When A Trust Can Be Useful

Do you want to leave something to your loved ones after you die, but think there should be "strings attached’?
Are you concerned that a disabled family member might lose government benefits if he or she inherits money?
Are you disabled?
Do you want to plan for your long term care?
Do you want to avoid probate?
Do you want to reduce or eliminate taxes that your estate might pay after your death?

For any of theser easons, a trust could be the answer. A trust is simply an arrangement where someone (a “trustee”) manages property of any kind for the benefit of another (a “beneficiary”). There are many different types of trusts. They can be complex or rather simple. They can be in Wills or stand on their own. They can be revocable or irrevocable.

There are many reasons to create trusts, in addition to protecting beneficiaries from their own foolishness, spendthrift ways, creditors or estranged spouses. Trusts are often created for tax reasons, financial reasons, charitable reasons and to maintain control. Eligibility to receive or continue receiving Medicaid and other governmental benefits are also primary reasons to create a trust. Part of the beauty of a trust is that you can set it up virtually however you want to, as long as it is legal. The specific desires of a trust creator, and the needs of the creator and proposed beneficiaries, must be taken into consideration.

Often, property put into a trust creates income, and that income is used for the benefit of certain persons during their lifetimes. After their deaths, the remainder (principal and unspent income) either is paid to the “remainder beneficiaries” or continues to be held in trust until they reach a certain age or some other event occurs, as stated in the trust.

The trustee’s authority and discretion are sometimes carefully limited and sometimes not so. The creator of a trust can give a trustee authority to pay all or part of the property of a trust to beneficiaries equally or otherwise. Sometimes a trustee is not permitted to pay anything but income to a beneficiary. Sometimes a trustee has authority to end the trust before it would otherwise end.

The reason or reasons for creating a trust will determine the type of trust and the language to be included. A trust structure that works for one person may have adverse unforeseen consequences for another. For example, transferring property into a Medicaid asset protection trust might be a good idea for a person or married couple who are relatively healthy, but not for someone, single or married, who it appears will need care in a skilled nursing facility in the near future. Then again, such a trust might be just the right option for that person.

Persons in second marriages and unmarried persons in long term relationships have circumstances that call for many questions to be asked and scenarios to be explored. The length of their relationship, their relative financial situations, whether they keep their assets separate, how they feel about their children and whether they have a prenuptial agreement are just some of the factors to be considered in determining how to proceed. A trust of some sort is usually wise, even if it is a simple trust contained in a Will.

Whether a trust should be revocable or irrevocable depends on several factors. The most important of these is the issue of whether the creator needs or likely will need part or all of the asset(s) that might be transferred into the trust. If the answer is ‘no’, an irrevocable trust could be appropriate and useful. In this type of trust, typically the creator only is entitled to the income created by the trust assets. However, in some types of irrevocable trusts, the creator also gives up the right to income.

Commonly, the creator’s residence is transferred into an irrevocable trust, with the creator keeping the right to live in the house under the same circumstances as before the transfer occurred, including continued eligibility for property tax exemptions. The creator usually has the right to tell the trustee to sell the residence, and to buy a substitute residence if desired. Any income created by trust assets typically belongs to the creator, with the assets being distributed among remainder beneficiaries after the creator’s death. If the trust is written correctly, assets can be protected against Medicaid reimbursement claims and receive a ‘step-up’ in tax basis after the creator’s death, which reduces capital gains tax liability.

The goals and circumstances of those considering trusts vary greatly. It is important when creating your plan to get good advice so that you know what you are doing is right for you, both in the short term and in the long term.

Copyright 2017 Joseph A. Bollhofer, Esq.