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Are There Universal Rules for Trusts in U.S. States?

Q. Last week, in your article about Power of Attorney documents, you discussed the Uniform Power of Attorney Act, a law that was created to give universal rules for POAs across the states that have adopted it. Is there a similar law for trusts? If so, does it mention anything about creditors’ claims against settlors? The reason I ask is because I wanted to know what type of trust would best protect my assets from creditors and be best for purposes of qualifying for certain government benefits. Thanks so much for your help!

A. A trust is a type of entity that can own assets, held through the name of a trustee, and allows the distribution of those assets at a particular point of time, such as at the death of the person who created the trust. A “living” trust (meaning a trust created by a person who is living) is a type of estate planning tool that is a great option for those wishing to avoid the “nightmare of probate.” Probate happens when somebody dies with assets in their own name, whether they have a last will and testament or whether they die “intestate,” meaning without a last will and testament. Many people erroneously think that a last will and testament avoids probate. It does not; it merely gives instructions to the probate court to tell the probate court how you would like your estate handled and distributed.

Assets you place in a living trust do not have to pass through a lengthy and costly probate process, as they would with a will. That means your heirs will obtain what you want to give them much more efficiently. It will also allow them to maintain privacy in a way that a public record last will and testament does not allow. In some circumstances, you can also use a living trust to protect money you owe to creditors, as I will explain.

There are many types of living trusts, and your debts and assets are treated differently depending on which type you choose.

How Does a Living Trust Work?

All living trusts start off either revocable or irrevocable. If you start off with a revocable trust, it becomes irrevocable upon your death. With a revocable living trust, you retain complete ownership and control of the property in the trust and can change all of the terms, including the trustees and beneficiaries. You can also take the money out of the trust at any time, and you can use the money in the trust to pay your bills. Because you can take the money out of the trust at any time, so can your creditors. Assets in a revocable living trust are not protected from your creditors, so if you cause a car accident and get a judgment against you (in excess of your insurance), or if you wind up needing nursing home care, all of the money in your revocable living trust is treated as if it belongs to you personally.

In other words, assets in a revocable living trust are not protected in any way from any type of creditors, including the most likely creditor that everyone faces, nursing homes. The primary goal of a revocable living trust is to protect your assets from the nightmare of probate.

Only an irrevocable Asset Protection Trust such as the Living Trust Plus®, specifically designed to protect your assets in connection with the Medicaid and lawsuits, will protect your assets from creditors and the expenses of nursing home care.

Here’s what you should know about the two main types of living trusts:

Revocable trusts: A revocable trust allows you to change it as often as you like before you die. While you’re alive, everything in the trust is considered your personal property. When you die, the assets in the trust are considered part of your estate, and the successor trustee you assigned controls distribution. The revocable living trust may be written to terminate at the time of your death, after everything has been distributed to the named beneficiaries, or the revocable living trust may be written to divide into Trust shares for each beneficiary, with each beneficiary inheriting an irrevocable asset protection trust that can last for that beneficiary’s lifetime. Its primary purpose is to avoid probate.

With a revocable living trust, your assets will not be protected from creditors looking to sue or from nursing home expenses. That’s because you maintain ownership of the trust while you’re alive. Therefore, if you lose a lawsuit and a judgment is awarded to the creditor, or if you enter a nursing home, the money in your revocable living trust will need to be handed over.

Irrevocable trust: There are many types of irrevocable trusts, but by far the most common irrevocable trust that we prepare for our clients is the Living Trust Plus®, a specially designed type of irrevocable asset protection trust that protects your assets from probate plus lawsuits plus the expenses of long-term care. The Living Trust Plus® protects your assets from the expenses of long-term care by making those assets non-countable in connection with Veterans Aid and Attendance benefits and Medicaid benefits. With the Living Trust Plus®, you give away ownership of the property to the trust, but you can retain full investment control of the trust assets by being trustee of your own trust, just as you would with a revocable living trust.

The Living Trust Plus® irrevocable asset protection trust protects your assets from lawsuits, creditors, and judgments. Because you can’t take the property back after you transfer ownership of it into the Living Trust Plus®, your creditors or a judgment holder can’t reach it, either. It’s not yours any longer.

The Living Trust Plus® also enables you to qualify for government benefits. Assets that you own count against you for purposes of qualifying for certain government benefits, including Medicaid and Veterans Aid and Attendance. As mentioned, the Living Trust Plus® protects your assets from lawsuits, medical expenses, and — most importantly for the 99.8 percent of Americans who are NOT among the ultrawealthy — from the devastating costs of nursing home care.

The Uniform Trust Code

You also asked about whether there are universal rules for trusts, as there are for Powers of Attorney. The answer is yes. In 2000, the National Conference of Commissioners on Uniform State Laws (NCUSL) drafted a uniform law for trusts, the Uniform Trust Code, and encouraged the states to adopt the UTC. The goal of the Uniform Trust Code is to provide “precise, comprehensive, and easily accessible guidance on trust law questions. On issues on which States diverge or on which the law is unclear or unknown, the Code will for the first time provide a uniform rule.”

Adoption by the States

As of today, 34 states and the District of Columbia have enacted a version of the Uniform Trust Code (UTC) — please note that states always have the option to modify or not adopt any part of a uniform act that the state legislature does not completely agree with, so uniform acts are never truly 100 percent uniform across all the states, but they are typically very consistent across states. Please see the Farr Law Firm’s list of States that Have Adopted the Uniform Trust Code on our website. To our knowledge, this list is the only list of its kind that contains links to the “Creditor’s Claims Against Settlor” section of the UTC for each state. Please note that it is this section of each state’s UTC that enables the Living Trust Plus® Asset Protection Trust to offer creditor protections for general asset protection purposes. There is also federal Medicaid law that requires each state Medicaid agency to honor this type of asset protection trust in connection with Medicaid eligibility. Until recently, only the state of Minnesota did not allow this type of trust in connection with Medicaid. But very recently the Minnesota “Trust Buster” Statute was overturned (an effort I assisted with), so now the Living Trust Plus® Asset Protection Trust works in all 50 states. The trend toward state uniformity in trust law should continue and the page will be updated as additional states enact the Uniform Trust Code.

Get Your Estate Planning Documents in Place to Protect Yourself and Your Loved Ones

Here at the Farr Law Firm, we have strategies to help everyone plan for themselves and their loved ones. For most Americans over age 65, a Living Trust Plus® is the preferable form of estate planning because it includes asset protection for the person planning, and not just for that person’s children or other descendants. For purposes of Medicaid eligibility, this type of trust is the only type of self-settled asset protection trust that allows a settlor to retain an interest in the trust while also protecting the assets from being counted by Medicaid and by the Veterans Administration. If you’re a client or potential client who would like more information about Living Trust Plus®, please call our office to make an appointment for a no-cost introductory consultation.

 

Estate Planning Fairfax: 703-691-1888

Estate Planning Fredericksburg: 540-479-1435

Estate Planning Rockville: 301-519-8041

Estate Planning DC: 202-587-2797

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About Evan H Farr, CELA, CAP

Evan H. Farr is a 4-time Best-Selling author in the field of Elder Law and Estate Planning. In addition to being one of approximately 500 Certified Elder Law Attorneys in the Country, Evan is one of approximately 100 members of the Council of Advanced Practitioners of the National Academy of Elder Law Attorneys and is a Charter Member of the Academy of Special Needs Planners.

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