By Attorney Maria C. Baler

Testamentary Trusts are less popular than their well-known cousin the Living Trust, but in the right situation 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 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.

Here are five things to know about Testamentary Trusts

1. What is a Testamentary Trust?

The word “testamentary” means “relating to or bequeathed or appointed through a Will.” The “testament” in the phrase “Last Will and Testament” comes from this definition. A Testamentary Trust is, as the definition implies, 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 maker of the trust (the “grantor”) during the grantor’s lifetime. Living Trusts can own assets during the grantor’s lifetime; Testamentary Trusts cannot. Assets owned by a Living Trust at the grantor’s death avoid probate which is one of the primary reasons for creating a Living Trust. 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.

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

2. Why Create a Testamentary Trust?

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?

The answer is in the regulations that determine whether assets held in a trust created by a husband or wife are “countable” when determining whether or not either will be eligible for Medicaid benefits to pay for nursing home care.

If a husband creates a 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 tries to qualify for Medicaid benefits to pay for nursing home care during their lifetimes. If the husband passes away, and if his 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 the wife may own, 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 assets 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 by the other spouse. In such a situation, if the caregiver spouse were to die, the ill spouse would almost certainly need a nursing home level of care as they could not live alone or care for themselves. In this case, if the caregiver spouse (the husband) creates a Testamentary Trust through his Will for the benefit of his wife, and if the caregiver spouse dies before his wife, any assets owned by the caregiver spouse in his name alone would pass through probate and fund the Testamentary Trust created by his Will for the benefit of his wife. The Trust assets could be used for his wife’s benefit during her lifetime, to pay for anything his wife needs that is not covered by Medicaid – things like flowers, books, hearing aids, haircuts, a new television, new clothes, companions or additional caregivers, or any number of other things outside of the cost of skilled nursing care. When the wife 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.

3. Who Can be the Trustee of a Testamentary Trust?

The Trustee of the Testamentary Trust is responsible to manage the Trust assets for the benefit of the Trust beneficiary – the wife in the previous example. Anyone other than the wife can be the Trustee of the Testamentary Trust for the wife’s benefit. 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.

There may be a conflict of interest if Jack is also a beneficiary of the Testamentary Trust after his mother’s death, in that the fewer assets he uses for his mother’s benefit while she is living, the more that will be left for Jack and the other beneficiaries of the Trust after her death. This is something that should be considered when choosing the Trustee for the Testamentary Trust. It may be appropriate to choose someone who is not an ultimate beneficiary of the Trust after the primary beneficiary passes away.

4. Ownership of Assets is Key

In order for a Testamentary Trust to work properly, the creator of the Will that includes the Testamentary Trust – the husband in our example – must own assets in his name alone. Assets that are owned jointly will typically pass automatically to the surviving joint owner and will not pass through probate and into the Testamentary Trust at the husband’s death. Similarly, assets that name a beneficiary will pass automatically to the named beneficiary and not through probate and into the Testamentary Trust.

For this reason, if a Testamentary Trust is created, a change in the way assets is owned is often required. In our example, the home that is jointly owned by husband and wife should be transferred into the husband’s name alone, so that when he dies the home will pass via the husband’s Will into the Testamentary Trust for his wife’s benefit. Similarly, a joint bank account should be transferred into the husband’s name. Perhaps beneficiaries should be removed from CD accounts, etc. How assets should be restructured is specific to each person’s situation, and should be done only with the advice of an attorney. However, if assets are structured properly to fund a testamentary trust, those assets will be available to provide for the surviving member of the married couple even if they are receiving Medicaid benefits.

5. What are the Disadvantages of Using a Testamentary Trust?

One of the main disadvantages of using a Testamentary Trust is that the assets must pass through probate before they are protected under the Testamentary Trust. Probate is an expensive and time-consuming process, made even more time consuming by the impact COVID-19 has had on our probate courts in Massachusetts. For this reason, it may be best to make sure the intended Trust beneficiary has some assets in her name that can be used for living or care expenses until the Testamentary Trust is established when the probate process is complete.

If the husband in our example creates a Testamentary Trust, holding assets in his individual name in order to fund his Testamentary Trust at death will subject those assets to a Medicaid claim at the husband’s death if he receives Medicaid benefits during his lifetime. For this reason, Testamentary Trusts are typically created by individuals who have not and do not expect to receive Medicaid benefits during their lifetime, although their spouse likely will receive those benefits.

Finally, if the ownership of assets is not structured properly and thoughtfully, the Trust may not work at all, or may not work to its fullest advantage. For this reason, this type of planning should not be undertaken without advice from an experienced elder law and estate planning attorney.

Testamentary Trusts can be a very effective planning tool in a very specific situation – when one spouse wants to protect assets for the surviving spouse in the event the surviving spouse is expected to require a nursing home level of care and wishes to qualify for Medicaid benefits to pay for that care after the first spouse passes away. If this is your situation, seek out 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.

Maria Baler, Esq. is an estate planning and elder law attorney and partner at Samuel, Sayward & Baler LLC, a law firm based in Dedham. She is also a former director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA), and the current President of the Board of Directors of the Massachusetts Forum of Estate Planning Attorneys. For more information, visit www.ssbllc.com or call (781) 461-1020. 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.

April, 2021

© 2021 Samuel, Sayward & Baler LLC