What Kind of Trust is Right for Me?

The Trust was developed more than a thousand years ago by the English nobility to ensure that their property passed the way they wanted without interference by the government. For that reason, the Trust has always been associated with the rich. Even today, many people believe that the Trust is a planning technique used only by the very wealthy. Others believe that establishing and managing a Trust is costly and beyond their means, requiring a team of attorneys, accountants and trust officers to administer the trust. These perceptions are wrong. The Trust is a planning tool that can benefit anyone who owns a home or has a few bank accounts or investments. While establishing a Trust will add to the cost of establishing an estate plan, the additional expense is a very cost effective investment. The legal fee for setting up a Trust is usually a fraction of the cost of probating a Will or commencing guardianship proceedings in Probate Court. The savings are not just monetary. All Probate Court proceedings take place in open court. They are commenced by a notice in the local newspaper. Family members who are not happy with the terms of the Will can easily hold up probate for months, while the assets in the estate are frozen. Probate records contain detailed information about family members and the estate assets and are available to anyone who asks for them. In contrast, the administration of a Trust does not invade your family's privacy. The Trust can be a private family agreement, with the terms of the Trust and information about the trust assets known only to those individuals involved with the Trust. It is not necessary to hire experts to administer your Trust. You, your spouse, and your children can act as Trustees. If your children are not old enough to be named as Trustees, a parent, sibling or close friend can act as Trustee. It is not necessary to obtain the approval of a Probate Court Judge to start the administration of the Trust, so there is no outside interference with the management of your affairs. With a Trust, the family is spared not only the expense, frustrations and the delays of probate, but also the invasion of the family's privacy. Following is a comparison of Wills versus Trusts:

Wills Versus Trusts

• A TRUST AVOIDS PROBATE
  With a Trust, your assets can be distributed directly to your beneficiaries after your death without time delays and without the need to obtain the approval of a Probate Court Judge or anyone else. Your Trust takes effect on the day that you sign it; it does not have to be "allowed" by a Probate Court Judge after your death. The person named to take over as Trustee after your death can immediately take over the management of the trust assets, paying your final bills and funeral expenses, and then distributing the remaining funds as directed by you in the Trust Agreement. There will be significant savings of attorneys fees and your family's privacy will be protected. In contrast, a Will must be allowed by a Probate Court Judge before it takes effect. In Massachusetts, this takes at least three months. In the meantime, the estate assets are frozen and bills cannot be paid. Even after the Will is allowed, the Executor must obtain the Court's permission to sell real estate, to make distributions to the beneficiaries, and for other routine tasks. The Executor must provide detailed information to the Probate Court, including the names and addresses of your beneficiaries, the value of every asset included in your estate, and the exact amount distributed to each beneficiary. All of this information is public and available to anyone who asks for it. The Executor must hire an attorney to get the Will allowed and must pay the attorney for multiple court appearances and for the preparation of the documents and accounts required by the Probate Court. f
  
• TRUSTS CAN REDUCE OR ELIMINATE ESTATE TAXES
  With two properly drafted and funded Trusts, a married couple can pass on $2,000,000 free of Massachusetts estate taxes and $4,000,000 free of federal estate taxes to their children and other beneficiaries. With simple Wills, the couple can shelter only $1,000,000 from Massachusetts estate taxes and $2,000,000 from federal estate taxes. For a couple with an estate worth $4,000,000, the use of Trusts can eliminate federal estate taxes and reduce Massachusetts estate taxes by $100,000. With simple Wills, the couple's heirs will pay $920,00 in federal estate taxes and $280,000 in Massachusetts estate taxes. The total savings resulting from the Trusts is more than $1,000,000. For smaller estates, the savings are still significant. A couple with an estate of $2,000,000 can eliminate liability for both federal and Massachusetts estate taxes with properly drafted and funded trusts. With simple Wills, the couple's heirs will pay $99,600 to the Massachusetts Department of Revenue for estate taxes.
  
• A TRUST ELIMINATES THE NEED FOR GUARDIANSHIP
  A properly drafted Trust includes instructions about the administration of the Trust in the event of your incapacity. If you become disabled or are unable to manage your assets, the person named by you as successor Trustee (your spouse, child, or close friend) can immediately take over the management of the trust assets for your benefit, following your instructions in the Trust. This can be accomplished privately, without the need to obtain the permission of a Probate Court Judge or anyone else and without the need to retain an attorney for Guardianship proceedings. A Will cannot accomplish this because the Will takes effect only after your death. Without a Trust, your family may have to commence guardianship proceedings in the Probate Court if you become incapacitated. Like the allowance of a Will, Guardianship proceedings are public proceedings, started by paperwork filed in the Probate Court and a notice in the local newspaper. After your Guardian is appointed, he or she must file yearly accountings, with detailed information about your assets, income, and expenses. Each bill paid by your Guardian must be listed on a yearly account. Your Guardian must obtain the Court's permission to sell real estate and undertake other routine tasks. An attorney must be retained to represent the Guardian throughout the Guardianship proceedings. Guardianship proceedings are costly, can go on for many years and truly violate your family's privacy. Your Guardian and your family doctor must disclose detailed information about your medical status, declaring you to be "mentally ill", as well as providing information about your finances and expenses.
  
• A TRUST ALLOWS YOU TO RESTRICT HOW YOUR ESTATE IS MANAGED AND SPENT AFTER YOUR DEATH
  A Trust can provide for the care, support and education of your spouse, children, grandchildren and other beneficiaries for several generations after your death. There are many reasons to continue the administration of your Trust after your death. You may want to provide for a second spouse, but ensure that your children by your first marriage will inherit a significant portion of your estate after your spouse's death. Your children or grandchildren may be too young to manage a large inheritance or you may have a child or grandchild with special needs or problems. Some people believe that their children or grandchildren should establish themselves in a career before they inherit and others want their estate spent for the benefit of their heirs in a specific way (i.e., college expenses). Whatever your reason, the Trust is the best way to provide future benefits for family members. A Will cannot accomplish this. After your Will is allowed, your Executor is required by law to make distributions to your beneficiaries within nine months from your date of death.
  
• A TRUST CAN PROTECT CHILDREN FROM EARLIER MARRIAGES, WHILE PROVIDING FOR YOUR SPOUSE
  You can provide for both a surviving spouse and children from a previous marriage with a Trust that stays in effect during the lifetime of your spouse, with the Trustee spending the trust funds for your spouse as directed by you in the Trust Agreement. After your spouse's death, the Trustee will distribute the remaining funds to your children. For a larger estate, the Trust can provide for the distribution of some funds to your children, with the balance held in Trust for your spouse. When the spouse dies, the Trustee can distribute the remaining funds to your children or other beneficiaries. This cannot be accomplished with a Will. Your surviving spouse is free to make use of any distribution made to him or her under the terms of your Will (unless their share of the estate is distributed to a Trust.) The same is true of jointly owned assets or life insurance proceeds collected by your surviving spouse. Without a Trust, you cannot direct how your spouse can spend his or her inheritance or how it will be distributed after your spouse's death. Even if you and your spouse draft Wills together, with the provisions of your spouse's Will consistent with your wishes, your spouse can draft a new Will after your death, leaving the money inherited from you to a new spouse, his or her children by another marriage, or to a favorite charity.
  
• A TRUST CAN INSURE THAT YOUR WISHES ARE CARRIED OUT AND ARE NOT SUBJECT TO PUBLIC ATTACK
  The allowance of a Will begins with the issuance of a citation, which is a public invitation to contest the Will. It is extremely easy for an unhappy beneficiary to hold up the allowance of a Will for months, even without hiring an attorney. Many Executors give in and pay a settlement to an unhappy beneficiary to avoid a lengthy, costly and public Will contest. By contrast, it is very difficult for a Trust beneficiary to overturn an established Trust. If you are concerned that a child or other beneficiary is going to be unhappy with their inheritance, it is far safer to leave your estate to your beneficiaries under the provisions of an established Trust, rather than under the terms of a Will.

Trust Basics

A Trust is a written document that gives one or more Trustees the legal authority to manage the property transferred to the Trust. The Trust contains instructions about how the trust property should be managed and distributed to the Beneficiaries of the Trust. The "Trustee" is an individual, a bank, or trust company, to whom property is transferred for the purpose of managing the property for the benefit of one or more individuals, known as "beneficiaries." The "Trust" usually includes the following provisions:

• The name of the "Settlor" or the "Grantor". The Settlor is the person who establishes the trust and who usually reserves certain powers or control over the property transferred to the Trust. If the trust is revocable, the Settlor may amend or terminate the trust at any time. If the trust is irrevocable, the Settlor does not have the power to amend or terminate the trust. In most cases, the Settlor is the person who funds the trust by transferring property owned by him or her to the trust. Other individuals may add property to the trust if the terms of the trust allow this.
• The name or names of the original Trustee or Trustees (there may be more than one Trustee). The Settlor of the trust may also be a Trustee of the trust. The Trustee is responsible for managing and investing the property transferred to the trust, and for paying the expenses necessary to maintain and preserve the trust property, including the payment of any taxes due, Trustee's fee, and legal and accounting expenses. The Trustee must also follow the instructions in the Trust regarding the distribution of the trust income and assets to the beneficiaries.
• The name of a successor Trustee or Trustees, who will take the place of the original Trustee upon the resignation or death of the original Trustee, or under other circumstances stated in the trust.
• The names of the original beneficiaries. The trust property is managed and invested for the benefit of the beneficiary or beneficiaries. The terms of the trust direct when and if distributions of trust income and trust principal should be made to the beneficiaries. The Settlor of the trust may name himself or herself as a beneficiary of the trust.
• The names of contingent or future beneficiaries, who will become the beneficiaries of the Trust upon the occurrence of a certain event or condition, such as the death of the original beneficiary.
• Instructions regarding the investment, management, and sale of any property (cash, stock, bonds, mutual funds, real estate, or any other asset other type of investment) transferred to the Trustees.
• Instructions regarding the distribution of trust income and principal to the beneficiaries. Trust principal is the property (cash, stock, bonds, mutual funds, real estate, or any other asset) that is originally transferred to the Trustee, property that is purchased by the Trustee with the funds originally transferred to the Trustee or property that is purchased by the Trustee with funds produced by the sale of other principal assets held in the Trust. Trust income is interest and dividend income, and in some cases, capital gains distributions, produced by the principal assets held in the trust. The instructions regarding the distribution of trust income and principal can be extremely detailed, or can give the Trustee wide discretion to determine how the trust income and principal should be managed and distributed.

Different Types of Trusts

The Living Trust. The most popular and versatile version of the Trust is the Living (Revocable) Trust. In simple terms, the Living Trust is a private family agreement that provides for the management of the family's property. The person who establishes the Trust, referred to as the "Settlor", may manage the Trust property, naming himself or herself as the original Trustee. The Trust may also be managed by other family members or by a professional Trustee. It is up to the Settlor to decide who will serve as original and successor Trustees. The Settlor also gives the Trustee instructions to cover all of the expected events that may occur during his or her lifetime and the lifetime of the future trust beneficiaries. The Living Trust is revocable. This means that the Settlor of the Trust may change the instructions contained in the Trust Agreement, as the family situation changes. The Settlor may also remove a Trustee and appoint a new Trustee. The Living Trust is more than a substitute for a Will. A Will takes effect only after the death of its maker, after it is "allowed" by a Probate Court Judge. The Living Trust takes effect on the day that it is signed. The most important feature of the Living Trusts is that it has the ability to take care of its maker, known as the "Settlor", during his or her lifetime. If the Settlor becomes incapacitated, the original Trustee (or Successor Trustee) of the Living Trust can care for the Settlor, without having to commence Guardianship proceedings in the Probate Court. After the Settlor's death, the Trust does not have to terminate. The Trust can continue for the benefit of several generations of family members, managed by the persons chosen by the Settlor to serve as successor Trustees. After the Settlor's death, the Living Trust becomes irrevocable. This means that the successor Trustees and the future beneficiaries cannot change or set aside the Settlor's instructions. Because it is extremely difficult to contest an established Trust, the Settlor of the Trust can have peace of mind that his or her wishes and instructions contained in the Trust Agreement will be honored after his or her death.


Trusts to Minimize Estate Taxes. Trusts are a critical component of an estate plan that is designed to minimize liability for estate taxes. A married couple can eliminate, or significantly reduce, Massachusetts and federal estate taxes by establishing and funding two Living Trusts. With this type of estate plan, husband and wife each establish a Living Trust with additional provisions that allow both of them to make full use of the Massachusetts and federal estate tax exemptions. Their Trusts are administered as standard Living Trusts during their lifetime. When the first spouse dies, the assets held in his or her Trust are divided into two subtrusts, known as a "Marital "Q-TIP Trust" and a "Family Trust". These subtrusts are created by the terms of the Trust Agreement. The two subtrusts are funded with the trust property in a way that takes advantage of the federal and State estate tax exemptions available to the deceased spouse's estate. A married couple with a smaller estate ($2,000,000 or less) can eliminate liability for both federal and Massachusetts estate taxes. For a larger estate, federal and Massachusetts estate taxes can be decreased substantially. The end result in both situations is the distribution of more assets to the couple's children and other beneficiaries and less to the IRS and the Massachusetts Department of Revenue. See page 12 below for more detailed information and examples of how estate taxes can be reduced or eliminated with the use of two Living Trusts. A single person can also minimize liability for estate taxes by establishing a Trust and making tax-exempt gifts to the Trust each year. Under current laws, an individual can make yearly tax-exempt gifts of $12,000 to any number of individuals. An individual with five children can gift $60,000 each year to a Trust established for the benefit of his or her children. If the Trust is drafted properly, the yearly gift of $60,000 to the Trust is deemed to be five tax-exempt gifts of $12,000 to each of the trust beneficiaries. There is no need to file a Gift Tax Return and no gift taxes will be due from the parent or the children. With this type of Trust, the parent is able to shift $60,000 each year from his or her taxable estate to the five children without any tax liability. Making gifts to this Trust is advisable when the parent's estate exceeds $1,000,000 (the current Massachusetts estate tax exemption). If the parent in this example has an estate valued at $1,300,000, he or she can reduce his or her taxable estate to $1,000,000 in five years by making five yearly gifts of $60,000 to the Trust established for the benefit of the five children. No estate taxes will be due from the parent or the children and liability for Massachusetts estate taxes will be eliminated. If the parent does not make any gifts and dies with an estate of $1,300,000, the Massachusetts estate tax that his or her children must pay will be $51,600.

The Legacy Trust. The Legacy Trust is an irrevocable Trust that is established for the primary purpose of protecting an older parent's assets from being eroded by nursing home costs. In this part of the country, nursing home care averages about $300 per day or $110,000 a year. With advance planning, an older individual can prevent nursing home costs from totally eroding their life savings. The Legacy Trust is appropriate when a parent has sufficient income (including investment income) to pay for his or her living expenses. The Trust is funded by the parent, who gifts his or her life savings and investments to the Trust. As long as the amount transferred to the trust does not exceed $1,000,000, no gift taxes will be due from the parent or the trust beneficiaries. The parent usually names his or her children and/or grandchildren as the beneficiaries of the Trust. The parent can be the original Trustee of the Trust, if he or she is able to manage their finances, with one or more children named as successor Trustees. If the parent is not able to manage their finances, one or more children can be named as the original Trustees. The funds gifted to the Trust by the parent are invested and the parent is entitled to the distribution of the income generated by these investments. The net income can be paid monthly, quarterly, or annually, whichever is most convenient for the person paying the parent's bills. The Trust will name at least one beneficiary who will be entitled to the distributions of trust principal (the trust investments) during the parent's lifetime. This provision ensures that the trust principal will be available to pay for the parent's care if the parent's income (including the investment income from the Trust) is not sufficient to pay for the parent's living expenses. If the parent needs funds in addition to their income, trust principal can be distributed to one or more of the trust beneficiaries, who will use the funds to pay the parent's expenses or purchase something that the parent needs. If the parent is admitted to a nursing home in the future, the trust investments are not deemed to be available assets to pay for the parent's nursing home care, as long as five years have passed after the funds have been gifted to the Trust. In this way, the parent's life savings are protected. After the parent's death, the trust principal and any undistributed net income will be distributed in a manner consistent with the parent's instructions contained in the Trust Agreement. Obviously, advance planning is required to protect the funds transferred to this type of Trust. If five years has not passed after the parent has gifted the funds to the Trust, some or all of the funds must be used to pay for the parent's nursing home care. However, the Trust can be structured so that the trust funds will be available to pay for the parent's care if five years has not passed since funds were gifted to the Trust. Because there is only one governmental program that pays for long term nursing home care (the medicaid program) and this program does not pay benefits until a nursing home resident has reduced his or her assets to $2,000, it is usually worth the expense and effort of establishing a Legacy Trust. The Trust can also be structured to reduce, or eliminate, liability for estate taxes.

Irrevocable Life Insurance Trust (ILIT). The Irrevocable Life Insurance Trust (ILIT) is another tool for minimizing liability for estate taxes and providing funds to pay for estate taxes. The Trustee of the ILIT holds title to one or more life insurance policies. These can be new policies purchased by the Settlor of the Trust or existing policies that the Settlor transfers to the Trust after it is established. The Settlor continues to pay the premiums for the insurance policies by making tax-exempt gifts to the Trust when the premiums are due. The Settlor usually names his or her spouse, children and/or grandchildren as the beneficiaries of the Trust. After the Settlor's death, the Trustee collects the life insurance proceeds and pays the estate taxes due from the Settlor's estate. Because the Trust owns the life insurance policies, the death benefits are not included in the Settlor's taxable estate. Any funds left after estate taxes are paid can be distributed to the beneficiaries named by the Settlor. It is sometimes appropriate for the Trust to continue after the Settlor's death. If the Settlor's spouse has a substantial estate, the Trust can continue to be administered for the benefit of the spouse and children. If the Trust is drafted properly, the funds remaining in the Trust after the spouse's's death will not be included in the spouse's taxable estate. If the beneficiaries are younger, the Trust can continue to be administered for their benefit until they reach the age designated by the Settlor, at which time they will receive an outright distribution of their share of the trust property. This ILIT is appropriate for individuals with life insurance policies that will pay out significant death benefits. Removing the death benefits from the individual's taxable estate can reduce or eliminate liability for estate taxes. The Trust is also appropriate for an individual who owns a business, a farm, or commercial properties that the family would like to continue to operate for one or more generations. The life insurance policies held in the ILIT will pay the estate taxes due after the death of the owner of the family business, the farm, or the commercial properties. The children will not be forced to borrow money, or even worse, sell the business, the farm, or the commercial properties to pay the estate taxes that are due.

Special Needs Trust The Special Needs Trust, which is also referred to as a Supplemental Needs Trust, is a Trust established by a parent or sibling for the benefit of a child or sibling with special needs or medical problems. This type of trust is appropriate when the child or sibling is receiving governmental benefits based on financial need. These benefits include SSI, medicaid, food stamps, and benefits for housing. If the parent gives money outright to the child, the child will no longer meet the financial requirements of the programs and will lose all of their benefits. To deal with this problem, the federal government created the Supplemental Needs Trusts. If the Trust meets the federal guidelines, a parent or sibling may make unlimited gifts or leave a child's inheritance to the Supplemental Needs Trust established for the child's benefit without disqualifying the child from receiving these benefits. The Trust must be irrevocable and the Trustee must be directed to make expenditures of the trust funds to supplement the governmental benefits for which the child is eligible. When the child dies, the Trustee must repay any lien imposed by the federal of State agency that granted the child's benefits. At the current time, the only program that imposes a lien is the medicaid program, which is administered in Massachusetts as the MassHealth program. In many cases, leaving a child's inheritance to a Supplemental Needs Trust is also necessary because the child is not able to manage their own finances.

If you would like more detailed information about any of these Trusts, please call my assistant to schedule a consultation.

WHY SHOULD I ESTABLISH A TRUST?

Probate Avoidance. Most Probate Courts are understaffed and the personnel are underpaid. There are lengthy time delays for most routine matters, such as the allowance of a Will, the appointment of an Executor, obtaining a License to Sell Real Estate, and obtaining the Court's approval for the Executor's distribution of the estate assets. With few exceptions, private family matters become public records. The probate process is started by the Executor of the Will, who must file the Will and paperwork with information about family members and Will beneficiaries (including home addresses). The Court issues a notice (called a "citation) that must be published in the local newspaper. The citation is almost an invitation to contest the Will. It is fairly easy for an unhappy family member to contest the allowance of the Will or the appointment of the Executor, holding up the administration of the Estate for months. After the Will is allowed, the Executor must provide the Probate Court with a description of all assets owned by the decedent, including their value, on the probate Inventory. If real estate is to be sold, the Executor must obtain permission from the Probate Court Judge prior to the sale. In order to settle the estate, the Executor must file an accounting that lists all of the decedent's debts, the costs of administering the estate, the amount of estate taxes paid, and a list of all distributions made to the beneficiaries, including the value of each asset distributed. All of the information contained in the Will, the Inventory, and the Executor's accounts become public records. Anyone may look at the probate records of any individual. There is no requirement that the person requesting a probate file be related to the deceased or named as a beneficiary of the Will. A noisy neighbor or relative, or a complete stranger is allowed complete access to all probate files on record. In addition to paying the legal fees to administer the estate, the Executor or Administrator must pay a substantial fee every time he or she files a document with the Probate Court. The estate must be kept open at least one year, to allow the creditors of the Estate to make claims against the estate.

It is not surprising that many people, particularly those who have served as an Executor of a relative's estate, are highly motivated to spare their own family this experience and expense. Unfortunately, many try to avoid probate in a way that jeopardizes their home and bank accounts. Some parents attempt to avoid probate by adding their children's names to their bank accounts or to the deed for their home as joint owner or transfer title to the child outright. This is a very risky way to avoid probate. If a child becomes involved in a divorce or lawsuit, the parent's home or bank accounts may be deemed to belong to the child. A former spouse may try to claim that they are entitled to become a co-owner of the parent's home or back accounts. A creditor may place a lien against the parent's home or attach the parent's bank accounts to satisfy a judgment. Probate can be avoided in a way that is far safer, by establishing and fully funding a Living Trust. If you establish a Trust during your lifetime, and transfer title to all of your assets to the trust prior to your death, the trust can act as a substitute for your Will.

This type of trust is usually referred to as a "Living Trust" or a "Revocable Trust". While you are living, you can retain complete control over the trust. You may add property to the trust at any time, distribute trust income and principal to yourself at any time, and you may amend or terminate the trust. After your death, your family can settle your estate privately and quickly by following your directions in the trust regarding the payment of your debts and the distribution of the trust assets. Even after your death, the trust remains a private document. The Trustees do not have to petition the Probate Court to have their appointment approved or to have the provisions of the Trust "allowed" before they can proceed with the administration of the Trust. The Trustees do not have to obtain the Court's permission to proceed with routine administrative tasks, such as the sale of real estate. While the Trustees must give all of the trust beneficiaries a periodic accounting of how they have managed and distributed the trust property, the accounts are shown only to the beneficiaries; the accounts do not have to be submitted to or allowed by the Probate Court. The result is that you, your family, and the beneficiaries of the trust, maintain your privacy regarding the management and distribution of any assets transferred to the trust.

This probate avoidance technique does not work in all situations. The probate of your Will can be avoided only if you have transferred title to all of your assets to your trust prior to your death. If you own assets that have not been transferred to your trust prior to your death, your Will must be probated in order to determine how those assets should be distributed and to allow the person named as your Executor to gain possession of these assets. There are also certain issues that can be resolved only by the allowance of your Will by the Probate Court, even if all of your assets have been transferred to a trust. These issues include the guardianship of a minor child, the distribution of personal items that have no legal title, the disposition of undistributed lottery winnings, the distribution of assets received from another estate, and funeral and burial directions. Therefore, the Living Trust should not take the place of your Will. You should have a Will directing your Executor to distribute your probate (non-trust) assets to your Living Trust after your death in the event that you have neglected to transfer all of your assets to the trust prior to your death. And if you have to deal with any of the special issues listed above, such as guardianship of a minor child, your Will should contain instructions regarding these matters. You need both a Will and a Living Trust to insure that your wishes will be carried out.

Spousal Support. In some situations, a husband or wife wants to make sure that after their death, their spouse will have sufficient funds to live comfortably, but they do not want to give complete control of their estate to their spouse. This is frequently the case when a husband or wife has children by a prior marriage. While they want to insure that after their death, their current spouse will be able to live comfortably, they also want to insure that their children by a prior marriage will inherit some or most of their estate after the death of their current spouse. They are also concerned about what will happen if their spouse remarries. Some husbands or wives feel that their spouse is simply not able to invest and manage money wisely. There are several types of trusts that can provide for the support of a surviving spouse, while preserving a large part of the estate for the children after both spouses are deceased. With a larger estate, it is appropriate to divide the estate assets into separate shares for the surviving spouse and the children. The degree of control given to the surviving spouse and/or the children will depend on your reasons for establishing the trust. Clients who believe that they are faced with a situation that cannot be resolved without causing financial hardship for one or more family members, or a situation that will lead to conflicts between family members, are pleasantly surprised to find that a trust with the appropriate provisions and a responsible Trustee provides a solution that benefits all family members.

Management of Assets for the Benefit of Children, Grandchildren, and Significant Others. The personal representative of an estate must distribute a child's bequest under a Will, or his or her share of their parent's estate, to the child if he or she has reached the age of eighteen, unless otherwise directed in the parent's Will, or in a trust established by the parent. Most parents agree that a child of eighteen is not mature enough to manage even a small portion of their estate. And most parents want to make sure that there will be sufficient funds to pay for their children's living expenses and college expenses if they die while their children are still young. Other parents wish to make gifts to their children to reduce liability for estate taxes, but don't want their child to have control over the funds gifted to them until they are mature enough to responsibly manage the funds. Many grandparents wish to make gifts to their grandchildren while they are young, so that the funds can be invested and used for the grandchildren's educational expenses when they are older. Establishing a trust is usually the ideal solution for these situations. Depending on your goals, the trust can be funded while you are living, or it can be funded after your death by the transfer of some or all of your estate to the trust, pursuant to the instructions in your Will. The directions to the Trustee can be as detailed as you wish. Some parents leave the distribution of trust assets completely to the discretion of the Trustee, and others establish a trust with very strict guidelines for the distribution of the trust assets to their children and grandchildren.

Example: Alex and Rhonda have three children, ranging in age from five to Eleven. Rhonda recently inherited $500,000 from her mother. They own a home valued at $350,000, have investments worth approximately $200,000, and life insurance policies that will pay death benefits of $350,000. Alex and Rhonda have planned a three-week trip to China. Their children will be staying with Rhonda's sister and brother-in-law while they are gone. They are concerned about their children's welfare if something happens to them while traveling, and they die in a common accident. They have simple Wills, naming Rhonda's sister and brother-in-law to serve as Guardians of their children after both of them are deceased. While they are confident that Rhonda's sister and brother-in-law will be very good substitute parents, they are not sure that they have the experience to manage their money for the benefit of their children and they do not want each child to receive their one-third share of the estate when they reach the age of eighteen. Alex has a brother who is an accountant. He has been giving Alex very good advice about investments. He is also very dependable and well organized, and he gets along well with Rhonda's sister and brother-in-law. Rhonda and Alex, with the assistance of their attorney, establish a trust that will be funded after both of them are deceased, if any of their children have not reached the age of twenty-eight at that time. They have decided that after both of them are deceased, their estate will be divided into three equal shares, to be invested and spent for each child's benefit. Their new Wills provide that if any of their children have reached the age of twenty-eight after Alex and Rhonda are deceased, he or she is entitled to receive his or her share of the estate outright. If any of their children have not reached the age of twenty-eight, that child's share of the estate will be transferred to a Trust that Alex and Rhonda established at the same time that they signed their new Wills. Alex's brother is named as Trustee. If the trust is funded, he will invest each child's share and spend whatever is needed for the "health, maintenance, support and education" of each child. As a practical matter, he will consult with Rhonda's sister and brother-in-law and establish a monthly budget to pay for the items such as food and clothing. He will also pay for private school tuition, medical bills, and college and graduate school. After signing their new Wills and the Trust, Rhonda and Alex feel that their children will be taken care of by their guardians and by Alex's brother, as Trustee, if something happens to both of them during their trip.

Planning to minimize liability for estate taxes.
If the value of the assets in your estate, or the value of the assets in the combined estates of you and your spouse exceeds $1,000,000, your Executor or Trustee must pay Massachusetts estate taxes before any distributions can be made from your estate. If the value of the assets in your estate, or the value of the assets in the combined estates of you and your spouse exceed $2,000,000, your Executor or Trustee must pay federal estate taxes, in addition to the Massachusetts estate taxes. The same is true if the value of gifts made during your lifetime, combined with the value of the assets in your estate, exceed $2,000,000. If your estate exceeds $1,000,000, there are several different methods for reducing, or eliminating liability for Massachusetts and federal estate taxes. Even if your estate is not large enough to warrant planning to minimize federal estate taxes ($2,000,000 or more), there may be a fairly large Massachusetts estate tax due from your estate. If you and your wife have an estate of $1,500,000, your children will have to pay $64,400 in Massachusetts estate taxes if you do not plan in advance. With two properly funded Living Trusts, you and your wife can eliminate this Massachusetts estate tax. (See page 12 for a more detailed description of these Trusts). A single person can reduce the federal and Massachusetts estate tax by making lifetime gifts to his or her children or other beneficiaries. This year, every individual can make tax-exempt gifts of $12,000 per person per year to any number of beneficiaries. While most people make gifts to their children or grandchildren, the tax-exempt can be made to anyone, whether or not related to you. There is also an unlimited charitable deduction. If you don't want to make a large charitable gift now, there are a wide variety of charitable trusts that can be used by a single or a married individual to reduce or eliminate liability for estate taxes and make a bequest to one or more charitable organizations in the future. An individual or married couple can also make tax-exempt gifts ($12,000 per beneficiary per year) to a trust that will distribute the funds in the future, such as a trust established to pay the college expenses of a child or grandchild. Many individuals reduce the size of their taxable estates by establishing an irrevocable life insurance trust (ILIT), which results in the exclusion of all life insurance proceeds payable after their death from their taxable estates, but makes the proceeds available to the beneficiaries named in the trust.

If the value of the assets in your estate or the value of the assets in the combined estates of you and your spouse do not exceed $1,000,000, you do not have to be concerned with planning to minimize liability for federal and Massachusetts estate taxes. This year, the value of assets that you can gift, or distribute under a simple Will or Trust, free of both Massachusetts and federal estate taxes is $1,000,000. If your estate exceeds $1,000,000, there are several different ways to minimize, or eliminate liability for estate taxes. If you are married and the total value of your estate exceeds $1,000,000, you should continue reading.

THE USE OF TRUSTS FOR ESTATE TAX PLANNING
ESTATE PLANNING FOR MARRIED COUPLES

A married couple has the chance to substantially increase the amount of assets that will be distributed free of estate taxes to their children and other family members or friends with the use of properly drafted and funded trusts. Many people believe that estate taxes are due only from the estates of the very wealthy. For Massachusetts residents, this is not true. If a husband and wife have a combined estate that exceeds $1,000,000, Massachusetts estate taxes will be due from the estate of the second spouse to die if the couple has not done the proper planning. If the couple's combined assets exceed $2,000,000, their children will have to pay a federal estate tax in addition to the Massachusetts estate tax. To determine if you have potential liability for estate taxes, you should determine the current fair market value of all of the assets included in your taxable estate, which include the following:

Real estate (primary residence, vacation home, business or property, and timeshares). While the assessed value of your real estate on your property tax bill is a good starting point, most cities and towns in Massachusetts do not assess residential real estate at 100% of its fair market value. The best way to determine the value of your home is to read the real estate transfers in the local newspaper each week to see what houses are selling for. You should try to find a few home that are similar to yours, taking into consideration the age and condition of the house, the number of bedrooms and bathrooms, improvements and other amenities. You can also ask a local real estate broker to do a market analysis of your home, telling them that you might be interested in selling. You can also consult websites, such as www.zillow.com, for an estimate of what your real estate is worth.

Bank Accounts and Certificates of Deposit

Stocks, Bonds, and Mutual Funds

IRA, 401-K, and similar tax-deferred retirement accounts

Life insurance policies. It is well known that life insurance proceed are not subject to income taxes. However, the death benefits payable under all life insurance policies are included in your taxable estate, unless the policy is held in an Irrevocable Life Insurance Trust (ILIT)

Any business owned by you. While you may think that your business is not worth very much or will not be worth anything upon your death, the IRS thinks otherwise. Your accountant will be able to give you a rough idea of the value of your business.

If the total value of your assets does not exceed $1,000,000 and you do not expect the size of your estates to increase in the future, you do not need to read any further. If the total value exceeds $1,000,000 or you believe that the future value may increase, it is well worth your time to review the following information.

First a few basics about estate taxes. There is an unlimited "Marital Deduction" under both Massachusetts and federal law that allows a husband and wife to make unlimited tax-free gifts to each other during their lifetime, and to leave their entire estate to the other without having to pay gift or estate taxes, no matter what the value of the gift, or the value of the property in an estate passing from husband to wife. If Bill Gates has a simple Will, his wife, Melinda, will be inherit all of Bill's Microsoft stock, real estate holdings, and other investments, free of estate taxes. If Bill gives Melinda the Hope Diamond for her next birthday, he does not have to pay a gift tax. However, the unlimited marital deduction only allows for the deferral of estate taxes. The size of the surviving spouse's taxable estate will determine if estate taxes are due from the couple.

In addition to the unlimited marital deduction, there are limited estate tax exemptions that everyone is entitled to. Under Massachusetts law, the estate tax exemption is $1,000,000 per person. Under federal law, the estate tax exemption is $2,000,000 per person. With proper planning, a married couple can shelter up to $2,000,000 from Massachusetts estate taxes and $4,000,000 from federal estate taxes. However, a married couple cannot make full use of these exemptions without proper advance planning. For married couples, these estate tax exemptions are "use it or lose it" exemptions. When the first spouse dies, his or her Executor will not be able to make use of the federal and Massachusetts exemptions to which he or she is entitled if title to all of the couple's combined assets pass to the surviving spouse outright. It doesn't matter how the property passes to the surviving spouse. The property can pass to the spouse under the terms of a simple Will, as a surviving joint owner of the couple's real estate and bank accounts, or as the beneficiary of a life insurance policy or retirement account. If the surviving spouse becomes the owner of the couple's combined assets after the first spouse dies, the couple has thrown away the use of a huge tax exemption. The same is true even if the couple has established a Living Trust without the proper tax language or even worse, if the couple has established the proper types of trusts, but failed to transfer title to their property to the trusts. The best way to show what a huge loss this can be is with a few examples:

Example 1. The Massachusetts Estate Tax: John and Jane Doe own the following assets when John died in 2006:

John and Jane held title to their home, the Certificates of Deposit, and the mutual funds in joint names. They have named each other as the beneficiary of their insurance policies and IRA accounts. They also had simple Wills naming each other as the primary beneficiary and their three children as the beneficiaries after both of them are deceased. After John died, it was not necessary to probate John's Will because all of the assets were either in joint names or had a designated beneficiary. Jane automatically becomes the sole owner of their home, the Certificates of Deposit and the mutual funds. As John's surviving spouse, she is entitled to rollover John's IRA into an IRA of her own. Jane does not have to pay any estate taxes because the unlimited marital deduction exempts all the assets in John's estate from estate taxation. Jane died shortly after John in 2007. At the time of her death, the value of the couple's assets are slightly more. After deducting the cost of probating Jane's Will, her taxable estate is $2,000,000. Her children do not have to pay federal estate taxes. The federal exemption in effect on the date of Jane's death is $2,000,000. The children are amazed to find out that Massachusetts has an estate tax. Jane's children must pay the Commonwealth of Massachusetts $99,600.

This could have easily been avoided if they had each established a Living Trust and divided their assets between the two Trusts. With each Trust funded with $1,000,000, no estate taxes would have been due to Massachusetts after Jane's death. Because John had more life insurance than Jane, the two Trusts could have been be funded by allocating more of the mutual funds to Jane's Trust. Each should have filled out a new beneficiary designation form for their life insurance policies, naming their Living Trusts as the primary beneficiaries and allocated their assets between two Living Trusts, as follows:

The cost of establishing and funding the two Trusts would have cost about $2,000 more than a simple estate plan. The ongoing expense of maintaining the two Trusts would have been minimal while both were alive. After John's death, the cost of administering his Trust would have cost in the range of $500 to $1,000 per year. Contrast this expense to the $99,600 paid to the Commonwealth of Massachusetts, which became one of the beneficiaries of the Doe's estate.

Example 2. Federal and Massachusetts Estate Taxes. Charles and Martha Sullivan have been married for 45 years, and have three children. Charles and Martha own a home jointly (as tenants by the entirety), which is worth approximately $650,000, and they have joint investments worth $700,000. In 2003, Charles inherited a "cottage" on Martha's Vineyard from his mother worth $1,300,000. Martha inherited $550,000 from her father, and she opened a brokerage account to invest these funds, in her name alone. After inheriting from their parents, they own the following assets:

Charles and Martha have simple Wills. After they inherited the property and money from their parents, their attorney advised them to amend their estate plan to include planning to minimize estate taxes. Charles died unexpectedly of a heart attack in 2005 before the couple finalized the documents. Under the terms of Charles' Will, Martha inherited all assets owned by Charles. His only probate asset was the cottage inherited from his mother, which Martha inherited after Charles' Will was allowed. His taxable estate consists of the cottage and his one-half interest in the assets owned jointly with Martha.

No estate taxes are due from Charles' estate. The unlimited marital deduction exempted all of the assets in Charles's estate from estate taxes, because title to the assets passed to Martha as the beneficiary of Charles's Will and as the surviving joint owner of the house and the joint investments. After Charles' Will was allowed, Martha inherited the Martha's Vineyard property. She obtained an appraisal for the property, and learned that the value had already increased to $1,750,000. The value of their home has also increased to $750,000 Following are the assets included in Charles's taxable estate, which passed to Martha after his death.

Title to the couple's home and the joint investment accounts passed to Martha outside of Charles' Will. Martha, as the surviving joint owner of the house and the joint investment accounts, automatically became the sole owner of those assets upon Charles's death. Martha's ownership of the house was established by recording Charles' certified death certificate at the Registry of Deeds. Charles' name was removed from the joint investments after Martha sent a certified death certificate and the required change of ownership forms to the banks and stock transfer agents. Martha later closed the bank accounts, and added those funds and stock, to her brokerage account. At the time of Martha's death in 2007, her taxable estate included the following assets:

The federal estate taxes due from Martha's estate are $920,000 and the Massachusetts estate taxes are $280,400. The total due is $1,200,400 or about 30% of the estate. They must be paid from Martha's estate before her Executor can make distributions to her children and they are due nine months from the date of Martha's death. All of the investments are depleted after the estate taxes, attorney and accountant's fees are paid. Although the unlimited marital deduction deferred the payment of estate taxes on the assets passing from Charles to Martha after Charles's death, all of the couple's combined assets were taxed at Martha's death. Advance planning, completed before Charles' death, could have eliminated the federal estate taxes due from Martha's estate and substantially reduced the Massachusetts estate tax. If each had established a Living Trust and divided their assets equally between the two Trusts, each Trust would have been funded with assets equal to $2,000,000 at the time of Martha's death. No federal estate taxes would be due from the children after Martha's death. The Massachusetts estate tax due would be $182,000. The total estate tax savings would be more than $1,000,000.

FREQUENTLY ASKED QUESTIONS
ABOUT REVOCABLE LIVING TRUSTS

Can I transfer real estate into my Living Trust? Yes. In fact all real estate should be transferred into your Revocable Living Trust. Otherwise, upon your death, there it would necessary to Probate your Will in every state where you own real property. When real estate is owned by your Revocable Living Trust, there is no Probate in any State.

If I transfer real estate into my Living Trust, will I pay real estate transfer taxes?

In Massachusetts, if your children and/or grandchildren are the only beneficiaries under your Revocable Living Trust, you will pay no real estate transfer taxes. Some states like New Hampshire, require a minimum transfer tax of approximately $40.

If I am only a part owner of property, can I transfer my share into a Trust?
Yes. Your share can go into the Trust without changing the shares owned by others.

Can I name Trustees and Beneficiaries that live out of state?
Yes. There is no limitation on where your Trustees or Beneficiaries reside.

Will I have to consult an attorney every time I buy new assets?
No. You simply take title to all assets in the name of the Trust, which will be set forth in the trust documents and they will automatically be owned by your Trust.

Does my Living Trust need to be registered or recorded anywhere?
No. The Revocable Living Trust is a private document which is not recorded. However, if you own any interest in real estate, the new deeds showing trust ownership, along with a Trustee's Certificate, will be recorded.

Can I sell assets owned by my Living Trust without complication?
Yes. You sell assets in the same way you currently do. You will, however, add the word "Trustee" after your signature.

Can I change the terms of the Trust?
Yes. While you are alive and competent, you can alter the Trust or even revoke it without penalty at any time.

Is the Living Trust just a tax loophole that the government will close down?
No. The Revocable Living Trust has been authorized by the law for centuries. The government has no interest in making you go through Probate or a Guardianship. Those proceedings only clog up the court system. In addition, there is no movement in Congress to reduce the Estate tax benefits available to a Revocable Living Trust.

Is it Difficult to transfer assets to my Living Trust?
No. All your assets except IRA and pension benefits can actually be owned by your Revocable Living Trust. I can transfer your real estate and all your personal property for you. The only assets you need to transfer are your stocks, bonds, and bank accounts and, in most cases, there is no fee for changing title to these assets. I will provide you with form letters to make the above transfers.

If I move to another state, is the Trust still valid?
Yes. The Revocable Living Trust is valid in all 50 states, regardless of the state where it was originally created.

Is a Revocable Living Trust only for the Rich?
No. A Revocable Living Trust can help anyone who wants to protect his or her family from unnecessary Probate fees, attorney's fees, court costs and estate taxes

Is a Revocable Living Trust a good idea for a single person?
Yes. If you are widowed, divorced, or unmarried, a Revocable Living Trust offers protection for your estate as well. It eliminates Probate, Guardianship, and you can pass up to $1,000,000 free of both Massachusetts and federal estate taxes.

Can I be my own Trustee?
Yes. If you are competent to handle your financial affairs now, there is no legal reason why you cannot be the Trustee of your own Revocable Living Trust. In fact, most Revocable Living Trusts have the people who created the Trust acting as their own Trustees. If you are married, you and your spouse can act as Co-Trustees.

What can I do with the assets in the Revocable Living Trust?
You can do anything you want with the Trust assets. When you set up your Revocable Living Trust, you are transferring the title of all your assets from you as an individual to you as the Trustee of your Trust. You then must manage the property for your benefit as the Beneficiary. What this means is that you will have absolute and complete control over all the assets of your Trust. If you want, you can spend, save, invest or even give the assets away at your discretion. There are no restrictions on what you can do with the assets in your Revocable Living Trust. Moreover, if you don't like the terms of the trust, you can amend it or revoke it at any time without penalty.

Are there any major disadvantages to a Revocable Living Trust?
No. Because you have complete control of all assets in your trust, you are free to manage the assets in your trust in any way you want. Also, because your trust is revocable, you have the right to make any changes to it while you are alive and competent.

There are a few minor disadvantages to a Revocable Living Trust. Initially, the Revocable Living Trust costs more than a Will because it is more expensive to prepare. In addition, you need to transfer your assets into the trust and possibly rearrange the manner in which you hold title to your assets.