A living trust is a legal document created during the trust creator’s lifetime that gives asset ownership to a pre-designated person, called a trustee. The trustee is then responsible for the management of the trust creator’s assets until they are ready to be passed on to any beneficiaries. Living trusts make it easier for assets to transfer to beneficiaries by protecting property from probate or other legal proceedings. When you go through the process of creating your will, you are able to create a living trust at the same time.
However, contrary to popular belief, setting up a living trust does not mean your assets are protected if you are faced with catastrophic medical bills. In these situations, the assets in your living trust can be used as payment, unless you’ve taken specific steps to safeguard them from creditors.
Let’s say your spouse becomes severely ill and must be hospitalized for about a month. During that time, the medical bills will begin to stack up, potentially presenting you with requests for hundreds of thousands of dollars. If these bills cannot be paid immediately, the hospital and collection agencies will start knocking down your door looking for payment. In many of these cases, your living trust is first place these creditors will look. How can you protect your beneficiaries’ future assets from being used as payment for this catastrophic medical event?
Unfortunately, your living trust is not safeguarded because you still have full ownership over your assets. Since you are technically in control of your own property, these assets will be counted when creditors determine your net worth. However, this also means that you have the freedom to alter the amounts and property held in your living trust. You would be allowed to remove some funds for your spouse’s medical bills, while leaving the rest of the assets in the living trust pool for your beneficiaries.
If you wish to completely protect your assets, you should consider putting them in an irrevocable trust. These trusts lock your assets away and do not allow you to modify, add or terminate any of the holdings. Like a living trust, irrevocable trusts are also controlled by trustees and beneficiaries. If you wish to make any changes to the trust, you can only do so with their explicit permission. However, irrevocable trusts are protected from creditors. If the hospital is sniffing around for payment, you can be assured they won’t touch any of the assets you locked away.
Since many people don’t have hundreds of thousands of dollars sitting around in the case of an emergency, a catastrophic medical bill could cause undue stress. If you’re concerned about creditors getting ahold of the assets in your trust, contact a Sacramento estate planning lawyer today. In these situations, it’s better to be prepared before a potential situation arises.
Thanks to the Yee Law Group for their insight into estate planning and protecting your assets from medical bills.