Pros and Cons of Revocable Trusts

In many family situations, revocable trusts can be a good planning device to handle assets and pass them on to children and grandchildren. They can also result in disqualification from government home care or nursing home care programs such as Medicaid. It is important to know when a revocable trust is a wise choice, or when it can cause a family to lose assets.

A benefit of a revocable trust is that it can be modified at any time depending on family circumstances. If a married couple makes such a trust to pass on their hard-earned assets to their children, and years later that child ends up in a nursing home, the assets can easily be redirected to the grandchildren by amending the trust. If the person making the trust dies, the assets in the trust either stay there for the family or can be paid out to them. It does not go through probate, so it protects family privacy, and names the person you want to handle your financial assets upon your death or incapacity. In addition, after your death, your house and investment assets such as stocks, get a “step up in basis”, which means IRS treats the assets as if they were bought at what they are worth at the time of your death. That means your heirs will not have to pay capital gains tax unless they sell the stocks or house for more than the value at the time of your death, even if you bought the stock or real estate at a much lower price years ago.

There are potential serious downsides to revocable trusts. First, if you or your spouse become sick and need long term care, all those assets will count toward Medicaid or VA benefits and may disqualify you or your spouse from getting those benefits. In short, revocable trusts give you zero protection of assets if Medicaid or VA benefits are needed. People often do them under the mistaken impression that they are “protecting” their assets. This is simply not true. The assets are still considered to be available to the husband and wife.

A second downside is that if one spouse dies, and assets are transferred from the trust to children or other non-spouse beneficiaries, the state of Connecticut will consider that a transfer of assets that will disqualify the surviving spouse from Medicaid for a certain period of time. A Connecticut Supreme Court case specifically decided that transfer from a deceased spouse’s revocable trust will create a penalty period that disqualifies a surviving spouse for Medicaid. A later Connecticut Supreme Court case made clear that if the deceased spouse’s assets had gone through probate and into a trust inside the will, this would not be considered a disqualifying transfer. The court also said that passing the assets to people other than the surviving spouse would cause a penalty period. So that can be a serious downside if the assets are in a revocable trust and are not passed into a trust inside the deceased spouses will.

The prudent person should ask for the benefits and the downsides of doing revocable trusts. Sometimes they are very beneficial, and sometimes they can be the wrong thing to do. If you are discussing revocable living trusts with someone suggesting you do one, make sure you ask for the pros and cons, and that the person knows your family’s health and financial circumstances. Mark Twain said, “I’ve found that common sense is not so common.” Prove him wrong by asking questions.