Estate Planning for the Middle Class

A "revocable trust" may be established to set aside certain assets in the event that the individual becomes incapacitated. These assets never technically leave the person's ownership, so the assets are still considered part of one's estate when one applies to Medicaid for benefits. The value of a revocable trust is that you can designate a professional to manage your finances, receive income from the trust, and potentially reduce expenses associated with settling your estate at death. With a revocable trust the individual can change the terms of the trust at any time.

An "irrevocable trust" is also referred to as a "Medicaid Trust." Assets are transferred into a new legal entity that then owns those assets. These assets are then no longer considered part of your taxable estate. By shifting assets into the trust, you may now be eligible for Medicaid benefits, but subject to the specific "look-back" rules of your county (see below). When setting up the trust, you determine who will receive the assets, regular payments, and income from the assets. Irrevocable trusts may also be used as an entity to own one's life insurance policy.

This is a simplification of the process, so keep in mind that estate planning involves a lot of "moving parts" that should all be considered. Some types of transfers may result in tax liabilities and future financial limitations. Irrevocable trusts require that the individual give up some degree of flexibility with the assets and may be expensive to prepare. Once the trust is established, the individual gives up all rights to the assets that are included in the trust. You can not change the terms once it is finalized.

A "credit shelter trust" is used to help an individual and her spouse maximize the federal tax credits they have when they die. This type of trust is also called a "bypass trust," "A-B trust," or "credit shelter trust plan." Each individual is permitted to transfer a large (but limited) amount of assets to his/her heirs free of taxation. For a married couple, the tax credit is essentially doubled (since it is the credits of two people). When the first spouse dies, the estate passes to the other, but when the second spouse dies, only one credit is remaining. This trust allows the two tax credits to be used instead of just one. Be aware that the U.S. Congress may make changes to the estate tax laws, raising the credit, or eliminating it all together. You should consult with legal and financial advisors who have up-to-date knowledge of federal and state tax laws.