How Seniors Can Protect Their Assets in a Trust

Over the past 20 years, more seniors over the age of 65 have started using irrevocable trusts to protect their assets from major life events like long-term care costs. An irrevocable trust can be a powerful, beginner-friendly estate planning tool to secure your finances, preserve your home, and ensure your wishes are honored for generations. Learn more about these asset protection trusts below.

What Is a Trust?

A trust is similar to a will or financial power of attorney, but it allows the trustee—often a family member or professional—to manage the assets within the trust without court supervision. Unlike a will, a trust continues to operate even after the grantor (or trustmaker) passes away.

Trusts can serve many purposes, including tax planning, avoiding probate, and protecting assets from potential creditors or future claims. Although trusts are governed by state law, a well-drafted trust agreement outlines specific powers, responsibilities, and conditions to fit each family’s needs.

Revocable vs. Irrevocable Trusts

While revocable trusts are useful for individuals in their forties to sixties who want flexibility, irrevocable trusts are often preferred by seniors for stronger asset protection.

Revocable trusts can be changed or dissolved easily, while irrevocable trusts generally cannot be altered without legal assistance. This permanence is what provides their strength—assets placed in an irrevocable trust are typically shielded from creditors and nursing home costs.

How Trusts Have Evolved Over Time

Irrevocable trusts are a much easier tool to work with today than they were fifty years ago. It used to be that even a minor change to an irrevocable trust had to go through the probate court. Now we can make a variety of changes with the use of a Trust Protector.

Here’s a recent example: The child of a client is now at the age where it makes sense for the child to set up an irrevocable trust. The child now wants the irrevocable trust to receive any inheritance from her parents so that the asset protection applies to the inheritance. Because the inheritance will never go into the name of the child directly, those assets have tremendous protection they could not otherwise have.

What Assets Can Be Placed in a Trust?

Many types of assets can be transferred into a trust, including:

• Investments and savings accounts*
• Real estate, such as your home or rental properties**
• Business interests, including LLCs and corporations

*Transferring assets directly from a retirement account, like an IRA or 401(k), into a trust can trigger income taxes. Always consult with your attorney or tax advisor before making any transfers.

**Holding a house in an irrevocable trust and adding a child to the deed can have different legal, tax, creditor, and estate-planning consequences. The appropriate structure depends on the owner’s circumstances and goals.

When to Consider Setting Up a Trust

You should look at setting up a trust when you are getting close to retirement, when you’re above 65, or when there is an early diagnosis of Parkinson’s, multiple sclerosis, dementia or other disease that could cause increased costs of care.

But strong planning is done well before it is needed. And no matter when you do it, generally it’s a good idea for a senior who has put planning in place to sit down with the child who is named to take care of things—or sometimes with all the children.

When an Asset Protection Trust Might Not Be the Right Fit

If the family isn’t getting along well, a trust might not be the appropriate tool. We need the court system—including wills, conservatorships and guardianships—when it is clear the family is having significant trouble dealing with differences of opinions on how to take care of the parents or their assets.

How Do You Set Up an Irrevocable Trust?

When setting up an irrevocable trust, it’s important to work with an estate planning or elder law attorney familiar with state and federal tax laws. With today’s federal gift and estate tax exemption set at $13,990,000, fewer individuals face federal estate taxes, but income tax planning remains critical—especially if much of your estate is in tax-deferred accounts like IRAs or 401(k)s.

Be sure to work with a good estate planning attorney, as poorly drafted and DIY documents can create more problems than they solve.

Do You Still Need a Will if You Have a Trust?

Yes, even when trusts are being used, it’s a good idea to have a will and power of attorney. The will is generally only used if, for some reason, an asset was overlooked and not placed in the trust. The will typically pours any assets into the trust that aren’t already there, so the trust can handle the overall administration.

We still see a fair number of trusts under will, which are not used until the will goes through the probate process. Usually that makes more sense for younger clients. Older clients generally want their trust to be effective as soon as it’s set up to start getting the asset protection immediately.

Talk to an Experienced Elder Law Attorney

Whether you’re protecting your home, managing retirement assets, or planning long-term care, an irrevocable trust may be one option to discuss. A lawyer can review the documents, explain applicable requirements, and tailor the plan to the family’s stated goals.

Have additional questions about setting up a trust? Our elder law and estate planning attorneys are available to help you. Contact Orr Law Group today!