Many have the misconception that only the wealthy need or can use trusts for estate planning. In this case, an elderly couple has two children – one of the children has a drug problem and the other is a spendthrift and has creditor issues. The major assets of the couple are their home and retirement accounts. They have limited assets in their checking and savings accounts. They do not have long-term care insurance.

Their existing Wills create a separate trust for each child with a relative acting as trustee to make distributions to the beneficiaries in their sole discretion subject to an ascertainable standard (health, education, maintenance and support). This would seem to protect the children from drug issues and creditor issues. However, there are several problems with the existing plan including (in no particular order):

  1. After spouse, the contingent beneficiaries of their IRAs are the children (individually). Since beneficiary designations generally supersede a Will, the child who has a drug problem would likely spend the money on drugs shortly after receipt of his interest in the inherited IRA.
  2. Although the couple could change the beneficiary designations of the IRAs to the trustees of separate share trusts created in their respective Wills, there was no language in the Wills regarding the ability to accumulate or stretch distributions presently permitted by the Internal Revenue Code.
  3. The couple did not really want distributions at the sole discretion of the trust subject to an ascertainable standard (health, education, maintenance and support). They wanted distributions limited to a certain percentage of the principal annually (it being understood that the distributions be at least the required minimum distributions if the trusts were beneficiaries of the IRAs).
  4. When you have an ascertainable standard in a trust, the beneficiary could go to court to compel a distribution (which would not be a surprise with these particular beneficiaries).
  5. Although the homestead is not a countable resource if either of them applies for long-term care Medicaid (as long as there is an intent to return home), the state could possibly make a claim for reimbursement against the homestead to the extent Medicaid benefits are advanced if the homestead passes by Will (which they presently have) or intestacy if the surviving spouse is on long-term care Medicaid.

As a result of the problems described above, a new estate plan is being implemented as follows:

  1. To avoid potential estate recovery issues against the homestead if the surviving spouse was on long-term care Medicaid, a Ladybird deed (which does not result in a transfer penalty) would be prepared since the property would pass by deed (and not by Will or intestacy) to avoid a successful claim by the Texas Medicaid Estate Recovery Program (under Texas law, a Medicaid recovery claim can be successful only if it passes by Will or intestacy).
  2. To further avoid estate recovery, the grantee (beneficiary) of the Ladybird deed would be a trust that the client would use for their benefit during life and then pass to the separate share trusts for the protection of the children created within the elderly couple’s trust after both the husband and wife pass.
  3. The trust for the husband and wife would have special language so that their retirement accounts could be designated to the protective trusts (protecting the beneficiary with a drug problem and the beneficiary with creditor issues) for the children within the trust which would be established and funded after both husband and wife pass. The special language would permit each beneficiary the stretching (to the extent permitted) of the retirement accounts (after the elderly couple die) for tax deferred growth or the right to accumulate in case a beneficiary has a marital problem. 
  4. The protective trusts for the children would describe exactly how the trust proceeds would be distributed taking into consideration the tax issues, the cap on distributions, distributions for housing needs, etc. The right to compel a distribution would be eliminated by the new trust disbursement language.

As a result, although the estate was not large, the goals of the couple were met as (1) there is protection of the children (from drug issues and creditors) with the distributions from their trusts being made exactly as the couple desired; (2) tax issues such as tax-deferred growth are addressed; and (3) Medicaid estate recovery avoidance issues were also addressed otherwise there could have been no assets left to even pass for the benefit of the children.

It should be also mentioned that the elderly couple’s trust has a contingent trust if a descendant was either a minor or disabled. Probate avoidance and privacy are also side benefits of the plan – but were not the main goals. This case illustrates even modest estates can benefit by trusts.

If interested in learning more, consider attending our next free “Estate Planning Essentials” workshop by calling us at (214) 720-0102 or sign up by clicking here.

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