Trusts Elder Law Attorneys Actually (Should) Use

Most lawyers can draft a trust. Far fewer can explain which trust actually solves a client’s elder law problem when dementia, long-term care costs, or Medicaid eligibility show up at the worst possible time. We get practical about what each major trust is designed to do, where the common misunderstandings start, and how to build estate planning that holds up under real pressure.

We walk through the revocable living trust as the classic probate-avoidance tool and why it’s still valuable for privacy and incapacity planning. Then we tackle the mistake we see constantly: clients assuming a revocable trust protects assets from Medicaid. It doesn’t, because Medicaid eligibility turns on benefit and control. From there, we talk about irrevocable trusts and why “irrevocable” alone means nothing for Medicaid planning unless the trust is drafted so the applicant can’t benefit in ways that make assets countable. That’s where the Medicaid Asset Protection Trust comes in, plus the five-year lookback and the judgment calls about what should and should not be transferred.

We also unpack special needs trusts in plain language, including the critical difference between first-party special needs trusts with a Medicaid payback requirement and third-party special needs trusts that let families support a disabled loved one without wrecking benefits. We round out with subtrust planning for kids to protect inheritances from divorce, bankruptcy, or lawsuits, and pooled trusts as a smart option when the amount is too small to justify a standalone trustee arrangement. If you want deeper training, check out the upcoming Transformation Weekend details at theelderlawcoach.com, and if this helped, subscribe, share it with another attorney, and leave a review.

Check out our new website www.TheElderLawCoach.com.

Transcript

SPEAKER_01 0:02

You're tuning in to the Elder Law Coach Podcast, the definitive resource for attorneys delving into the world of elder law. With your host, Todd Watley, a certified Elder Law attorney, past president of the National Elder Law Foundation, and renowned coach with a quarter century of specialized experience. Whether you're an established attorney looking to refine your expertise, or an emerging lawyer seeking a successful foray into elder law, this is your masterclass. Now, let's get started with the Luminary in the field. Here's Todd Watley.

Revocable Trusts And Incapacity Traps

Irrevocable Trusts And Medicaid Myths

Medicaid Asset Protection Trust Rules

Special Needs Trusts First Vs Third

Subtrust Planning For Kids And Lawsuits

Pooled Trusts For Smaller Amounts

Training Invitation And How To Register

SPEAKER_00 0:37

Hey, this is Todd Watley, the Elder Law coach. As always, I am very thankful that you are listening. And today I want to jump into, I thought it was so important. If you are seeing me, you can see moving boxes and things be behind me because I am moving in. And the audio may not be as good as always, but I wanted to get this out there because I do think this is extremely important. It's come to my mind that a lot of times elder law attorneys don't utilize all of the trusts that are out there. And I have found that trust attorneys sometimes don't understand how certain types of trusts work with elder law. And so hopefully today I'm going to go through a number of different trusts and explain what they do basically and how it fits in with the elder law practice. So hopefully both the elderlaw attorney can learn about some of the newer trusts that are out there, and the estate planning attorney can see how those trusts become very important with the elderlaw client and not just trust, powers of attorney, things like that. So let's jump into it. One of the most common or the most common trusts that a lot of people do, and I would I would even say that your family law attorney, your criminal attorney, you know, they're like if a client wants a trust, they can do a trust, okay? And that is normally a revocable living trust. I do understand as an elder law attorney, my trust has specific things in there that you won't find in most other trusts, but it is the basic estate planning tool for a lot of people. Remember, the sole benefit of a revocable living trust is to avoid probate. That's important. We need to do that in a lot of states. Some states probate's not a big deal, but I still think avoiding probate is better than going through probate. But there were some states, like Arkansas, where probate is a very in-depth, problematic process and really should be avoided. The other thing that's cool about a trust is that it provides for incapacity planning. So that once the original trustee, typically the grantor, becomes incapacitated, there is language in there that helps transition from one trustee to the next. Now, here's something that I do very interestingly in my trust that I see very, very few attorneys do. So if you do trust, you understand the way we transition from the original trustee to the successor trustee, typically is three ways. Number one, they resign. Number two, we get a doctor's letter, or number three, if we can't get those two, we do a guardianship. Particularly if you're dealing with someone who has dementia, it is progressive, it starts very minimal and gets worse over time. That is a problem. When the person just becomes suddenly incapacitated, stroke, car wreck, whatever, that's easy. Yes, the transition from one trustee to the other, simple, straightforward. But with those clients with dementia and it's progressive, and there's a point at always almost always when that person is not making good decisions, but they don't know that they are making not good decisions. They are being scammed, they are not paying their bills, there are things going on, and typically along with this comes a very high level of paranoia. They don't think anything's wrong with them, they think everything's fine. And so to get them to go to the doctor is almost impossible because they're like, there's nothing wrong with me. It's y'all that are the problem, not me. And so if we can't go, if they won't resign, number one, we can we can't get them to the doctor. Our only other option is to file a guardianship. In my office, what we do is we put a provision in there that says if the successor trustee makes a claim that the original current trustee is incapacitated, the current trustee has 30 days to go to the doctor and prove that they are not incapacitated. And if they fail to do that, the transition occurs. Now, understand the person has to agree with this, but if you're doing estate planning with the client who has absolutely no dementia, and you explain that to them as opposed to going to court and spending tons of money for court, they're like, that sounds like a great idea. And so they agree to it when they sign, and then we can kind of use it, quote, against them once they have developed some level of dementia and they are not cooperating and things are a problem. So that's one thing I do, and I would suggest I can do a whole podcast on that at some point to explain that. But I think that's just something that I find very interesting, and I don't find that in a lot of trust. The other point with a revocable living trust is it keeps things private and it allows full control during the client's lifetime until they become incapacitated. Now, please be sure that your clients understand because most people think a revocable living trust protects their assets from Medicaid. You may not say that as the attorney, but I promise you, clients sometimes think that. And we need to be very clear that clients understand this does not protect you from Medicaid. And when I tell people they're like, What? I thought, wait, wait a second. I thought this protected no, it does not. Well, it's not in my name anymore. That doesn't matter. Medicaid looks at what you benefit from, not just what is in your name. So be very clear to these people that a revocable living trust does a fantastic job, and it's many times necessary to avoid probate and do special things with your stuff once you pass away, but it does not protect you from Medicaid. All right. Then we move on to a next type of trust we can do is just your general irrevocable trust. There are a lot of reasons we do those eyelets, different things that that trust or just irrevocable to do a number of things. It can, and I'll talk about this more in just a second, it can protect from long-term care costs, but just the fact that a trust is irrevocable does not mean that it automatically protects you from Medicaid. I hate those meetings when someone goes to a non-elder law attorney in preparation for long-term care and they do this trust that the attorney, I think, tells them, yes, this will protect you from Medicaid because it is irrevocable when it actually doesn't. And the issue there is who benefits from the trust. If the Medicaid applicant benefits from the trust, it does not protect them from Medicaid. Okay. Um, an irrevocable trust will preserve wealth for the heirs, and it provides some protection in some states so that you can put your assets into this trust, and after some time period, typically two years, the assets are protected from creditors. Okay. So there are some irrevocable trusts that are really great. It also can get it out of your estate, which is great for tax reasons. Generally. Okay. So it can save hundreds of thousands of dollars and give people peace of mind. Now, let's move on specifically to the Medicaid Asset Protection Trust, an irrevocable trust that is specifically designed to protect you from Medicaid. And this is a trust that, in in the ideal situation, what I recommend, and even though some states don't require all of this to be absolutely safe. And if you I want to say, if you're in Arkansas and you're listening to this, please take my word for this. You don't want the client to benefit from income. You absolutely don't want them to benefit from the trust or the assets in the trust. That's true across all 50 states, okay? But some states will allow the client to benefit from the income. I don't do that, okay, because for a number of reasons. If they wanted VA, being able to get income from this trust would cause them trouble with their improved pension benefits. Aidan attendance is one. And so I but my state has been fairly clear that if a client benefits from the income, then they are going to have a problems with this trust. So when I do an a Medicaid asset protection trust, and I would recommend all of you do this also, is that you make it so that they do not benefit from the corpus nor from the income. And once you do that, it is protected from Medicaid. Now, there is a five-year look back, there are issues there, and please understand, and I I did a whole podcast on this one trust, so I would suggest going to listen to that if you've not listened to it. But not everything goes into the trust, and this trust is not for everyone. Okay, please go listen to that podcast. The next trust is a special needs trust. That is a beautiful, beautiful trust that can solve so many problems. Number one, it is for a person who is disabled and on Medicaid, not Medicare, Medicaid. And it allows the person to benefit from these assets but not lose their Medicaid. And so, Todd, you just said that if a person benefits from the trust, Medicaid counts it. Yes, that is true, except with a special or supplemental needs trust. And it is worded so that the person can benefit from the trust for things that Medicaid doesn't pay for, it supplements, not replaces the Medicaid money. And so the trust has to be written very carefully so that it does just that, it supplements and not supplants or replaces the assets from Medicaid or the benefits from Medicaid. Now, to make it even a little more complicated, is there are two types of special or supplemental needs trust. There's a first party and a third party. First party is we are funding the trust with the beneficiary's money. Okay, they have gotten money that is in their name from a lawsuit, from an inheritance, from something that they now have money. It's like, uh oh, I'm on Medicaid. This is more than I can have, and so I will be disqualified. Federal law, Medicaid law allows the person to create this special needs trust and put their money into this trust. Now, the requirement there for this to work is you have to have a payback provision with a first party special needs trust. Okay. Meaning that the state gets paid back for the benefits that they have paid out when this person passes away. Then, if there is any money, any money left over, it can go to the heirs. That is different than a third party special needs trust, which is a third party's person is benefiting this trust. Now, one thing that's interesting, only the first party special needs trust is in statute, okay? That is in the Medicaid rules, it is specifically mentioned. A third party special needs trust is not mentioned in the Medicaid statutes, okay? It is simply in an estate planning tool that you use. But the the benefit here is someone else's money is going to benefit. So many times parents or grandparents want to benefit a disabled child, but they know if they just leave them money, they're going to lose their benefits. And so many times what happens is people disinherit this special needs child who probably needs the money more than anyone, and they hope that the child that they leave the money to will benefit that child. Well, that's great, even with the best intentions of you know, a very good sibling who absolutely would use the money for this child, but if that sibling goes through legal problems, bankruptcy, divorce, or lawsuit, the money's gone. And that's that's not good. Okay. And so therefore, we create a a third-party special needs trust so that the parent, grandparent, aunt, uncle, anyone can leave this person money, leave it in the trust so that they can benefit from the money but not lose their benefits. Okay. All right. One thing that I find that a lot of attorneys don't do, and I don't know why they don't do it, is what I'm going to call a testamentary trust. And it's technically, if you create this trust in a revocable living trust, it does basically the same thing as a testamentary trust, but it's not technically a testamentary trust. Okay. I'm a little admint on that because I just learned that. Okay. I will tell y'all, been doing this twenty twenty-seven years, and I'm still learning things every day. And when I was preparing for this podcast, I was doing my research and said, I know what a testament, my trust, create testamentary trust, no, no big deal, until I learned that a true testamentary trust is only created by will through a probate. Well, in in Arkansas, we do our best not to go through probate. And I panicked. I was like, wait a second, my trust create this, and we're not going through probate, and their will doesn't create this trust. The trust creates the trust. Did some research, looked at my statute, which is, you know, pretty much follows the uniform trust code. So I would assume this is the case everywhere. But your, I'm sorry, your revocable living trust should create subtrust, and that's technically what it is. It is a trust that is created when you do the revocable living trust. It just doesn't come to life until the grantor dies. But basically, the parents' trust at their death creates a subtrust for each child. And that child is the beneficiary. That child can be the trustee if they're good with money, or we can split that so that the child is the beneficiary and someone else is the trustee so that the money is protected. And even if the child is great with money, has no issues whatsoever, solid marriage, everything's great. We still leave it in that subtrust so that if the person goes through bankruptcy, divorce, or lawsuit later on, the parents' money doesn't get involved. And so I call these testimony trusts. And in previous podcasts, I may have said, Oh, yeah, our trust creates testimony trusts. Technically, it doesn't. Okay. It creates a subtrust that functions like a testamentary trust. But thankfully, we can do it through a will and it works. Okay. The only thing it's subject to is the rule against perpetuities, and that's generally not a problem. Okay. So I love testamentary trusts. I think they should be in every estate plan that you do. There's just no good reason not to. Our next trust is a pooled trust. A pooled trust is very similar to the special needs trust or supplemental needs trust. It's basically that, but it's pulled the the beneficiary's money is pulled with other people's money. The reason for this is for smaller estates, okay. To do a special needs trust and to have a trustee for that trust, there needs to be a fairly substantial amount of money in the special needs trust to make this worthwhile. Okay. And so therefore, for the lower asset trust, someone comes into money or someone wants to leave a grandchild$20,000. Well,$20,000 is definitely not enough money to justify a special needs trust for that child with a trustee because the trustee is going to probably charge at least three or four hundred dollars a month, and that's going to eat up the trust just in trustee fees. The person's not going to benefit much. So therefore, there's a pooled trust. You can put that twenty thousand dollars with a company. It's typically a nonprofit who has gone through the process to be deemed a pulled trust with Medicaid and different things. So you can put the$20,000 there, and then basically the nonprofit runs it and their economy of scale, they they get paid a little bit from each trust. It's not much. But typically they get funded by when the beneficiary passes away, the money doesn't go to the state, it goes to the nonprofit. And so there are it's really nice with your lower asset money that suddenly comes into play with a disabled person who is on Medicaid. All right. That's not all of the trusts. There are some very specific trusts that I would like to talk about eventually, but not today. I don't want to go into very long detail, but those are just some trusts that I hope if you're an estate planner and you know nothing about elder law, you understand now how these come into play with Medicaid, with Elder Law. If you're an Elder Law attorney, just focusing on Medicaid and different things, and estate planning has primarily been just a revocable living trust. Please branch out. Please think about you know getting into some of these other trusts because they are important. Okay. And basically anyone can draft a trust. Okay. Estate planner, financial planners, they are getting hit heavy with doing estate plans for the clients. Don't let them leave your office. Don't let them go to the lawyer. You may not get them back. You know, there's just a lot of pressure there. People can download it off the internet. Had a guy the other day said, you know, I almost did a chat GPT trust. I thought, you know, this is kind of important. I might want a professional. I was like, you think? Yeah, great idea. And so he came in and he's letting me do his trust rather than chat GPT. So people are getting pressure out there, and and we are not just providing a trust, just a stack of paper. We are providing a comprehensive program for people. And many times just a revocable living trust doesn't work. There are some other trusts out there. There are some really cool things we can do. And I want to invite you to a weekend long, very intense training that I am calling the Estate Planning Transformation Weekend. Okay. It is June 12th through the 14th. I want you to come to Bentonville, Arkansas. Come see me. Let's get locked in a room together. You plus 19 other people in a room and let's learn estate planning. It's all day Friday, and why I say all day, we're going to go like nine hours, okay? Solid. Nine hours on Saturday, and then quite a few hours on Sunday. We will cover the trust. I will explain what they are, how they fit in, and then we will do tons of fact patterns, tons and tons of fact patterns to see how this plays out. We will do some marketing, we will do some things to show you how to get the word out there that separates you. Once you're through this course, hopefully it does transform your practice to a very in-depth, comprehensive estate planning firm along with Elder Law. Somewhat, okay. I will discuss Elder Law. So if you're just an estate planner and you want to learn how this fits with Elder Law, this is the weekend for you to see how you can incorporate Elder Law into your practice and use some of these special trusts for the Elder Law client. If you're an Elder Law attorney and you've just been stuck with payable on death and revocable living trust, you definitely need to come and learn how to expand your practice to provide much more comprehensive plans for your clients that clients are very willing to pay for. So I would encourage you, check out my website, theoterlawcoach.com, for this. And if you are listening to this after June of 2026, we are doing this periodically. So just go to the website, theoterlawcoach.com, see when the next estate planning transformation weekend is. And also check out the Medicaid transformation weekend. I am doing that. We had great success last time, and I am doing that also. So thank you very much for listening. Again, I am Todd Whatley, the Oder Law Coach, and I would love for you to come to beautiful Northwest Arkansas in June and learn about estate planning in depth and truly transform your practice. Okay? Thank y'all, and I will see you next time.

SPEAKER_01 21:09

Thank you for joining this episode of the Elder Law Coach Podcast. For those eager to take their elder law practice to new heights and are interested in Todd's acclaimed coaching program, visit www.theelderlawcoach.com. With Todd Watley by your side, the journey to becoming an Elder Law authority has never been more achievable. Until next time, keep learning, keep growing, and stay passionate about elder law.