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Trusts are tools that estate planning lawyers use to solve or avoid money management and property management problems for clients. Protective trusts protect assets from problems plaguing the trusts’ beneficiaries. Protective trusts are increasingly common as lawyers and clients focus on solving problems that do not necessarily involve the clients directly. This article introduces some kinds of protective trusts to help people recognize and understand them.
A “spendthrift” trust is a trust for a beneficiary plagued by financial or legal problems. The beneficiary may receive some benefits from the trust, but the beneficiary cannot squander the assets, nor can the beneficiary’s creditors take the assets away. People make spendthrift trusts to prevent their family members from losing inheritance because of legal or financial problems such as unstable marriages, employment disruptions, or financial irresponsibility.
A special needs trust enables a trustee to use assets for a beneficiary before or after the beneficiary becomes disabled without disqualifying the beneficiary for public assistance benefits like SSI or Medicaid. There are three basic kinds of special needs trusts in Indiana: (1) spousal testamentary special needs trusts, (2) third-party settled special needs trusts, and (3) self-settled special needs trusts.
A spousal testamentary special needs trust protects a deceased person’s assets from a disabled surviving spouse’s long-term health care expenses. Couples often make wills with testamentary trusts for each other in case one person requires nursing home care after the other person’s death. If both spouses are healthy when they make their plan, they may divide their assets to direct each person’s share of assets into a trust for the other person’s benefit, thereby protecting at least 50% of the assets in case the surviving spouse requires nursing home care. If one spouse is already in a nursing home, the other spouse may own all of the couple’s assets and protect the assets with a spousal testamentary special needs trust for the disabled spouse. The trust must be part of a last will and testament, because federal law offers no asset protection for revocable trusts (the typical trust with which most people are familiar, sometimes referred to as a “living” trust).
A third-party settled special needs trust is a trust that a person can make in his or her will or trust to provide assets for a disabled beneficiary without disrupting the beneficiary’s public assistance benefits eligibility. A third-party settled special needs trust resembles a spendthrift trust, but usually has additional language to direct how a trustee should distribute money for the beneficiary’s benefit so that the distributions do not disrupt public assistance benefits eligibility.
A self-settled special needs trust allows a disabled person to receive an inheritance, personal injury lawsuit settlement distribution, or other source of assets without disrupting the disabled person’s public assistance benefits. The most critical requirement for a self-settled special needs trust is that it must distribute any assets that remain in the trust after the beneficiary’s death to the state.
A “Miller” trust is a form of self-settled special needs trust designed for nursing home residents with excessive income (in 2018, monthly gross income exceeding $2,250). Indiana Medicaid rules disqualify nursing home residents with excessive income, but a Miller trust can help a high-income nursing home resident achieve Medicaid eligibility. For example, if a nursing home resident receives more than $3,000 of combined monthly pension and Social Security benefits, the resident can become eligible by transferring at least $750 per month to a Miller trust, which the trustee will pay to the nursing home (yes, the system is as goofy as that sounds, but it works). The payment to the Miller trust effectively reduces the countable income down to the income limitation, thereby qualifying the nursing home resident for Medicaid benefits.
Protective trusts are powerful asset protection tools. Experienced estate planning and elder law attorneys use those tools to help clients protect assets for their families. Protective trusts will become increasingly common as more people discover the value of expert estate planning.
Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois. Jeff is also a registered civil mediator, a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation; a member of the Illinois State Bar Association and the Indiana Association of Mediators; and he was the 2014-15 President of the Indiana State Bar Association.
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