Should I Use a Corporate Trustee?

Recently, a client decided to include a corporate trustee as part of their estate plan.  When discussing the matter, they were surprised at how affordable they can be, and that they were glad they choose that route.  Thinking of that conversation and how important it is to name a proper trustee, I wanted to highlight some benefits of corporate trustees.

The Quad Cities Times’ recent article entitled “Benefits of a corporate trustee” warns that care should be taken when selecting someone to serve in this role. Now, many clients have loved ones in their lives who are capable of serving as a trustee or other fiduciary, but for some, family members may not have the experience, ability and time required to perform the duties of a trustee. Those with personal relationships with beneficiaries may cause conflicts within the family. You can name almost any adult, including family members or friends, but think about a corporate or professional trustee as the possible answer.  I also covered how to choose a trustee here:  https://www.galliganmanning.com/how-to-pick-a-trustee/

Here are some reasons to use a corporate trustee:

Experience and Dedication. Corporate trustees can devote their full attention to the trust assets and possess experience, resources, access to tax, legal, and investment knowledge that may be hard for the average person to duplicate. It’s their job and they hire professionals with backgrounds in these areas.  Many people who choose a corporate trustee do so for this reason.

Relative Cost.  This may seem a strange reason to consider a corporate trustee.  Most people don’t consider them at all because professionals will charge fees to serve.  However, trustee fees are often regulated by law or by the trust document.  Both individuals such as family members, and corporate trustees might only be able to charge the same rate.  Given the fact the trust might pay your middle child and an office of professionals the same rate, that isn’t a bad deal.  Further, corporate trustees sometimes take assets under management.  This means they would invest your assets for you, and therefore make money on the investments like a financial advisor does.  If they do, they often include those fees at a reduced rate when serving as a trustee.  This means you actually save money in the end.  It is also possible that they don’t take money under management so that your investment advisor can continue to invest the funds if that’s your preference.

Successor Trustee. If you choose to name personal trustees, you may provide in your trust documents for a corporate trustee as a successor, in case none of the personal trustees is available, capable, or willing to serve. Corporate trustees are institutions that don’t become incapacitated or die. You should consider the type of assets you own and then choose the most qualified trustee to manage them.

Middleman.  Clients sometimes struggle to admit to their estate planning attorney that their families don’t get along.  They don’t want to talk about how a child of theirs struggles with addiction, is dependent on them for support or otherwise would be difficult for a family member trustee to deal with.  In that situation, corporate trustees have the benefit of professional detachment.  The beneficiary can be as angry with them as they want, and the anger won’t be directed to one of your loved ones.  This can make professional trustees an attractive middleman or wall between a difficult beneficiary and the rest of the family.

In sum, many estate owners can benefit from the advantages of a corporate trustee.

Ask an experienced estate planning attorney when working on a trust about naming the appropriate corporate trustee, and the advisability of including terms for your registered investment advisor to manage assets for your trust.

Reference: Quad Cities Times (Nov. 28, 2021) “Benefits of a corporate trustee”

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Revocable vs. Irrevocable Trust – What’s the Difference?

Sometimes you need to look past the trust's name to see if it is truly revocable or irrevocable.
Sometimes you need to look past a trust’s name to see if it is truly revocable or irrevocable.

At first, the difference between a revocable trust and an irrevocable trust may appear very simple. One would think that, as the names imply, a revocable trust is one that can be terminated or amended, while an irrevocable trust is one that cannot be changed.  However, as often happens with the law, things aren’t always what they seem as reported in the article “What’s the difference between a revocable and irrevocable trust” from Market Watch. 

Sometimes you have to look beyond the name of the trust to determine if it is truly revocable or irrevocable.

A revocable trust, often referred to as a revocable living trust, is one that can be changed or terminated by the person who created the trust, whom we shall refer to as a trust maker. A revocable living trust is often used as a substitute for a Will because, like a Will, it can be amended by the trust maker depending on the circumstances, and it can help avoid probate if the trust maker’s property is titled in the name of the trust (or the trust is named as a beneficiary on the trust maker’s accounts and other assets).

But, a revocable trust becomes an irrevocable trust on the trust maker’s death. Also, the trust maker’s incapacity during life may result in a revocable trust becoming irrevocable. This can be confusing because the trust may keep the same name (for example, the John Doe Revocable Living Trust), but, if John Doe is deceased, the revocable living trust is really an irrevocable trust.

A revocable trust is considered almost an alter ego of the trust maker. As a result, a revocable trust does not provide creditor protection. From a tax standpoint, a revocable trust belongs to the trust maker and is included in the trust maker’s estate when calculating the estate tax.

As for an irrevocable trust, one would generally think that it is a trust that cannot be changed. But this impression, too, may be deceptive. A trust maker, beneficiary, or an independent person may be given powers to make certain changes to an irrevocable trust. Those changes may include the removal and replacement of a trustee and the ability to change or add beneficiaries.

An irrevocable trust is considered to be totally separate from the trust maker. It is usually constructed to avoid having the assets of the trust included the trust maker’s estate for estate tax purposes. An irrevocable trust can offer the beneficiary creditor and divorce protection, as well as prudent management of trust assets if the beneficiary is not good with financial matters. That’s why many parents create irrevocable trusts for their children when making gifts instead of making gifts to their children directly.

In addition to the trust maker giving the power in limited circumstances to change certain provisions of an irrevocable trust, an irrevocable trust may be “reformed” by a court, if it can be shown that the trust’s purposes can no longer be carried out.

And many states have passed laws allowing an irrevocable trust to be “decanted” – meaning that the assets of the original trust may be poured like wine into a new trust that includes provisions that are better suited to the current situation. These laws for the most part include safeguards to make sure that this is not a unilateral decision on the part of the trustee or the trust maker and the decanting is permitted only if it is in the best interests of the beneficiaries.

Of course, a trust maker may always prohibit reformation or decanting when creating an irrevocable trust, but, if the trust is to last for generations, it may make sense to allow limited ways for the irrevocable trust to adapt to changing circumstances.

So the next time you come across a reference to a revocable or irrevocable trust, look beyond the name to determine whether the trust is really revocable or irrevocable.

Reference: Market Watch (Oct. 8, 2021) “What’s the difference between a revocable and irrevocable trust”

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Retaining Assets While Being Medicaid Eligible

Medicaid is a program with strict income and wealth limits to qualify, explains Kiplinger’s recent article entitled “You Can Keep Some Assets While Qualifying for Medicaid. Here’s How.” This is a different program from Medicare, the national health insurance program for people 65 and over that largely doesn’t cover long-term care. In this system, clients often have a goal of retaining assets while being Medicaid eligible.

If you can afford your own care, you’ll have more options because all facilities (depending on the level of medical care) don’t take Medicaid. Even so, couples with ample savings may deplete all their wealth for the other spouse to pay for a long stay in a nursing home. However, you can save some assets for a spouse and qualify for Medicaid using strategies from an Elder Law or Medicaid Planning Attorney.

You can allocate as much as $3,259.50 of your monthly income to a spouse, whose income isn’t considered, and still satisfy the Medicaid limit. Your countable assets must be $2,000 or less, with a spouse allowed to keep half of what you both own up to $130,380. Countable assets include things like cash, bank accounts, real estate other than a primary residence, and investments.  However, you can keep a personal residence, personal belongings (like clothes and home appliances), one vehicle (2 for married couple), engagement and wedding rings and a prepaid burial plot.  There are more detailed rules for countable and exempt assets, but suffice it to say most things count.

If you have too much income over the $2,382 income per month for the application, you can use a Miller Trust aka Qualified Income Trust for yourself, which is an irrevocable trust that’s used exclusively to satisfy Medicaid’s income threshold. If your income from Social Security, pensions and other sources is higher than Medicaid’s limit but not enough to pay for nursing home care, the excess income can go into a Miller Trust. This allows you to qualify for Medicaid, while keeping some extra money in the trust for your own care. The funds can be used for items that Medicare doesn’t cover.

However, your spouse may not have enough to live on. You could boost a spouse’s income with a Medicaid-compliant annuity. These turn your savings into a stream of future retirement income for you and your spouse and don’t count as an asset. You can purchase an annuity at any time, but to be Medicaid compliant, the annuity payments must begin right away with the state named as the beneficiary after you and your spouse pass away.

These strategies are designed for retaining assets while being Medicaid eligible for married couples; leaving an asset to other heirs is more difficult. Once you and your spouse pass away, the state government must recover Medicaid costs from your estate, when possible. This may be through a a claim on your probate estate (usually means the house) before assets go to heirs, reimbursement from a Miller Trust or other items.  That is a topic unto itself, albeit an important one, so see here for more information on Medicaid recovery.  https://www.galliganmanning.com/protect-assets-from-medicaid-recovery/

Note that any assets given away within five years of a Medicaid application date still count toward eligibility. Property transferred to heirs earlier than that is okay. One strategy is to create an irrevocable trust on behalf of your children and transfer property that way. You will lose control of the trust’s assets, so your heirs should be willing to help you out financially, if you need it.

Reference: Kiplinger (May 24, 2021) “You Can Keep Some Assets While Qualifying for Medicaid. Here’s How”

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