By Jerry Sprute
As an Elder Law attorney, I am often asked to explain the difference between a Revocable Living Trust and a Safe Harbor Trust.?The short answer is that a Revocable Living Trust is a basic estate planning tool used to avoid probate that can be altered, amended or even revoked by the Grantor, whereas a Safe Harbor Trust is a blueprint in your Will that is used to protect assets for the surviving spouse or other beneficiary, and is irrevocable.? But the heart of the question really has to do with the purpose behind each Trust, and how that plays a part in an individual?s overall estate plan.? A brief explanation of the basic construction of a Trust would be helpful in setting the framework for this analysis.
Trust Basics
You can think of a Trust, whether Revocable or Irrevocable, as a big empty box designed to hold assets.? The box has a set of instructions, called a Trust Agreement, guiding the construction, administration and distribution of the Trust.
Three essential roles are involved in the Trust process: the Grantor, the Trustee and the Beneficiary.? The Grantor is the person who establishes the Trust by setting up the rules; this person names the Trustee and the Beneficiaries, and decides when and how Trust assets are to be distributed.? The Grantor customarily is the person who transfers their assets into the name of the Trust.? The Trustee is the Trust manager; this person?s duty is to manage the Trust assets and follow the Grantor?s instructions regarding distribution.? The Beneficiary is the person for whom the Trust is created; this person enjoys the beneficial use of the Trust assets and receives distributions from the Trust.? A Trust will usually name both primary (initial) Beneficiaries and contingent (secondary or ?ultimate?) Beneficiaries.
The Revocable Living Trust
A Revocable Living Trust is generally used as a replacement for a traditional Will in estate planning.? The Grantor, Trustee and primary Beneficiary is usually the same person(s).? A Revocable Living Trust is created by the Grantor (or Grantors in the case of a married couple) signing the Trust Agreement, which acts as an instruction manual for the administration of the Trust and distribution of Trust assets.? The Grantor then funds the Trust by retitling their financial accounts, real property and other assets into the name of the Trust.? The Grantor(s) are named as the initial Trustee, who maintains complete control over the assets and manages the Trust assets for their own benefit as the Beneficiary.? For all practical purposes, there is no change in the way the Grantor uses and enjoys his or her assets.? At any time, the Grantor can make any changes whatsoever to the Trust Agreement, including naming different Trustees, changing Beneficiaries and plans of distribution, and even getting rid of the Trust altogether.? For this reason, the Revocable Living Trust is not a separate taxable entity; the Grantor continues to treat the Trust assets as their own for income tax purposes.
A properly funded Revocable Living Trust will avoid probate upon the Grantor?s death.? ?Probate? is the court process of transferring assets from the hands of the deceased into the hands of the living.? Because the Revocable Living Trust is the legal owner of the Grantor?s assets, even after the Grantor?s death the Trust ?lives on?, with a successor Trustee taking charge of the assets to follow the Grantor?s instructions regarding distribution of the trust assets to heirs (the contingent Beneficiaries).? This makes for easier administration of the decedent?s estate, allows for some privacy protection, and may even result in fewer disputes among heirs.? A Revocable Living Trust becomes irrevocable at the time of the Grantor?s death.
The Safe Harbor Trust
The Safe Harbor Trust, in contrast, acts more like a beneficiary in your Will.? No Trust is established during the Grantor?s lifetime; instead, the Grantor leaves instructions in the Will to create the Trust at the time of their death.? The Grantor still appoints the Trustee and names the Beneficiary.? But unlike the Revocable Living Trust, the Trustee cannot be the surviving spouse and is irrevocable at the time it is established.
Knowing that the surviving spouse can have very limited resources to qualify for any long-term care benefits under Medicaid or other government programs, the Trustee manages Safe Harbor Trust assets for the exclusive benefit of the Beneficiary, but the assets in the Safe Harbor Trust are not owned by the Beneficiary. Because assets are not counted as owned by the surviving spouse, they will not interfere with any long-term care benefits the he or she would be eligible for, and can be used to supplement where those benefits fall short.? The use of a Safe Harbor Trust ensures that the Grantor?s estate will not be subject to the $2,000 asset limitation of Medicaid, and provides much greater assurance that the surviving spouse will be able to maintain a much higher quality of life should long-term care becomes a reality.
As an additional bonus, the Safe Harbor Trust also maximizes the estate tax exemptions for married couples, and provides inheritance protection for the children of the Grantor upon the death of the surviving spouse, ensuring that any assets remaining in the Safe Harbor Trust go to or for the benefit of the Grantor?s children or other named beneficiaries.
In summary, the Revocable Living Trust is an effective tool for avoiding probate, but does not protect the estate from the potentially high cost of uncovered long-term care costs that the surviving spouse may face, and unless additional safeguards are put in place a Revocable Living Trust will provide no tax or inheritance protection.? In contrast, the Safe Harbor Trust places control of the Grantor?s estate in the hands of the Trustee for the benefit of the surviving spouse, and will protect the Grantor?s estate from long-term care costs and taxes, providing a greater quality of life for the surviving spouse.
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