Sam Moak

 Part 2 of 3

 Last week I warned you about living trust scams often perpetrated on consumers, particularly baby boomers and the elderly.  This week I will point out some of the more common statements made in an effort to convince someone they need a Living Trust.

Fraudulent and Misleading Statements Used in Living Trust Scams

 Con artists promote their business by making false or incomplete statements about the probate process, guardianships and the taxation of estates.  Such statements include:

 1.  “Living trusts save taxes.”

 Misleading. Most Texans’ estates will face no estate taxes at all.  In fact, unless your assets total greater than $5.34 million dollars, your estate is exempt.  It’s twice that for a couple.  If your estate is taxable, a Will can accomplish exactly the same tax savings as a trust at a much cheaper cost.

 A living trust is a revocable trust, which means that it can be amended or terminated by the settlor.  The settlor is the person who owns the trust or creates the trust.  In Texas, all trusts are considered revocable unless the trust document expressly states otherwise. 

 Traditional testamentary planning (wills) and revocable trusts planning (living trusts) are subject to essentially the same tax consequences and planning opportunities.  The creation and funding of the living trust are not taxable events for gift tax purposes because of the power of revocation.  During the settlor’s remaining lifetime, the settlor will be treated as the owner of the revocable trust assets for income tax purposes.  The assets of the revocable trust will be included in the settlor’s estate for tax purposes upon the settlor’s death.  Further, due to the Taxpayer Relief Act of 2012, there remains very little difference in the post-death income tax treatment of living trusts and probate estates.  Consequently, tax savings is not a good reason to implement living trust planning. 

2.  “Living trusts will help you qualify for public assistance benefits.”

 False.  I recently had a client come in for me to review/update her power of attorney documents and she mentioned she had created a Family Trusts in order for her husband to qualify for Medicaid.  This is always a Red Flag for me.  A living trust will not help you qualify for public assistance benefits, particularly nursing home Medicaid benefits.  In fact, your home could lose its exclusion status and therefore be considered an asset.  Withdrawals of corpus are treated as “income” which could affect eligibility.  Finally, a gift from the trust is subject to the  60 month lookback period for Medicaid qualification.  This means a gift received from the trust while you are on Medicaid or within 60 months before you go on Medicaid could jeopardize your Medicaid eligibility.  Finally, if the trust is “revocable,” it is no good for Medicaid planning,   A “revocable” trust is one that may be changed or rescinded by the person who created it. Medicaid considers the principal of such trusts (that is, the funds that make up the trust) to be assets that are countable in determining Medicaid eligibility. Thus, revocable trusts are of no use in Medicaid planning. 

 3.  “Living trusts help you avoid contested Wills.”

 Misleading.  Because a “trust” and a “Will” are separate legal concepts, a trust is not subject to a Will contest.  However, trusts, like Wills, are subject to attack on the basis of lack of capacity, undue influence, and fraud.  If you have a disgruntled family member who is inclined to challenge a Will, they will also challenge a trust.

 4.  “Living Trusts help you avoid your creditors.”

 False.  During your lifetime, assets in a living trust are subject to the claims of your creditors.  After death, these assets are subject to the claims of your estate’s creditors.

Due to space limitations, the remainder of this column will be published on Tuesday, Oct. 25. 

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

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