not a factor when a living trust is used instead of a will because the trustee would be empowered to distribute assets outside of probate. This is one advantage, but there are many others.
One of them is the ability to streamline the administrator’s administration process because the assets that must be distributed would be consolidated. You can also include a spendthrift provision to protect the interests of a beneficiary who may not be skilled at handling money.
As the grantor of a living trust, you would act as the trustee while you are alive. Unfortunately, a significant percentage of elders become incapacitated late in their lives. To account for this, you could name a disability trustee when establishing your living trust.
Clearly, a living trust is a comprehensive, versatile estate planning tool that can be a far better choice than a last will.
Modifying a Living Trust
Establishing a living trust gives you absolute flexibility. This type of trust is revocable, so you have the power to dissolve it entirely if you ever choose to do so.
If you want to make minor changes to the living trust, you can prepare a trust amendment to accompany your original trust document. If the changes are more significant, a restatement of the trust would be appropriate.
A third possibility is to completely revoke the original trust and create a brand-new revocable living trust. This would only be necessary if the circumstances have changed dramatically.
Irrevocable Trusts
While we’re on the subject, we should mention that in addition to the revocable living trust, there are irrevocable trusts. As the name indicates, the grantor cannot revoke this type of trust after it has been created.
Plus, if you create an irrevocable trust, you cannot be the trustee, so you cannot directly control the funds you conveyed to it. In most cases, an irrevocable trust cannot be changed, but there are limited exceptions we will explain in another post.
Why would you want to lose this control if you can use a revocable living trust more flexibly? The answer lies in the concept of “incidents of ownership.”
Useful Separation
When you establish and fund an irrevocable trust, you surrender incidents of ownership of the assets because you no longer have control of them. This can be useful if you are in certain situations.
For example, a federal estate tax is a factor for high-net-worth individuals with more than $13.61 million in assets. There are irrevocable trusts that can be used to provide estate tax efficiency.
Many elders will need long-term care at some point. Nursing homes provide custodial care, which is not covered by Medicare. Since nursing facilities and in-home caregivers are very expensive, this gap is a problem.
Medicaid is another government health insurance program that will pay for custodial care. It is a need-based program that is only available to people with limited assets.
As a response, you could potentially convey assets into an irrevocable, income-only Medicaid trust. You would no longer be able to access the principal, but you could receive distributions of the trust’s earnings.
If you apply for Medicaid at least five years after funding the trust, the assets that are held by the trust will not count. This is the core of a nursing home asset protection strategy.
These are a couple of scenarios that would call for the utilization of an irrevocable trust, and there are others. We will look at them over time, so you may want to bookmark this page and come back to visit.
Attend an Educational Event!
We frequently see the results of estate planning in action when people come to us seeking damage control solutions. It is disconcerting to see families struggling with difficult circumstances that could have easily been avoided if a plan had been established in advance.
People tend to take action when they understand why estate planning is important. This is why we share so much information on this website, and we take these efforts a step further through the learning events that we conduct on an ongoing basis.
There can be many of them on the schedule at any given time, and we urge you to attend the session that works for you. If you decide to join us, we ask that you register in advance so that we can reserve your seat.
To see the schedule and obtain more detailed information, visit our Metairie, LA estate planning events.
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