Revocable vs. Irrevocable vs. Special Needs Trusts – Are all trusts created equally?
If you’ve started thinking about estate planning and you’ve been doing some initial research, you’ve probably heard about “trusts,” but are they all the same? Is the fact that your mom’s house is “in a trust” enough to protect the house from Medicaid? Let’s chat.
Trusts are nimble creatures. At their heart, they’re contracts. As you think about contracts, for example, a contract to buy a house versus a contract to buy a cat, there may be some similarities, but there will also be significant differences because the two contracts are trying to accomplish very different things. The same is true with trusts. While two documents may be trusts, what they contain, what they accomplish may be very different things. As you begin to approach estate planning and decide what type of planning is the best fit for you, you’ll want to think about what you’re trying to accomplish. Trust planning isn’t about having a certain amount of money, it’s about what you want that money or those assets to do – do you want them to be for your kids in a protected way? Do you need to protect the assets from liability? Do you want the assets to benefit several people, but have one decision maker managing how everyone benefits? This is trust planning. The trust takes ownership over assets and then you write the rules for how and who those assets will support.
As you begin chatting with your attorney about your goals, they’ll help you identify which type of trust will best accomplish those goals. For example, if your goal is to provide for your children, but you don’t want them to manage their entire inheritance at 18, a revocable trust that becomes a sub-trust for his or her benefit might be the best option. That the trust is revocable would allow you to change it, if you wanted to, as your kids get older and you have different ideas about how to best support them. What if you have a child with special needs? Your trust can be written so that some of your children will be able to manage their inheritances at an age of your choosing, but that your child with special needs will inherit their share in a special needs trust so they are not disqualified from government benefits. What about the trust your mom created 20 years ago, is that going to be enough to protect the house from Medicaid? While a trust can protect assets from a Medicaid spend down, that protection depends on the provisions of the trust.
Which is to say, you can’t judge a trust, or a cupcake, by its cover. Trusts have certain things in common – that they are a special contract that has an independent identity and can own things – but what one trust accomplishes may be very different from another trust. Lemon cake isn’t yellow cake.
