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Why You Might Want a Will with a Testamentary Trust

testmentary trusts - wills-estate planning

You may or may not have heard of the term, “testamentary” trust. So, let’s start by explaining what they are. They are simply trusts created by wills.

Why You Wouldn’t Want a Testamentary Trust (Normally)

We usually try to avoid testamentary trusts mainly due to the administrative burden they entail. Since they are created by wills, they do not go into effect until the person creating the will — the “testator” or “testatrix” — dies and their will is admitted to probate. This means a probate administration must be commenced and the probate court must approve the appointment of the trustee.

Then, once the testamentary trust is up and running, the trustee must submit annual accountings to the probate court and go through a judicial process to have them approved. Further, any change of trustees must be approved by the court.

In addition, testamentary trusts are not private since everything becomes a court record. And, finally, testamentary trusts are generally less tailored to the grantor’s wishes. While the grantor may write whatever they want into the trust just as they can with non-testamentary trusts, the reality is that trust provisions in wills are generally less detailed and less specific to the individual’s goals.

These are many of the reasons we generally advise clients to avoid using testamentary trusts and instead to create independent, stand-alone trusts. These are often accompanied by so-called “pour over” wills which simply state that the individual’s probate assets — anything not passing through trust, joint ownership or beneficiary designation — will go into the trust.

The Benefits of Judicial Oversight

Some people choose to create testamentary trusts despite all these drawbacks due to the oversight they provide. While the involvement of the probate court makes all the trust transactions public and adds cost and administrative burden, it also adds transparency and means that a judge, and often a guardian ad litem, is looking over the shoulders of the trustees. This can be important especially when the individual creating the trust doesn’t have total confidence in their trustees or have other people to keep an eye on the trustees, for instance when the beneficiaries of the trust are minor children. In addition, if the beneficiaries are children and the trusts provide that they end when the children reach a certain age, often 25, then the extra costs of using a testamentary trust will not last indefinitely.

The Special MassHealth Rules

The main reason, however, that clients choose to use testamentary trusts has to do with the perversity of the Medicaid (MassHealth in Massachusetts) rules regarding trusts. Individuals seeking MassHealth coverage of nursing home care, and for many other types of care if they’re 65 or older, are limited to $2,000 in countable assets. They can shelter assets in an irrevocable trust with severe limitations, the main one being that they can have no access to the principal in the trust, just the income. So, for instance, if you were to place an investment portfolio into trust, you could still receive the interest and dividends it generated, but could not dip into the trust assets themselves if you needed them. (You can also live in a house owned by an irrevocable trust, which is why they’re often used to protect the family home.)

Further, the act of transferring assets into an irrevocable trust causes the grantor to be ineligible for MassHealth for the subsequent five years, the so-called “look-back” period.

These rules also apply to trusts created by the spouses of applicants for MassHealth benefits. But here’s where the perversity of the rules comes in. They do not apply to to testamentary trusts, meaning that there’s no five-year transfer penalty and the surviving spouse can have access to the principal in the trust. (By “access,” I mean the trustee can make distributions to them or on their behalf. They trust cannot provide that the surviving spouse has a right to demand distributions. If they did have that right, the trust assets would be considered available to them in determining their eligibility for MassHealth.)

Used When Spouse Needs Nursing Home Care

Since spousal-created testamentary trusts are exempt from the usual MassHealth trust rules, they are often created by the healthy spouses of nursing home residents. While nursing home residents are more likely to be ill and to die before their spouses living at home, it happens that the “healthy” spouse dies first. If they have not updated their estate plan, everything will pass to the nursing home spouse and have to be spent down for their care. Further, the nursing home spouse may well not have the capacity to manage the assets.

The healthy spouse can protect against this happening by disinheriting the nursing home spouse and directing that their state pass directly to their children, if any. But that can leave the nursing home spouse high and dry with no resources to pay for whatever they may need, whether that be care management, extra assistance after a hospitalization, paying to hold the nursing home bed during a lengthy hospitalization, or even to pay for out-of-state family members to come to visit. The children may or may not pay for these expenses, or may end up in conflict, disagreeing about whether or not to dip into the funds now in their own pockets. A testamentary trust protects the nursing home spouse and the family.

Or Home Health Care

These protections can be even more important when the ill spouse is not in a nursing home but is receiving MassHealth-covered home health care. Often they need a combination of private funds and MassHealth assistance to pay for all their needs. And those needs and costs are likely to increase if their spouse is no longer available to assist. If the deceased spouse’s assets pass to the ill spouse, they may lose their MassHealth coverage until the inheritance is spent down. If the funds pass to children or others, the surviving spouse may lose the private funds they need to stay at home. The result may be an otherwise unnecessary move to a nursing home since it would be entirely covered by MassHealth.

Or As a Standby Reserve Fund

Recognizing all these benefits of testamentary trusts, some healthy older couples execute wills with testamentary trusts for one another so that funds are set aside just in case the surviving spouse falls ill. That way they will still have some resources in reserve in case they run through their savings and have to depend on MassHealth. (This planning strategy can become even more important after March 1st, when older Massachusetts residents will no longer be able to transfer assets to pooled disability trusts. This is explained here: Funding Deadline Coming for Pooled Trusts.)

Finally, as with testamentary trusts created for minor children, the extra administrative costs and burdens of such trusts left for older beneficiaries, whether or not they are already residing in a nursing home, are unlikely to last for many years.

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