Understanding and Establishing Trusts for Elderly Parents

Your parents may have reached the point where they require financial assistance. You might be anxious that they will mismanage their assets or fall victim to elder financial abuse, causing their funds to be depleted.

Having enough money is critical at this stage in your parents’ lives to guarantee that they are well cared for. Making a living trust for your elderly parents is not only practical, but it can also ensure that they are adequately taken care of in the future.

In this post, we’re going to step you through key aspects of setting up a trust for an elderly parent, including what you can expect and the implications of having a trust.

What is a Trust?

A grantor is used to establish a living trust and to place all of the assets under the trust. The trust will be managed by a member of your family, and beneficiaries will be named to receive the assets that have been named in the trust.

For your parents, there are numerous sorts of trusts to consider:

• Testamentary Trusts
• Irrevocable Living Trusts (ILTs)
• Revocable Living Trusts

Will vs. Trust

To begin, it’s important to understand the difference between a will and trust.

A will is a legal document that takes effect once a person has died. A will lays out how the assets, as well as any money, will be divided. Inheritance taxes must be paid and wills must be filed with the probate court.

A trust, however, focuses on people who are still alive but are often unable to make important decisions for themselves. The trust specifies how their finances should be managed. Trust monies are not taxed, and their distribution does not require a court order.

Trusts can be established to direct wishes before, during, and after death. A trustee is appointed to oversee the trust’s finances and ensure that they are managed in accordance with its documents. A trust takes effect immediately after it is funded, whereas a will does not take effect until the person has died. Trusts are also private, whereas if the codicil is broken, a will be created.

Types of Trust

What is an Irrevocable Trust?

The grantor is the sole trustee of the trust, with the ability to choose a successor if necessary.

A revocable trust adds an extra layer of security for your parents by making it more difficult for a family member who isn’t the trustee to mismanage their funds. If the grantor opposes or your parent is unable to control their aspirations, it might be canceled in court.

The beneficiaries of an irrevocable trust have a say in whether it is canceled or changed in any way. They must give their approval for these adjustments to be made. When the assets of this trust are transferred, the grantor loses their claim to them.

When a parent applies for Medicaid, an irrevocable trust is commonly employed so that they do not have to sell all of their assets in order to qualify.

This permits your parents to keep their assets and yet qualify for Medicaid, as well as ensuring that a spouse does not lose their home when a significant other passes away.

Although an irrevocable trust is permitted in certain jurisdictions, it is not commonly used in Florida for Medicaid applicants.

Furthermore, an irrevocable trust only shields assets from Medicaid once they have been transferred to the trust.

How Does a Testamentary Trust Work?

A testamentary trust, which is designed to safeguard a spouse after death, is another option. When a spouse passes away, their assets are transferred to a testamentary trust, which empowers a trustee to manage their finances.

Your parents will not be concerned about money since they will have no influence over it. Setting up a living trust for your parents helps ensure that their assets are secure and not vulnerable to fraud or mismanagement.

This will provide your parents more independence as they get older, and it will allow a living trust for elderly parents to safely care for them as they age or grow unwell.

Aside from a living trust and a will, it’s also crucial to understand the power of attorney.

The Tax Benefits of a Trust

Tax advantages are also available through trusts.

A step-up in basis applies to assets held in a trust, which can result in significant tax savings for the heirs. Assets that are simply handed away within the owner’s lifetime, on the other hand, usually retain their original cost foundation.

Consider the illustration below.

Assume that shares of stock that cost $5,000 when purchased are worth $10,000 when a trust beneficiary inherits them. In this case, the stock’s basis would be $10,000. If they were handed to the same recipient as a gift while the original owner was still alive, their basis would be $5,000. If the shares were later sold for $12,000, the person who inherited them from a trust would face tax on a $2,000 gain, while the individual who was given the shares would owe tax on a $7,000 gain.

To put it simply, the taxes when receiving assets through a trust are considerably reduced.

Choosing the Right Trustee is Critical

A properly drafted trust will not only protect an individual’s possessions but will also allow trustees to allocate money to beneficiaries, who can then spend it for the benefit of the elderly person.

As a result, it’s critical to pick a trustworthy trustee.

In general, there are two types of special needs trusts.

Individuals construct and pay for first-party special needs trusts, which usually result in instant eligibility for Medicaid benefits. These trusts must include a return provided to the state for money paid out by Medicaid on the individual’s behalf, and they are not permitted for those over the age of 65.

Third-party special needs trusts are established and funded by someone other than the impaired person, have no state payback provision, and have no upper age limit. Third-party special needs trusts can be an effective strategy to pay for a loved one’s continued care while also protecting assets.

8 Ways to Assist Aging Parents with Money

Money is often a difficult topic and it can come with even more loading in the case of an aging parent and an adult child. There are multiple factors at play here, which may include your concern for their financial wellbeing and their desire to hold onto control in their lives.

The complexities mean that any conversations need to be approached carefully. It’s also important to think carefully about the options at hand and what may truly be best for your parent.

The following tips all highlight ways you can help your parents with their finances.

1. Maintain a Respectful Tone of Voice During Conversations

First and foremost, it’s critical to be sensitive to and respectful of your parents’ financial — as well as emotional — requirements.

As individuals get older, not being able to retain their financial independence can be upsetting and disappointing. It’s important to understand where they’re coming from.

Don’t try to railroad them into specific decisions either. Your opinion isn’t the only one that matters. They may have a very different view on how to proceed.

2. Organize Your Important Financial Documents

The first step in assisting your parents with their finances is to take note of where important personal files are kept. Birth and marriage certificates, Social Security cards, life, health, and property insurance policies, and mortgage information are all examples of these documents.

If your parents own or rent a safe deposit box, be sure you know where the combination and keys are kept, as well as whether you or someone else must be a signer to gain access to the box, which is normally situated at a bank.

3. Make a Record of all Your Financial Transactions

Make a list of your parent’s monthly income and expenses, including whether they get a monthly pension, disability, or government aid, as well as any additional monthly expenses like car and mortgage payments, credit card payments, utility bills, and other personal expenses.

List their bank and investment information, including PINs, savings and checking account numbers, and investment account numbers.

4. Organize the Documents Related to Estate Planning.

Find out if your parents have a final will, living trust, living will (also known as a health care directive), or power of attorney, and where the originals and copies of paperwork are kept if you don’t already know. Work with them to develop these documents if they don’t already have them.

5. Make Health Care and Durable Powers of Attorney.

Giving someone durable power of attorney for finances and health care can help elderly parents designate trustworthy people to manage their finances and health care decisions if they become disabled or incapable.

If your parents become incapacitated, a durable power of attorney allows them to choose someone to carry out financial activities on their behalf. It can be set up to take effect only if a certain event occurs, such as dementia, an incapacitating illness, or the death of the spouse.

This sort of power of attorney can assist your parents to keep control of their finances until the time comes when they are no longer able to.

A health care power of attorney designates a trusted person to make health care decisions for your parents if they become unable to do so themselves. A health care power of attorney is usually written in combination with a living will, which establishes your parents’ specific health care selections in the event of incapacity.

It gives a trusted individual the ability to make medical decisions on your parents’ behalf. A final will and testament is an important estate planning instrument. If your parents own valuable personal property, you should let them know.

6. Engage the Services of a Financial Advisor

If your parent’s financial position is more complicated than you or they can handle, you should seek the advice of a financial advisor, accountant, or tax attorney.

A money manager may be necessary for exceptional circumstances to assist with budgeting, administering Social Security, paying payments, or balancing their checkbook.

7. Keep an Eye Out for Any Potential Red Flags

Keep an eye out for any strange behavior on bank statements or checkbook registers while you sort through and organize your parents’ financial information. Red flags include payment issues or duplication, abnormally high spending or charitable contributions, significant credit card debt, collection notifications, and even sweepstakes or contest expenditures.

8. Choose The Timing Wisely

It’s best to talk about money with your parents while they’re still capable and self-sufficient. Your parents can spend their golden years in the most pleasant, stress-free, and secure way possible if you plan ahead and seek out the proper expert financial aid on their behalf.

Final Thoughts

Medicaid recipients do not have to spend down their life savings in order to qualify for help. A properly drafted irrevocable trust can secure at least a portion of their assets for both their own and their heirs’ benefit.