Trusts and asset protection — a plain-English overview
This article is for educational purposes only and does not constitute medical, legal, or financial advice. Every family situation is different, and you should consult with appropriate professionals about your specific circumstances.
Trusts sound complicated because people who know about trusts seem to talk about them in a kind of financial insider language that makes your eyes glaze over. But the basic concept is actually straightforward, and understanding what a trust is and what it can do is important if your parent has significant assets that might need protection.
A trust is, at its heart, a legal arrangement where your parent puts assets into a legal structure that's managed by someone according to your parent's instructions. That's it. That's the thing. Instead of your parent owning the house directly, the trust owns the house. Instead of your parent's name being on the bank account, the trust is the account holder. Why would your parent do this? Because it creates specific advantages for how those assets are managed, how they're distributed, and how they're protected.
Understanding trusts matters because trusts serve multiple purposes. Some are about convenience: setting up a trust so that assets avoid probate and transfer smoothly to heirs when your parent dies. Some are about control: making sure that money goes where your parent wants it to go, to the people your parent wants to benefit. Some are about asset protection: making sure that if your parent needs long-term care and eventually needs Medicaid, some assets are protected from being depleted by care costs. Some are about privacy: keeping details about your parent's estate out of public court records. Some are about taxes: reducing what your parent or your parent's heirs will owe to the IRS.
Your parent might need a trust, or your parent might not. Depending on your parent's situation, the advantages might be significant or might be minimal. This is why consulting with an attorney who specializes in elder law is important.
Understanding the Basics
Let's start with what a trust actually looks like, because thinking about it in concrete terms makes it less mysterious.
Your parent creates a document called a trust agreement. This is a legal contract. It names your parent as the person who put the assets into the trust, which is called the grantor or settlor. It names a trustee, which is the person who will manage the assets held in the trust according to your parent's instructions. This could be your parent themselves, or it could be someone else like an adult child, a bank, or a professional trustee. It also names beneficiaries: the people who will eventually receive the money or assets from the trust. Often this is your parent while your parent is alive, and then your children or other heirs after your parent dies.
Then your parent transfers assets into the trust. This might be the house, bank accounts, investments, or other property. The process is different for different types of assets. A house gets transferred by deed. A bank account gets transferred by filling out forms with the bank. Stocks and mutual funds get transferred through brokerage forms. Once the assets are in the trust, they're no longer owned directly by your parent. They're owned by the trust, for the benefit of your parent and your parent's heirs.
Why does your parent remain the primary beneficiary and often the trustee? Because in most cases, your parent continues to live their life exactly as before. Your parent still uses the house. Your parent still spends the money in the accounts. Your parent still gets the benefit of the investments. The only difference is the legal structure of how those assets are titled.
The magic happens when your parent becomes incapacitated or dies. If your parent becomes unable to manage the trust because of dementia or illness, the successor trustee takes over. This could be an adult child who your parent named in the trust document. That person then manages the assets without needing court involvement or permission, because the trust document gives them that authority. This avoids the need for a guardianship proceeding, which is expensive and public and gives your parent less voice in what happens.
When your parent dies, the assets in the trust automatically transfer to whoever your parent named as the beneficiary. No probate is required. This saves time, money, and keeps the details private. If your parent wanted different children to get different amounts, or wanted assets held in trust for a grandchild instead of given outright, the trust document can specify all of that.
There are different types of trusts with different purposes. A revocable living trust is one your parent can change or cancel at any time. It's mostly useful for probate avoidance and for managing assets if your parent becomes incapacitated. An irrevocable trust is one your parent cannot change once it's created. It's used when your parent wants to protect assets from being claimed by creditors or from being counted as your parent's assets for Medicaid purposes. A testamentary trust is created in a will and takes effect only after your parent dies, so it doesn't help with incapacity issues.
Your Parent's Specific Situation
Whether a trust makes sense for your parent depends on several factors, and this is where you really do need an attorney's guidance.
First, does your parent have enough assets to make a trust worthwhile? The advantage of a trust is primarily in avoiding probate. Probate is the legal process where a will is validated and assets are distributed according to that will, with court supervision and fees involved. If your parent has a modest estate, probate costs might be small. But if your parent has significant assets, a house worth several hundred thousand dollars, retirement accounts, investments, or business interests, then avoiding probate could save thousands of dollars and months of time.
Second, what state is your parent in? Probate costs and timelines vary by state. In some states, probate is relatively simple and inexpensive. In other states, it's expensive and slow. If your parent is in a state where probate is complicated, a trust becomes more valuable.
Third, does your parent own property in multiple states? If your parent has a house in Florida and a vacation property in Colorado, and your parent dies, both properties would potentially go through probate in both states. A trust avoids this problem, which is significant.
Fourth, does your parent have complex family dynamics? If your parent has children from multiple relationships, or if your parent wants to leave money to some heirs and not others, or if your parent wants to make sure grandchildren are protected and money isn't left to a spouse who might remarry and exclude your parent's grandchildren, a trust gives your parent much more control over how assets are distributed. A simple will doesn't give your parent nearly as much control.
Fifth, is your parent likely to need Medicaid for long-term care? This is where things get strategic. If your parent has significant assets but might need long-term care in the next few years, certain trust structures can protect some of those assets from being claimed by Medicaid. This is not a guarantee, and it's highly dependent on the specifics of your parent's situation and your state's rules, but it's worth exploring. An elder law attorney can advise on whether these strategies make sense for your parent.
Sixth, does your parent want to plan for incapacity? If your parent becomes unable to make decisions, a revocable living trust that names your parent as the initial trustee and names a successor trustee allows someone to take over financial decisions without needing a guardianship proceeding. This is actually one of the most practical advantages of having a trust.
Taking Next Steps
If your parent might benefit from a trust, the first step is consulting with an elder law attorney in your parent's state. This attorney will review your parent's specific situation, understand what your parent's goals are, and advise on whether a trust makes sense and what kind of trust.
This will probably cost several hundred to a few thousand dollars in attorney fees, depending on the complexity of your parent's situation. This sounds expensive, but compare it to the cost of probate or the cost of not having plans in place if your parent becomes incapacitated. It's usually a worthwhile investment.
The attorney will help your parent create the trust document. Your parent will sign it in front of witnesses and possibly a notary, and then the fun part begins: transferring assets into the trust. This is tedious but important. A trust that looks good on paper but has no assets in it is worthless.
Your parent will need to change how accounts are titled. Instead of an individual account, it becomes a trust account. The house deed changes to put the house in the trust's name. Investments get retitled. Bank accounts get retitled. This all takes time and paperwork, but it has to be done for the trust to be effective.
Once assets are in the trust, they're managed according to the trust document. Your parent continues to use them exactly as before. If your parent names themselves as the initial trustee, your parent continues to make decisions about the assets. If your parent names someone else as the trustee, that person is now responsible for managing them according to your parent's instructions, which are spelled out in the trust document.
If your parent's situation changes, the trust can usually be updated. This requires working with an attorney again, but the option exists.
When your parent dies or becomes incapacitated, the successor trustee takes over. Your parent should discuss this with the person they're naming as successor trustee, so that person understands the responsibility and is prepared. Ideally, your parent provides written instructions about how the trustee should manage the assets and what your parent's wishes are.
The Real Advantage
Here's what's worth understanding about trusts: they're not magic, and they're not a tool only for the wealthy. They're a way of organizing your parent's assets and managing them strategically. For some families, they're incredibly valuable. For others, a simple will and other documents like power of attorney are sufficient.
What matters is that your parent has some plan. Not having a plan and hoping it will all work out is how you end up with probate, family conflict, assets not going where your parent wanted them to go, and someone getting stuck handling complicated legal proceedings with no clear authority to act.
A trust is one tool to avoid this. There are others, depending on your parent's situation. But the conversation with an elder law attorney is worth having, because the cost of not planning is usually much higher than the cost of planning.
How To Help Your Elders is an educational resource. We do not provide medical, legal, or financial advice. The information in this article is general in nature and may not apply to your specific situation. If you are concerned about a loved one's cognitive health or safety, consult with their healthcare provider or contact your local Area Agency on Aging for guidance and support.