THE REVOCABLE LIVING TRUST TRAP
Although a Revocable Living Trust is good for avoiding probate (and for married couples, an A-B Trust can reduce or eliminate estate taxes), it cannot protect your home from nursing home costs. Some years back, the State of Hawaii passed a Medicaid rule: If your home is in a Revocable Living Trust, you cannot qualify for Medicaid until you take your home out of the trust. Now, I am seeing more cases in which the Revocable Living Trust may actually act as a trap, trapping your home so that it could be lost to nursing home costs.
Let me give you an actual example. Husband and Wife are elderly. Wife suffers from Alzheimer’s disease, and is not mentally competent. She is in a nursing home. Husband is healthy. Husband and Wife own a home, which is held in their Revocable Living Trust. The trust says that when both Husband and Wife die, the property will go to their children equally. Wife has large nursing home expenses of $10k+ per month.
The trust says that the wife’s half of the trust assets are to be used for her support. Wife is not mentally competent, so she cannot take her half of the property out of the trust. Husband can take his half of the property out of the trust, but he cannot take wife’s half of the property out of the trust. Or even if the trust does allow Husband to take Wife’s half out of the trust to put it into her name, the trust does not allow him to give the house to himself or their children.
The problem with this trust is that it does not clearly allow Husband or the children to transfer Wife’s property out of the trust to themselves after she is incapacitated. The trust provides that after she is incapacitated, her share of the trust assets are to be used for her benefit. When a person becomes incapacitated, there is a danger of the trust “trapping” her assets.
If the trust assets can be used only for her benefit and husband is not allowed to even take the property out of the trust, then she could never qualify for Medicaid until the house is sold and half the money is spent on her nursing home costs. If the trust does allow the husband to take the property out of the trust to put in back into Wife’s name, she could get qualified for Medicaid, but once the husband passes away or moves out of the house, the State will put a lien against her half of the property for every penny the State spend on her nursing home care.
A trust like this may be fine for a single person with no children who wants to make sure that no one gets any of her assets unless some assets are left after she dies. However, if a person has a spouse or children, or would prefer to have a relative or friend, rather than the government, receive her assets, the trust should be worded differently.
Our law office has seen many different trusts written by many different attorneys. Most trusts have the problem described above. Most trusts are written so that the assets may become trapped if the person becomes incapacitated and enters a nursing home. The reason for this is that most trusts were written to avoid probate or estate taxes. The attorney who prepared the trust was not thinking about protecting assets from nursing home costs.
The problem can be solved by amending the trust to make it more flexible. Your trust should allow some way of transferring the assets to someone else in case of your incapacity. If you have a trust, it would be a good idea to have it reviewed to make sure it gives you the flexibility you need in case nursing home care becomes necessary.
This column is for general information only and is not tax or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.