Living Trusts with a Spouse pic

Living Trusts with a Spouse: What You Should Know

Living trusts are often touted as the magic bullet of estate planning, promising smooth sailing for your assets after you’re gone. Often the alleged advantages are minimal or overstated, and there is a significant disadvantage for married couples where this “bullet” might come with a horrible hidden cost: the Medicaid trap. Before you rush to transfer everything to a living trust, let’s explore the potential pitfalls that could leave your surviving spouse high and dry when they need it most.

The Dream Turns Nightmare: The Medicaid Trap

Imagine this: you and your spouse create a living trust, putting your nest egg away for a rainy day. Fast forward – your spouse passes away, and you’re left grieving. The trust, as promised, allows you easy access to your shared assets. But years later, when you need long-term care, the trust you thought would be your savior becomes a roadblock. Why? Because Medicaid, the government program that helps with nursing home costs, has strict asset limits. Since the trust holds all your assets, they’re still considered available to you, disqualifying you from much-
needed benefits. Suddenly, the dream of a comfortable retirement crumbles as you face the harsh reality of paying for care out-of-pocket.

But what if when your spouse dies, their share of the trust splits off into a separate trust that is irrevocable, that you can’t terminate or amend, and from which you can’t withdraw money or other assets at will? One would think that Medicaid could not count that split-off trust as part of your assets. Not true. This would be true only if the trust were created in your spouse’s last will and testament, but not if it’s created in a living trust. Why? Due to a fluke in the law. A trust by one spouse in favor of the other spouse is a countable resource to the surviving spouse for Medicaid purposes if the trust is created while the person is alive, but not if the trust is created in their testament or will (known as a “testamentary” trust). There’s no practical difference between the split-off trust and the testamentary trust, but nevertheless, the law treats them differently for Medicaid purposes.

Living Trusts: Are They Worth the Risk for Spouses?

For a number of reasons, living trusts often fall short of the promised benefits. While living trusts offer potential benefits like probate avoidance, the Medicaid trap throws a wrench into the equation for married couples. Here’s why you might want to think twice:

  • Medicaid as a Lifeline: Nursing home care is expensive. Without Medicaid as an option, the surviving spouse could face financial devastation.
  • The “Healthy Spouse” Trap: Even if you plan well, there’s no guarantee you’ll be the one needing care first. The healthy spouse could unwittingly push themselves over the Medicaid asset limit with the trust’s assets.

Remember, planning is key! Consult with an experienced estate planning attorney who specializes in elder law. We can help you create a plan that considers both your current and long-term goals, including the possibility of needing Medicaid, while still achieving your estate planning objectives.

Don’t let a living trust become a financial nightmare for your surviving spouse. Explore your options carefully and make informed decisions to ensure a secure future for both of you.

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