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 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. Children may argue over who should be appointed as legal Guardian of a parent. 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

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:

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 Trust 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, a 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. 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 $13,000 to any number of individuals. An individual with five children can gift $65,000 each year to a Trust established for the benefit of his or her children. If the Trust is drafted properly, the yearly gift of $65,000 to the Trust is deemed to be five tax-exempt gifts of $13,000 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 $65,000 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 $65,000 to the Trust established for the benefit of the five children. No gift 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.

Irrevocable Income 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 $335 per day or about $122,000 a year. With advance planning, an older individual can prevent nursing home costs from totally eroding their life savings. This 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 $5,000,000, 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 a Trustee of the Trust, although at least one child should serve as a Co-Trustee of the Trust. If the parent is not able to manage their finances, one or more children should be named as the original Trustee. 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 this type of 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 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 Trust. 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.

Conclusion. Attorney Roberta A. Schreiber has more than thirty years of experience in Estate Planning, assisting clients in choosing, drafting, and administering the Trust or Trusts that are appropriate for their situation. If you need assistance in establishing or administering a Trust, please contact us for legal representation.