Trust funding is one of the most important aspects of an estate plan or asset protection plan. Attorneys, and clients, hear so much about trust funding, but rarely is it truly understood or implemented properly. Given how important trust funding is, it is a wonder why most estate planning lawyers leave the funding to the client. We regularly see clients who bring us copies of the parents fancy estate planning binders where the plan or many of the benefits to the plan fail because the trusts were never funded or even worse were funded improperly. That is why many of our estate plans and asset protection plans include trust funding. It is important to understand proper trust funding to ensure that the planning works the way it was intended.
The first key step in trust funding is to identify what type of estate plan the client is pursuing. Is the client looking for a traditional estate plan with revocable trusts, an asset protection plan that uses one or more irrevocable trusts, or a plan to protect assets from disability or long term care costs.
A traditional revocable living trust is an estate plan wherein the client identifies who gets to benefit from the client’s assets when the client is well, disabled, and after death. A critically important point to funding a revocable living trust is if all assets funded in the trust are still 100 percent available to creditors, predators, and long-term care costs of the grantor while alive. The assets can continue to be made available to the creditors and predators of the beneficiary after the death of the grantor without proper planning.
In the alternative, if a client has opted to do an irrevocable trust for asset protection and/or current or future benefits eligibility (we call these IPUG® trusts) then funding is much more important, because assets are not protected from third-party predators until funded, and they’re not protected from long-term care costs until funded and any related penalty period for the conveyance of the trust has expired.
Funding in asset protection or benefits eligibility is significantly different than with a traditional revocable trust plan.
Regardless of what type of planning, we also need to look at the types of assets we are funding. For example, funding a home has several options as well as funding an IRA or other tax-qualified assets.
We must know what type of planning the client done and what type of assets is the client funding. If a client has done a revocable living trust, then funding is important to ensure that the trustee actually has the authority over the client’s assets to administer them in the manner that has been identified by the client in the trust. If funding is not completed or properly done, a “pour over will” usually cleans up any missed items at death by transferring any assets that were not previously transferred to the trust. This process involves probate and is not generally desirable. There is a bigger risk if the client doesn’t die, but becomes incapacitated. The failure to fund a revocable trust has more significant consequences. The failure to fund assets to the trust does not eliminate probate, which is one of the primary benefits of using a revocable trust. Probate can increase the costs, cause delays, and subject probate assets to the claims of creditors.
On the other hand, when planning for asset protection or benefits eligibility, funding becomes one of the most critical elements. If an asset is funded into an irrevocable asset protection trust today, it is protected from any and all claims that arise after the funding. If planning for benefits eligibility, the funding of the last asset becomes most critical, as all assets funded to a trust will be subject to Medicaid’s review of that transfer for up to 60 months. We call this the “look forward™” period. When funding an irrevocable trust for benefits planning, the look forward on the final conveyed assets will trigger protection of the assets. For example, if a client has $500,000 to fund and only funds $450,000 of it, and two years later remembers to finally fund the last $50,000, the $450,000 conveyed initially will have a 60‑month look forward, but the $50,000 conveyed two years later will have its own separate 60-month look forward that will extend years beyond the expiration of the previous trust transfer. That is why it’s essential when benefits eligibility planning that funding be done in a timely and effective manner to ensure that the look forward period is minimized.
Although funding is a critical element in each type of planning, what can complicate it further is the type of assets being funded. For example, let’s consider funding a home. For a typical revocable living trust, the funding of the home ensures that there will be no probate on the home. In Florida a home is generally not available to creditors. While the home is exempt for married and single applicants, it can be subject to estate recovery after death for all funds paid on behalf of the applicant during their lifetime if the surviving spouse was to be moved to a care facility in anther state.
The other major asset to be considered in funding is retirement accounts. The Supreme Court in Clark v. Rameker decided in June 2014 that IRAs are not protected for those who inherit them. There is an obvious exception for an IRA that names a spouse beneficiary, who then combines it with an existing IRA. While this ensures IRA protection from general creditors, an IRA is not exempt in determining one’s eligibility for Medicaid, and therefore, leaving an IRA to a spouse can expose the entire IRA balance to the surviving spouse’s nursing home costs. Some retirement accounts are considered assets and some are considered income sources. It is important design and fund your plan to permit qualification for benefits under both the asset test and income test. Federal Medicaid laws are absolute: an IRA is an available resource, unless it is annuitized. Florida does not consider retirement accounts that are annuitized as assets unlike some states have liberalized the interpretation of annuitization (i.e. many states deem they were payouts of RMD to satisfy the annuity executor) it is not the federal law, but merely state policy, which could be changed at any time without notice. Over the last few years, several states have changed their policy regarding assets that were presumed to have been protected immediately previously. These assets can be immediately available for long-term care costs.
The naming of a beneficiary of an IRA and other qualified or beneficiary designated accounts to the trust is now important to maintain the asset protection intended. For example, even for a young couple with no assets, a $250,000 life insurance policy that pays to the spouse at death could be a catastrophe.
If you are looking for a complete estate plan or asset protection plan where trust funding is included, contact the Florida Estate Planning and Asset Protection team at Law Office of David M. Goldman PLLC, use the contact us link or call us at 904-685-1200.