In Plain English: “Living” Trusts and Wills

February 19, 2020 Austin F DuBois

Elder law and estate planning has a lot of confusing jargon. In this post, I clarify some of the most frequent questions I've heard from people, specifically around "living" trusts, wills, "living" wills, and related documents.

In listening to my clients and community, I constantly encounter the myths surrounding long term care and estate planning, and seek to dispel them. In this article, I will clear up some confusion I hear surrounding some very common estate planning and elder care terms, specifically “living trust”, “will” and “living will”.

The source of much of this confusion is that “living trust” and “living will” sound very similar. People tend to be at least vaguely aware that a “living trust” is something that you set up during your lifetime (hence the term “living”) in order to better deal with your assets. People are also fairly familiar with the concept of a “will”, the common abbreviation for “last will and testament”. A will also applies only to assets, instructing how to manage and distribute them upon death. It seems like a fairly reasonable extension to presume that the term “living will” has something to do with your assets (since that’s what a will does) during your lifetime (since that’s when a living trust is done). But, a living will is in fact entirely different from both of these documents, having nothing at all to do with assets. A “living will” is the document where you state, essentially, that you do not want life sustaining treatment if you are in a permanent vegetative state.

Here are the full descriptions of each of these documents:

Living Trusts

A living trust is also referred to as an inter vivos trust, since lawyers are historically fancy and like to use Latin. Here, inter vivos means “within life”.

A trust is a special kind of contract that behaves in many ways more like a business entity. It is a set of instructions drawn up by a person, often called the “grantor”, “settlor”, “trustor”, or in my practice I prefer to use the term “trustmaker”–to prioritize clarity over tradition. This is the person who owns the assets (real estate, investments, business interests, bank accounts, life insurance, etc.) that will become subject to (or commonly said to be “put into”) the trust.

The trustmaker then relinquishes some degree of control over those assets and grants that control to a Trustee. The Trustee could be, depending on the situation, the trustmaker herself (in which case not much control is relinquished), another person (typically a family member such as a responsible adult child) or business (such as a bank, professional trust company or family-controlled special company).

The types of instructions that are included in the trust depend on the purpose for which it is created.

Revocable Living Trusts

Many people have “revocable” living trusts. This means that the trustmaker can cancel (“revoke”) the trust on a whim. This leaves the trustmaker with ultimate control since regardless of what the trust instructions are, the trustmaker can simply scrap it if they don’t like it, amend it, entirely re-do it, or whatever she wants. This level of retained control is usually appealing to people, but keep in mind that it also does not offer much in the way of protection.

The best thing that a revocable living trust does, if your assets are properly aligned with it, is help your heirs avoid probate. “Probate” is the court process for managing and distributing assets in an estate. Revocable living trusts can also help with management of assets during the trustmaker’s lifetime, such as if they have a period of disability or incapacity, or for whatever reason cannot manage their own affairs. That is, however, only in that a revocable living trust can provide instructions for who becomes Trustee and when–it does not protect any assets against long term care costs or assist with Medicaid qualification.

Irrevocable Living Trusts

An increasing number of people are using irrevocable living trusts in their estate plans, and rightly so. Irrevocable is the opposite of revocable–you cannot revoke it on a whim. Importantly, you can revoke an irrevocable trust, under New York law, if certain parties to the trust sign off. Let me say that again: you can revoke an irrevocable trust, as contradictory as that sounds. Doing a plan that involves an irrevocable trust does not mean you are once and for all stuck with it. Short of fully revoking an irrevocable trust, a well-drafted irrevocable living trust should include a number of flexible powers, so even if you don’t revoke it, you can still change its effect if your situation or intentions change.

The reason to do an irrevocable trust is to usually to protect the assets in some way. The most common reason today is to ensure that the assets you put into the trust are not countable toward Medicaid qualification. Many people believe they can never qualify for Medicaid, because the exemptions for Medicaid qualification are so low, but they can indeed qualify by doing the right proactive planning involving such a trust. We refer to these types of irrevocable living trusts as “Medicaid trusts” or “Medicaid Asset Protection trusts”. Doing an estate plan that includes a properly drafted irrevocable trust can protect its assets from being spent on long-term care costs. It also bears mentioning that even without doing proactive planning, options are still available at the last minute.

Another reason, for those that have very high net worth, would be to avoid estate tax. Estate tax only applies to assets that a person has certain degrees of control over. If assets are in a revocable living trust, the trustmaker has power to cancel that trust and get back all its assets, which is a very high degree of control, and therefore estate tax would apply to those assets. If the assets are in an irrevocable trust, and the trust instructions severely limit the trustmaker’s control over the assets in certain specific ways, estate tax does not apply to those assets. This planning is much rarer now that the estate tax exemptions are $11,580,000 for Federal estate tax, and $5,850,000 for New York State estate tax. But, for those of us fortunate enough to be in that realm, this type of planning is available.

Last Will and Testament

A Last Will and Testament, or simply, “will”, is the document that appoints someone to manage a person’a assets and directs the distribution of the assets upon that person’s death. A will does not go into effect until a person’s death–as opposed to the above-described living trusts, which go into effect during a person’s life.

Three important points about a will are:

  1. It only applies to assets that are held in a person’s sole name. So any accounts that are jointly owned, or have their own beneficiary designations are not subject to the provisions of a will. This matters when a person puts specific instructions in the will, but may not realize that it does not automatically apply to everything she owns. A common source of dispute among children is that Mom or Dad’s will distributes their assets equally, but one child was a joint owner on most of the accounts, usually only for convenience, but ends up with more than her fair share of the total assets. The other siblings argue that the intention was for the inheritances to be equal, as provided by the will, but the will simply does not apply to jointly owned accounts and a fight ensues.
  2. It only takes effect upon death. Therefore, no matter how good your will is, or how well you’ve ensured that your assets are titled properly so the will applies to them, it does not do anything to protect and preserve those assets during your lifetime, particularly against long-term care costs.
  3. Finally, it is instructions for the probate process–by definition, a will is to be used during the probate process. It does not help to avoid it. Nor, conversely, does not having a will mean probate is avoided. If you don’t have a will, you have died intestate (“without a will”) and the intestacy laws of your state will direct how your assets are distributed. Unless you have done trust planning or individually accounted for all your assets (which I recommend against for other reasons), the local court, with its attendant bureaucracy, will have to be involved.

A will should always be part of your estate plan, but oftentimes should only serve as a backup to more thorough planning involving a trust, to achieve the goal of protecting and preserving your assets.

Living Will

A “living will”, contrary to all of the above documents that regard asset control, management and distribution, has nothing to do with assets. The living will term comes from the literal definition of a person’s “will”–a desire and intention. The Last Will and Testament described above is an expression of a person’s last will, which is that their assets be managed and distributed in some specific manner. A person’s living will is an expression of a person’s desire and intention about how their health care is to be managed during their lifetime. They express this desire and intention in a document to control in circumstances when they are unable to express it themselves, due to some degree of incapacity. It typically regards the cessation of life-sustaining treatment in cases where a person has lost all cognitive functioning and is in a permanent vegetative state.

Important health care documents to do alongside a living will are a health care proxy, which names a person to make certain health care decisions if you are unable to do so, as well as a HIPAA (Health Information Portability and Accountability Act)

As always, it is best to speak with an experienced, person-focused elder law and estate planning attorney to help bring together all of this information and help you apply it to your or your family’s unique situation.