Testamentary Trusts, though less popular than their well-known cousin the Revocable Living Trust, can be the perfect solution to a vexing problem – protecting assets for a surviving spouse when he or she may need nursing home care. Testamentary Trusts offer a unique benefit in long-term care planning by safeguarding assets for your spouse’s Medicaid eligibility. Testamentary Trusts may be the one solution where it may be possible to have your cake and eat it too in the world of long-term care planning.

So what is a Testamentary Trust? A Testamentary Trust is a trust that is created by the terms of a Will. Because the Will does not take effect until death, the Testamentary Trust created by the Will does not come into existence until after the creator (or “testator”) of the Will has died.

This is very different than the more popular Living Trust, which is a trust created by the creator of the trust (the “grantor”) during the grantor’s lifetime and helps avoid the probate process. You may recall that probate is the court proceeding necessary to transfer title to assets owned by a person in his or her name alone (with no beneficiary named) at death. The key difference between the Revocable Living Trust and the Testamentary Trust is that while Revocable Living Trusts are usually better for avoiding probate, they do not protect assets if a person needs to qualify for Medicaid long-term care benefits.

Because Testamentary Trusts do not come into existence until after death, they cannot own assets during their creator’s lifetime. Instead, the assets pass through the probate estate of the deceased spouse, and into the Testamentary Trust as provided under the terms of the deceased spouse’s Will, to be held in trust after the testator’s death for the benefit of the trust beneficiary.

If a Testamentary Trust does not allow you to avoid probate with the trust assets, and does not come into existence until after death, why would you create one? Testamentary Trusts can help protect assets from being counted toward Medicaid eligibility if one spouse needs care. They do this by taking advantage of the regulations that determine whether assets held in a trust created by a husband or wife are “countable” when determining whether either spouse will be eligible for Medicaid benefits to pay for nursing home care.

For example, if a husband creates a Revocable Living Trust and transfers $500,000 into that Trust during his lifetime, and names his wife as the beneficiary of that trust after his death, the Trust assets will be fully “countable” if either husband or wife applies for Medicaid benefits to pay for nursing home care. If the husband passes away, and if his Revocable Living Trust allows the Trustee to use the trust assets for his wife’s benefit during her lifetime, the Trust assets, and any other assets (with a few exceptions) the wife owns, will be “countable” and must be spent on the wife’s care before she will be eligible to receive Medicaid benefits to pay for her care.

However, Medicaid regulations provide that if a Testamentary Trust is funded by Will at the death of one spouse, and the assets are held in that Testamentary Trust for the benefit of the surviving spouse, the assets in that Testamentary Trust will not be countable in determining the surviving spouse’s Medicaid eligibility. This is an important distinction and one that can allow a spouse to set aside money in trust for the benefit of his or her surviving spouse.

A Testamentary Trust works especially well in situations where one spouse is ill and is being cared for at home, or in a situation where the ailing spouse is residing in assisted living. In both of those situations, funds are needed to pay for the care of the ill spouse. Testamentary Trust planning means that there will be funds available to support the surviving spouse in the home or in assisted living. However, if a higher level of care is needed following the death of the first spouse, the assets in the Testamentary Trust will not have to spend down on the surviving spouse’s nursing home care costs.

When the surviving spouse passes away, any assets remaining in the testamentary trust will be distributed according to the Will’s provisions – for example, to the couple’s children, or other individuals or charities.

Anyone other than the beneficiary may serve as the Trustee of the Testamentary Trust. For example, when the husband creates his Will with a Testamentary Trust for his wife’s benefit, he names his son Jack as the Trustee. Jack will have the authority to manage and invest the assets in the Testamentary Trust after his father’s death, and the discretion to use the assets in the Testamentary Trust for his mother’s benefit during her lifetime.

In the right circumstances, a Testamentary Trust can be a game-changer for protecting assets from long-term care costs incurred by a surviving spouse. If this is your situation, seek the advice of an experienced elder law and estate planning attorney who can assess your situation and discuss whether a Testamentary Trust is the right planning strategy for you. With the right legal guidance, you will have peace of mind knowing your assets are protected and your family’s future is secure.

Attorney Leah A. Kofos is an associate attorney with the Dedham firm of Samuel, Sayward & Baler LLC, which focuses on advising its clients in the areas of trust and estate planning, estate settlement, and elder law matters. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit ssbllc.com or call 781-461-1020.

 

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