A trust is a written legal document that creates a legal entity that can hold your assets and/or income. New York and federal law permit a variety of trusts, including revocable and irrevocable trusts created during your lifetime as well as testamentary trusts created in your Last Will &Testament.
- Revocable Trust. A revocable trust can be revoked by the Grantor during his/her lifetime, but becomes irrevocable upon the Grantor’s death. Revocable trusts are a useful planning device to avoid the expense and time of probate. In addition, revocable trusts are helpful for individuals who wish to maintain their privacy. A Last Will and Testament must be filed in Surrogate’s Court to be probated after decedent’s death, and the heirs are entitled to receive a copy. A revocable trust, however, need not be filed with the court and generally, only the Grantor and Trustee receive a copy. Revocable trusts also are useful in the case of persons who own property in more than one jurisdiction, as they will help avoid an additional proceeding (ancillary probate) in the other jurisdiction.
- Irrevocable Life Insurance Trust.An irrevocable trust can be used to hold a life insurance policy and can be the beneficiary of the policy. Such a trust has potential estate tax savings, because the proceeds of the life insurance policy can be removed from the taxable estate of the person who transferred the policy into the trust, if the transfer was made three years before the date of death.
A life insurance trust is often useful for liquidity purposes. For example, a single parent with minor children can benefit from putting in place a life insurance trust as part of estate planning. If the parent dies while the children are minors, the life insurance policy proceeds are payable to the trust and the Trustee will have immediate access to funds to meet the children’s needs, without waiting for the probate process to be completed.
- Irrevocable Medicaid Asset Protection Trust. Individuals who anticipate requiring long-term care and wish to protect their assets for their loved ones may transfer assets into a Medicaid Asset Protection Trust. If the trust is properly drafted, Medicaid will not consider the assets in the trust as “available” or countable in determining whether a person is eligible for Medicaid benefits. Accordingly, these trusts are an important planning tool to enable individuals with assets above the Medicaid eligibility levels to be made eligible for Medicaid. There are specific requirements for such trusts in order for Medicaid to not count the trust assets, including that the person creating the trust (the Grantor) not be able to access the “principal” or assets of the trust. Depending on the nature of the assets transferred to the trust, the tax implications and the client’s preferences, the MAPT may provide that income be payable to the Grantor.
In the case of MAPTs that contain real property or cooperative apartments, the trust may provide that the Grantor has the continued right to use and occupy the premises during his/her lifetime, and the obligation to pay the carrying costs of the premises. This provision protects the Grantor’s right to continue to reside in their home, while simultaneously avoiding having the house be counted as an asset or having Medicaid seek recovery against the home upon the Grantor’s death.
Medicaid has a five-year look-back period for transfers, and any transfers made into a Medicaid Asset Protection Trust that are made within 5 years of an application for Medicaid are penalized.
- Supplemental Needs Trusts. A supplemental needs trust (SNT) is a trust created for the benefit of a disabled person age 65 or under that allows that person to maintain important government benefits such as Medicaid. Ordinarily, in order to be eligible for Medicaid, SSI, and many other government benefits, individuals must meet certain income and resources requirements. However, the assets and, in some instances, incomedeposited into a properly drafted SNT are not calculated when determining a person’s eligibility for Medicaid and certain other government benefits. Consequently, beneficiaries of an SNT are able to benefit from the funds in the trusts, while still receiving the government benefits they would otherwise not be entitled to receive. The monies in the SNT can be used to supplement the benefits paid by Medicaid.
There are two types of SNTs: a first-party SNT is funded with the monies of the disabled person, and a third-party SNT is funded with the monies of someone else, usually a relative. The grantor in third-party trust can frequently fund such a trust without incurring normal transfer penalties; this is used frequently as a Medicaid planning tool for elderly parents of disabled children. For a first-party SNT, the trust must provide that the state receives the amounts remaining in the trust when the disabled person dies, up to the total amount of benefits paid by the state on behalf of the disabled person. For a third-party SNT, there is no requirement that the monies remaining in the trust be paid back to Medicaid when the person dies.
- Pooled Trusts. A pooled trust is a trust for the benefit of a disabled person that is created and administered by a not-for-profit organization. Several specific organizations operate pooled trusts and have different requirements, such as minimum starting deposits and monthly fees. Similar to an individual SNT, a pooled trust allows a disabled person to be eligible for certain government benefits even if his or her resources exceed the eligibility levels for Medicaid and SSI. However, in a pooled trust, the assets of many disabled individuals are “pooled,” or held in a single trust, for management and investment purposes, with a separate subaccount for each individual. With a pooled trust, the balance remaining on the beneficiary’s death either goes to the pooled trust organization or to the State. Pooled trusts are available to persons over 65, but the funding of a pooled trust with the assets of a person over 65 will result in a Medicaid transfer penalty.
Pooled income trusts are used to protect the income that a disabled person receives in excess of the income levels to determine eligibility for government benefits. In order to receive Medicaid, individuals with an income greater than the maximum set by Medicaid ordinarily must pay the surplus income to the Human Resources Administration. Individuals with a pooled income trust, however, pay their excess to the not-for-profit trustee. The trustee then pays the individual’s expenses from the funds the individual deposits each month into the trust. For many people the existence of a pooled income trust enables them to continue living in the community, since few people can subsist on the maximum income allowable by Medicaid.
It is not uncommon for a person to maintain both types of pooled trusts – one for excess income and the other for excess resources (excess beyond the Medicaid maximums) and many of the not-for-profit organizations manage both types. In all these types of trusts, the beneficiary must be formally designated as disabled. If the beneficiary already receives Social Security Disability or Supplemental Security Income, that determination has already been made. If not, a disability determination has to be made.
Meenan & Associates works closely with clients to identify whether a trust is appropriate for them, based on their circumstances and goals, and, if so, to craft a trust specifically tailored to their needs and preferences. Meenan & Associates has years of experience drafting revocable and irrevocable trusts, lifetime and testamentary trusts, i.e., trusts in Wills, and trusts for a variety of purposes, including asset protection, estate and Medicaid planning, estate tax minimization and special needs planning.