Unfortunately, many trusts will trap assets and force them to be spent for the medical costs of an ill spouse, when the assets could otherwise have been saved from Medicaid spend down, and could have been used for the well spouse.
And all too often, the well spouse really needs the money.
Many trusts that people believe are fully revocable are only revocable while both spouses are alive and well.
In many cases, if one spouse becomes incapacitated, half of the assets of the trust are trapped in the trust.
Many times, if the assets could be pulled out of the trust, the assets could either be saved for the well spouse, or the assets could be converted into a stream of income that could be benefit the well spouse.
Assets that are deemed the assets of the ill spouse, and that are trapped in a trust, must be spent for the care of the ill spouse. This is true even though Medicaid might otherwise pay for this care.
It can be very important to have existing trusts reviewed while both spouses are still well enough to change the trust if the existing trust will trap half of the assets in this fashion.
All too often people have trusts which were designed to limit estate taxes, when there is no likelihood that the couple would ever have to pay estate taxes. These trusts will often trap assets as outlined above. There is no estate tax currently in Oregon for people with a million dollars or less. For people with less than a million dollars, the chances of one spouse needing Medicaid are often significant. Trusts that are drafted with estate tax avoidance considerations, when estate tax is not an issue, can present a real problem.
It can be very important to rewrite such trusts for people who expect to have less than a million dollars when they die - especially if there is ever any chance that one spouse will need Medicaid.
Removing the estate tax driven provisions can also have other benefits. For example, often these provisions, even if they do end up saving estate taxes for people who have over a million dollars, can result in far more being paid in capital gains taxes than would ever be assessed in estate taxes.
And, as outlined above, such estate tax avoidance provisions can greatly reduce the flexibility and options available if either spouse ever becomes incapable, or after the death of the first spouse.
Steven A. Heinrich
Divorce & Custody
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