Preparing for the future and having a financial plan in place is important. This process includes comparing the costs of your loved one staying in their current residence to the cost of senior living. Another part involves ensuring your loved one’s assets are preserved and distributed according to their wishes.
This is where estate planning documents, such as wills and trusts for seniors, come into play. To help you and your loved one get started, we’re exploring trust types and why your senior loved one should consider establishing one.
Essential Personal and Estate Planning Measures
Sitting down to talk with your loved one about the financial future, from estate planning to rightsizing to senior living, is one of the best ways to honor their wishes and needs. Even if your loved one already has a will, it may still be wise to have a trust, advance healthcare directives, and power of attorney in place as part of your loved one’s estate plan.
Advance Healthcare Directive
An advance healthcare directive is a legal document that provides instructions for your loved one’s medical care. The directives only go into effect if your loved one is unable to communicate their wishes for their medical treatment. Establishing an advance healthcare directive is important because their wishes may differ from what you or other family members assume.
Power of Attorney
Power of attorney is another kind of legal document that enables someone to act on your loved one’s behalf and make financial decisions when they’re unable to make choices for themselves. If a power of attorney isn’t created in advance and your loved one is incapacitated, you and your family members may have to go to court to appoint a guardian. This can be a lengthy and expensive process.
Trust
Trusts for seniors provide clear guidance on your loved one’s financial wishes and how their estate should be distributed, including property and money. A trust is a legal agreement between a trustor and a trustee. The trustor transfers their assets into the trust, and the trustee administers the assets according to the trustor’s desires. Just like a will, trusts may have beneficiaries such as a spouse, children, family members, or close friends.
Common Types of Trusts for Seniors
There are several different types of trusts for seniors. Here are the basic trust structures.
Revocable Trusts
A revocable trust is called such because it can be edited or revoked at any time if your loved one acquires new assets, needs to change beneficiaries, or needs to modify how the assets named in the trust are managed. This type of trust enables your loved one to control their assets and avoid transfer of the assets until necessary.
However, assets put into a revocable trust aren’t shielded from creditors. For example, if there’s a lawsuit, the assets in the trust can be liquidated to satisfy the judgment. Assets in a revocable trust are also subject to federal and state taxes upon distribution. Additionally, assets in a revocable trust are distributed without needing to go through probate court, which provides more privacy.
Irrevocable Trusts
This type of trust can’t easily be edited or modified. Changes may be made to this type of trust, but only in rare circumstances and with complete consent from all beneficiaries or by court approval. In some cases, beneficiary consent and court approval are required; the exact requirements are dependent on state law.
The main reason many people choose irrevocable trusts is because of the tax structure. Assets in an irrevocable trust aren’t subject to estate tax upon distribution. Rather, if the irrevocable trust is a guarantor trust, the beneficiary doesn’t owe income taxes because the creator of the trust pays taxes. If it’s not a guarantor trust, the beneficiary owes income taxes once the assets are distributed.
Keep in mind that although irrevocable trusts offer more protection from creditors, they can be more complicated to establish because they can’t easily be modified.
Joint Trust
A joint trust is also known as a joint living trust or shared living trust. It’s a trust created between two people, such as married partners. In a joint trust, both parties have equal authority to control the assets under the trust and they each serve as a co-trustee.
When one of the co-trustees passes away, the other person in the trust becomes the sole trustee. If the second person also passes away, the trust becomes irrevocable because it can’t be modified. In this scenario, a successor trustee manages the trust and distributes the assets accordingly.
Other Types of Trusts
The trusts we’ve covered so far represent the basic structure of trusts, but they aren’t the only options available to you. Trusts aren’t one-size-fits-all. Depending on your loved one’s unique situation and concerns, they have many other options.
Special Needs Trust
This type of trust ensures that someone who is mentally or physically disabled or chronically ill has access to funding. It enables the individual to receive financial support without jeopardizing other programs the person may be entitled to, such as Medicaid, Social Security, or Supplemental Security Income.
Generation-Skipping Trusts
This type of trust, also known as a dynasty trust, passes assets to the grandchildren rather than the children of the grantor. This arrangement ensures that estate taxes are avoided, which they wouldn’t be if the children inherited the assets.
Life Insurance Trust
In this trust, the life insurance policy is the asset, and the insured person doesn’t own the policy anymore. Instead, the trustee manages the policy. This trust offers control over how insurance policies are distributed and can help beneficiaries avoid paying estate tax.
Qualified Terminable Interest Property (QTIP) Trust
Under this trust, the grantor leaves assets to a surviving spouse and also leaves directions for how the assets are distributed after the surviving spouse passes away.
Bypass Trust
Also known as a credit shelter trust, this is a trust for married couples. When one of the spouses passes away, their portion of the estate is transferred to a trust. The other spouse may access the assets and receive income from them, but the beneficiaries listed in the trust receive the assets when that spouse passes away.
Marital Trust
With this type of trust, also known as a spousal trust, a deceased spouse’s assets are transferred to the surviving spouse. The assets are transferred without taxes and are also protected from creditors. When the surviving spouse passes away, the assets in this trust aren’t considered part of their estate, which keeps taxes lower on their own estate.
Financial Planning for Senior Living
Making sure your loved one has their finances in order and has planned for the future is important when estate planning. To help you know what to expect when planning future needs, we recommend exploring our resource, A Complete Guide to Financial Planning for Senior Living.
The content on this site is for informational and educational purposes only and does not constitute financial, accounting, or legal advice.
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