Living Trust Plus™ FAQ

Frequently Asked Questions About the Living Trust Plus™

I’m still healthy. Why should I care about avoid nursing home expenses?

Because 70% of Americans who live to age 65 will need long-term care at some time in their lives, and because 50 percent of all couples and 70 percent of single persons become impoverished within one year after entering a nursing home. You can’t just hide your head in the sand and hope that you are never going to need nursing home care.  The best estate plan in the world is useless if you wind up in a nursing home all of your money on long-term care.

What is the Living Trust Plus™ and how does it work?

The Living Trust Plus is an irrevocable asset protection trust that you create while you are living, that allows you to receive all income from the trust assets, including the right to live in any trust-owned real estate, but you can not have direct access to principal.

If either you or your spouse has direct access to principal, the assets in the trust would be deemed “countable” for Medicaid eligibility purposes and would be completely available to almost all  other creditors. Prohibiting direct access to principal is the key to why the Living Trust Plus works — for general creditor protection and for Medicaid asset protection.

Does the Living Trust Plus completely avoid probate, just like a regular revocable living trust?

Yes, if properly funded.  So long as all assets are either titled in the Living Trust Plus or name the Living Trust Plus as the beneficiary on death, probate will be avoided.

You say I can’t have direct access to my principal. Does this mean I may have indirect access to the trust principal?

Possibly. There are two ways that you might have indirect access to the trust principal. The first way is that the trust is written so that the Trustee has the ability to make distributions of principal to the trust beneficiaries, who are typically your adult children. If the Trustee distributes principal to a trust beneficiary, that beneficiary can, but is not required to, return some of that principal to you or use it for your benefit.

There must not be any prior agreement that a trust beneficiary will return some of that principal to you or use it for your benefit.  The second way for the Settlor to get at the trust principal is for the trust to be terminated, as explained below.

I thought this is an irrevocable trust?  How can an irrevocable trust be revoked?

The Living Trust Plus is an irrevocable trust, and many people, including lots of good estate planning attorneys, think that means the trust can never be revoked. But the fact is that the term “irrevocable” means only one thing – that the trust can not be unilaterally revoked by the creator of the trust.

Although the Living Trust Plus is irrevocable and can’t be revoked unilaterally by the settlor, under common law and under the Uniform Trust Code, a non-charitable irrevocable trust can be modified, terminated, or partially terminated upon the consent of the trustee and all trust beneficiaries.

What kind of people use the Living Trust Plus?

Typically clients who are in their mid-60s to mid-80s, already retired, and worried about the potential catastrophic cost of long-term care, and they want to protect the nest egg that they’ve been saving for a rainy day.

The rainiest possible day for most people is the day they start needing nursing home care, and if they want to truly protect their nest egg and have it actually benefit them when the time comes, they know they need to do something to shelter that money. The Living Trust Plus, for many people, is the best way to do that.

What about Long-Term Care Insurance?

Most Living Trust Plus clients don’t have long-term care insurance because they’re too old to afford it or to qualify for it, or they have a medical condition that prohibits them from getting it. For many clients, the Living Trust Plus is the best possible alternative to purchasing long-term care insurance to cover nursing home expenses.

What assets can go into the Living Trust Plus?

The main types of assets that should be funded into the Living Trust Plus is real estate, any non-qualified financial investments, ordinary bank accounts, and life insurance.

Are there gift tax implications when I transfer assets into my Living Trust Plus or when the trust distributes assets to my children? 

There is never tax due by the recipient of the gift. Rarely is any tax due by the giver of the gift either. Many people confuse the annual gift tax exclusion with the lifetime gift tax exemption, but these are entirely different. Let’s try to clear up the confusion:

The Annual Gift Tax Exclusion. The annual gift tax exclusion is the amount that can be given away by an individual (or by the trustee of the Living Trust Plus) in any given year to an unlimited number of people free from any federal gift tax consequences at all. For example, if you have three children, you (or the trustee of your Living Trust Plus) could give away the annual gift tax exclusion amount ($14,000 as of 2017) to each of your children each year and these transfers to your children are completely disregarded for federal gift tax purposes and need not be reported.

The Lifetime Gift and Estate Tax Exemption. In addition to the annual gift tax exclusion amount, there is a lifetime gift tax exemption amount, which is the total amount that can be given away (over and above any annual exclusion gifts) by an individual (or by the trustee of the Living Trust Plus) over the individual’s entire lifetime. The lifetime gift tax exemption is the same as the federal estate tax exemption so that if you (or the trustee of the Living Trust Plus) give away any amount of your lifetime gift tax exemption, then this amount will be subtracted from your estate tax exemption when you die. For 2017, the lifetime gift tax exemption is $5.49 million per individual (almost $11 million for a married couple), which is the same as the federal estate tax exemption.

Federal Gift Tax Return. If annual transfers are made in excess of the annual exclusion amount, then a Federal Gift Tax Return (IRS Form 709) needs to be filed by the giver of the gift by April 15th of the calendar year following the date of the gift. As stated above, there is a gift tax annual exclusion for gifts of $15,000 per person per year or less (as of 2018), and there is a lifetime exemption equivalent of $11.2 million per individual (double that for a married couple), so no gift tax will be due unless your total gifts (including gifts made by the trustee of the Living Trust Plus to beneficiaries of the trust) exceed the amount of this lifetime exemption. The annual exclusion amount and lifetime exclusion amount are currently set to increase for inflation in the future. If you have an accountant that does your taxes, you should have your accountant prepare the Form 709. If you don’t have an accountant, our firm can prepare the Form 709 for an additional charge.

Are there any capital gains tax implications for selling my home if I have titled my home into my Living Trust Plus

No. The capital gains tax implications of selling a home from the trust are no different than if you sold it yourself as an individual.  The Living Trust Plus does not affect the $250k capital gains exclusion available to each owner on the sale of a primary residence.

Are there any other tax implications in connection with the Living Trust Plus

No.  The Living Trust Plus is completely tax neutral – i.e., it will have no effect on your income tax, capital gains tax, gift tax, or estate tax.

What if a big percentage of my assets are tied up in a qualified retirement plan (e.g., IRAs and 401(k) plans)?   Can I still do the Living Trust Plus™?

Although qualified assets can’t be transferred into the Living Trust Plus™ because of IRS regulations, it sometimes makes very good sense to liquidate your qualified plans and transfer the after-tax balance into the Living Trust Plus™ Asset Protection Trust.  Although “conventional wisdom” typically recommends postponing paying taxes as long as possible, every rule has its exception.  For example, converting funds from a traditional IRA to a Roth IRA has three significant benefits:

(1) You can avoid future mandatory disbursements from your IRA;
(2) Avoiding future mandatory distributions means your money can grow for a longer time, and will grow tax fee in a Roth IRA.
(3) By converting funds now, you owe tax at today’s ordinary income rates, and will never again have to pay income tax on these funds, or the growth in these funds.

No one knows if or when the federal government is going to raise tax rates, or whether your beneficiaries will be in a higher tax bracket.  Assuming that either or both of these scenarios could become true, then converting now makes good sense. That is because paying the tax bill at your lower rate will ultimately produce more cash for your heirs than if you left the money in a traditional IRA and they paid the tax.  See also:  http://www.usatoday.com/money/perfi/taxes/2011-05-05-tax-cut-record-low_n.htm wherein USA Today states that “Americans are paying the smallest share of their income for taxes since 1958,” meaning that there is a significant change of taxes increasing over the years.

These same 3 exceptions, and a fourth and much greater exception, applies to moving funds from a traditional IRA into an after-tax investment inside the Living Trust Plus™:

(1) You avoid future mandatory disbursements from your IRA;
(2) Avoiding future mandatory distributions of principal means your money can grow for a longer time and, if put into tax-free investments, can grow tax fee inside the Living Trust Plus™ (however, unlike a Roth IRA, the deferred growth may at some point be subject to income taxation).
(3) By converting funds now, you owe tax at today’s ordinary income rates, and will never again have to pay income tax on these funds.
(4) Lastly, and most importantly, transferring assets from a traditional IRA into the Living Trust Plus™ protects those assets, after 5 years, from ever having  to be paid to the nursing home for long-term care.  Given that 70% of adults over the age of 65 will need long-term care, this asset protection feature of the Living Trust Plus™ is overwhelmingly more significant than the tax savings that might occur by leaving money in a traditional IRA which is completely exposed to nursing home expenses.

All that being said, some people with a lot of money in IRAs or other tax-qualified retirement accounts are not good candidates for the Living Trust Plus™ asset protection trusts. For these people, we may instead suggest they engage us to assist with long-term care financial planning and retirement planning to come up with other ways to help pay for long-term care if and when needed.

Does a married couple create one joint Living Trust Plus™ or two separate trusts? And what happens on the death of the first spouse?

A married couple will typically create two separate trusts, and typically nothing changes on the death of one spouse, as both trusts were already irrevocable prior to death. For married couples with estates larger than the Estate Tax exemption equivalent amount ($1 million in 2011), the Living Trust Plus is designed to utilize both exemptions.

Are there any assets that can’t go into the Living Trust Plus?

The assets that shouldn’t be transferred into the Living Trust Plus are your qualified retirement plans (e.g., IRAs and 401(k) plans) and your primary checking account. Most states treat qualified retirement plans as countable resources for Medicaid.

So if you want to protect the assets in your qualified retirement plan from Medicaid by using the Living Trust Plus you will need to cash out your retirement plan first, and pay any income taxes that are due as a result of terminating the plan.  We usually do not put annuities into the trust either, but it depends on the type of annuity.

Are there different types of trusts under the Living Trust Plus umbrella?

Below are two diagrams showing how the Living Trust Plus™ can operate.  There are two different versions of the Living Trust Plus™ — in the first version, which is most often recommended, the creator of the trust retains no ability to receive distributions directly from the trust. This version is simpler to operate mechanically and for tax purposes then the second version, and is also the only version that works for Veterans desiring to protect assets in connection with the Veterans Aid and Attendance Benefit and Medicaid.

Medicaid Asset Protection Trust
Veterans Asset Protection Trust
Veteran Pension Asset Protection Trust

Medicaid Asset Protection Trust
Medicaid Income-Only Trust
Living Trust Plus™ Income Only Trust

The second version, illustrated below, allows the creator of the trust the optional right to receive distributions of ordinary income directly from the trust. This second version, sometimes called an “income-only trust,” protects your assets from probate PLUS lawsuits, PLUS nursing home expenses (which can be paid by Medicaid), but does NOT protect your assets in connection with the Veterans Aid and Attendance Benefit.