If you are supporting elderly parents financially (paying their rent, covering medical bills, or supplementing their retirement income), what happens to them if something happens to you?
Without a plan, your parents could lose the support they depend on overnight. A trust can ensure they are taken care of even if you are no longer around to provide for them. Here is how to set one up.
Your Parents Depend on You, Not Your Estate
When you die, your assets go to your designated beneficiaries, usually your spouse or children. Even if you intend for some of that money to continue supporting your parents, there is no guarantee it will:
- Your spouse may not continue the payments. Especially if money is tight or family dynamics are complicated, a surviving spouse may not feel obligated to support your parents at the same level.
- Your children may have other priorities. If your children inherit outright, they may use the funds for their own needs. Not unreasonably, but your parents still lose their support.
- Your estate may not have enough liquidity. If most of your wealth is tied up in real estate or retirement accounts, there may not be readily available cash to continue supporting your parents immediately after your death.
A trust solves this by creating a legally binding obligation to use specific funds for your parents’ care.
How a Third-Party Support Trust Works
The most common tool for this situation is a third-party support trust, a trust you create and fund for the benefit of your parents.
Key features:
- You are the grantor. You create and fund the trust during your lifetime or through your estate plan.
- Your parents are the beneficiaries. The trustee distributes funds for their care according to the terms you set.
- A trustee you choose manages the funds. This can be a family member, a trusted friend, or a professional trustee. The trustee is legally obligated to follow the trust’s instructions.
- The trust terminates when your parents no longer need it. Typically, the trust ends when both parents have died, and remaining assets pass to your other beneficiaries (spouse, children, etc.).
Because this is a third-party trust (you created it, not your parents), the assets are generally not counted as your parents’ resources for purposes of government benefits eligibility. This is a critical distinction.
Protecting Government Benefits
If your parents receive or may need Medicaid, SSI, or other means-tested government benefits, how you structure the trust matters enormously.
What to avoid:
- Do not give money directly to your parents. Cash gifts or direct deposits into their accounts are counted as income and resources, which can disqualify them from Medicaid or SSI.
- Do not leave an outright inheritance to your parents. If your parents are named as direct beneficiaries of your estate, the inherited assets become their resources and may disqualify them from benefits.
What works:
A third-party supplemental needs trust (also called a special needs trust) allows you to provide for your parents without affecting their government benefits eligibility.
- The trust can pay for things that government benefits do not cover: companionship services, travel, personal items, home modifications, supplemental medical care, and quality-of-life expenses.
- The trustee makes payments directly to providers (not to your parents) to avoid the funds being treated as income.
If your parents are not currently receiving government benefits but may need Medicaid for long-term care in the future, planning the trust correctly now can preserve their eligibility later.
How to Fund the Trust
There are several ways to fund a trust for your parents:
Life insurance. This is often the most efficient option. You purchase a policy on your own life and name the trust as the beneficiary. When you die, the insurance proceeds fund the trust immediately, providing a dedicated source of support.
A specific bequest in your trust or will. You can direct a fixed dollar amount or a percentage of your estate to the parents’ trust upon your death.
During your lifetime. If you want the trust to be available in case of your incapacity (not just death), you can fund it now with cash or investments. This ensures your parents are covered if you suffer a disabling illness or injury.
Retirement account beneficiary designation. You can name the trust as a beneficiary of your IRA or 401(k), although this is usually discouraged because the strategy has tax implications that should be carefully evaluated. Retirement distributions to a trust may be taxed at compressed trust rates unless distributed to the individual beneficiary.
Choosing the Right Trustee
The trustee selection is especially important for a parent’s trust because:
- Your parents may be vulnerable or have diminishing capacity.
- The trustee needs to be responsive to your parents’ day-to-day needs.
- The trustee may need to coordinate with healthcare providers, government agencies, and other family members.
Options include:
A sibling or other family member. Works well if the person is responsible, available, and has a good relationship with your parents. The risk is that family dynamics may complicate the role.
A professional trustee. A law firm, bank, or trust company provides objectivity and financial expertise.
A combination. This is the best option so as not to exhaust a family member tasked with both jobs. Name a family member as the primary contact for your parents’ physical care needs and a professional trustee to handle investment, bill-paying, taxes, IRA distributions, and other accounting responsibilities.
Whoever you choose, make sure they understand your parents’ needs and your expectations for how the trust should operate.
What Should the Trust Cover?
Be as specific as possible in the trust document about what the funds should be used for:
- Housing (rent, mortgage, property taxes, maintenance, assisted living)
- Medical and dental expenses not covered by insurance or Medicare
- In-home care, companionship, and personal assistance
- Transportation
- Clothing, personal items, and daily living expenses
- Quality-of-life expenses (hobbies, entertainment, travel)
- Emergency expenses
You can also include a priority order. For example, housing and medical care first, then quality-of-life expenses. This helps guide the trustee if funds are limited.
Plan Before It Is Too Late
If your parents rely on your financial support, the time to plan is now, while you are healthy and able to set up the right structure. A trust created during your lifetime gives you the ability to monitor how it works and make adjustments as your parents’ needs change.
To discuss creating a trust for your parents, contact McKarcher Law to schedule a consultation.
Author Bio
Joshua McKarcher, Estate Planning Attorney
Joshua McKarcher is the founder of McKarcher Law PLLC in Clarkston, where he practices estate planning and administration for families in the Lewis-Clark Valley and throughout Washington and Idaho. He handles the cross-border planning that families with property or relatives in both states need.
He earned his law degree from The George Washington University Law School in Washington, D.C., graduating in the top 2% of his class, where he was elected to the Order of the Coif and served as Managing Editor of The George Washington Law Review.
He began his career at Covington & Burling LLP, handling complex corporate bankruptcy and insurance insolvency matters. He argued and won before the U.S. Court of Appeals for the Fourth Circuit, where the court ruled unanimously in his clients’ favor, and he won unanimous opinions twice before the Idaho Supreme Court, which overruled one of its precedents at his suggestion during oral argument.
That experience, spent untangling estates and businesses after something has gone wrong, is what shapes his work today: building estate plans that identify and minimize the risk of disputes, keep families out of probate, reduce estate and income taxes, and protect what people leave behind.
537 6th Street, Clarkston,
WA 99403
