Living Trusts - Helpful Or Not

Many people respond to advertisements about “living trusts”.  Invariably the advertisement has an enticement, such as “avoid probate”, or “avoid taxes”.  Sometimes people create a living trust, and sometimes they do not, but in almost all cases, the family does not have a good understanding of what the trust does, and very often, a mistaken impression that the trust will protect their assets if they need nursing home care.  The words “living trust” simply mean that the trust is created and assets put into it while you are living.  There are innumerable variations on what kind of “living trust” you can have. 

Let’s examine the “revocable living trust”, which is the kind that most people do.  The key word is “revocable”.  It means what it says, and it can be revoked entirely, or partially, at any time.  Common sense tells you that if you can revoke something, and take back all the assets, that all those assets are still available to you.  For this reason, revocable living trusts do absolutely nothing to protect your assets if you or your spouse need nursing home care, or Veteran’s benefits at home.  The State of Connecticut, and the VA, quite logically take the position that if a trust is revocable, the assets in it are still yours, and will count against you in determining if you are eligible for assistance.  So if you are contemplating the pros and cons of a revocable living trust, keep in mind it will not protect one penny of your assets if you become sick.

Often revocable living trusts have special estate tax planning paragraphs in them that seek to shelter assets from the Federal or Connecticut inheritance taxes.  This can be a good thing if your assets exceed $5 million for Federal Estate Tax and $2 million for Connecticut inheritance tax.  But it is probably true that 99% of Connecticut residents do not have assets that exceed $5 million, or even $2 million, so these tax clauses do not hurt them, but they don’t help them either.  Most Connecticut residents will never pay any inheritance tax, whether or not they have a revocable trust with tax sheltering provisions.

One reason often touted for revocable living trusts is that they “avoid probate”.  This is technically true.  The assets in the trust do not go through probate, but can be transferred directly to the children or other beneficiaries.  But what is often left unsaid is that even though the assets do not pass through probate, the probate fee is the same, whether or not you have a trust, a will, or neither.  That is because the probate fee is not based on what passes “through probate”, but on what is shown on the inheritance tax return, and in most situations, an inheritance tax return must be filed, even though there is no tax due.  The good news is that in Connecticut, the probate fee is very small.  But as of 2011, there is a new law that charges interest on the unpaid probate fee if the inheritance tax return is not filed.

One benefit of a revocable living trust is that it can allow someone else to handle your affairs for you, if you become incapable.  So this is a valid reason for such a trust.  However, a power of attorney may be just as effective without the complication or cost of the trust.  Another benefit is that it does allow for a greater degree of privacy, if that is a concern.

A few years ago, a client came to me about his sick brother who had put most, but not all of his assets into a revocable living trust.  He put his house in the trust, and some bank accounts, but some assets were still in the brother’s name.  “My brother’s assets are protected, right?” he asked.  Sadly, I had to inform him that all assets were countable and would have to be spent on his brother’s care.  A few months later, his brother died.  At that time Connecticut had a much lower estate tax exemption and again I sadly had to inform him that all the assets were countable and the State inheritance tax had to be paid, even though most of the assets did not pass through probate.  “So what good was the trust for my brother?” he asked.  In his case, the trust was neutral, neither good nor bad, except for his mistaken belief that the assets were protected if he got sick.  It is this mistaken belief that causes the greatest harm to families.

There are certain types of irrevocable trusts that can protect assets from the costs of a nursing home, but these are significantly different from the revocable trusts and are not for everyone.

So, a word to the wise is get information on the pros and cons of a revocable living trust from an experienced elder law attorney.  It may be beneficial.  And it may not.