Overview
First, what is a trust? Simply put, a trust is one type of a legal entity. Other examples of legal entities include corporations or partnerships. A trust has one or more persons (the "trustee") who holds the property for the benefit of another (the "beneficiary"). The property contained in a trust can be either real estate, investments, or a combination of both. The person who gives the property to a trust is known as a "donor" or "grantor." A trustee's responsibilities include managing, investing and distributing the property of the trust. Although a beneficiary does not legally own the trust property directly, he holds a beneficial or equitable interest in the trust, and has rights to the trust assets that vary depending on the purpose and language of the trust. Trusts can be written in many ways to accomplish different goals. For example, a trust can be written so that the trustee is required to pay to the beneficiary all income earned on trust property or it can be written to give to the trustee discretion over how to use the trust property for the beneficiary. In addition, a trust can include a "standard" that guides the trustee in making decisions regarding trust distributions such as limiting distributions for educational purposes or for the general support of the beneficiary. A trust can and should be tailored to meet the specific goals of each client; however, too often, there appears to be significant confusion as to why a trust was initially established.
Attorneys are to blame for much of the confusion relating to trusts. Attorneys often use different names for trusts that are more of a marketing gimmick than a way to identify the trust purpose. For example, in describing trusts, attorneys sometimes use the terms "Loving Trust" or "Living Trust" even though the trust is neither loving nor alive. While these "Loving" or "Living" trusts are usually created and funded while the client is alive and used to benefit a loved one, these terms are otherwise meaningless.
Types of Trusts
Medicaid Irrevocable Asset Protection Trust
Many of our clients are worried about protecting their assets should they or a spouse need nursing home care. Under the Medicaid regulations, assets held in an irrevocable trust are not counted as being owned by the applicant or his spouse as long as the trust principal cannot, under any circumstance, be paid to the applicant or his spouse. Funding an irrevocable trust will make the donor ineligible for nursing home Medicaid benefits for five years from the date of the transfer to the trust. Keep in mind that when a trust is irrevocable it means, for the most part, that it cannot be changed once it has been created, and once funded, the assets cannot be returned to the donor.
Supplemental Needs Trust
Generally, the purpose of a supplemental needs trust (also known as special needs trust) is to provide for the continuing care of a disabled spouse, child, relative or friend. The beneficiary of a well-drafted supplemental needs trust has no direct access to the trust assets. However, the trustee has full discretion to provide for the beneficiary while keeping in mind the trust's purpose of not impacting the beneficiary's eligibility for public benefit programs.
In determining which kind of supplemental needs trust is most appropriate, it is imperative to assess the beneficiary's situation. The type of supplemental needs trust to use is dependent, in part, on whether the trust is being created by the disabled person himself with his own funds (a so-called "self-settled trust"), or by a third-party (for example, a parent to take care of a disabled child). In addition, which trust to use is also dependent upon the specific benefit the beneficiary is receiving, or may receive in the future. For example, the public benefit program known as Supplemental Security Income (SSI) requires that a self-settled supplemental needs trust contain a "pay-back provision" that states, upon the recipient's death, the Commonwealth be reimbursed for benefits provided to the beneficiary. Other types of supplemental needs trusts, however, allow the remaining trust assets, upon the beneficiary's death, to be paid out to other family members instead of reimbursing the Commonwealth.
Revocable Trust
A revocable trust is sometimes referred to as a "living" or "inter vivos" trust. Such trusts are created during the life of the donor rather than through a will. The donor of a revocable trust maintains complete control over the trust and may amend, revoke or terminate the trust at any time. The donor is able to reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death. The disadvantage of a revocable trust is that the trust assets are fully countable to the donor for purposes of determining Medicaid eligibility. Revocable trusts are sometimes used to avoid probate at the donor's death, as the trust assets pass through the trust rather than through a will. Revocable trusts can continue after the donor's death. For example, the trust can continue to manage assets for minor children. Keep in mind that a revocable trust becomes irrevocable after the death of the donor.
Testamentary Trust
A testamentary trust is a trust created by a will. A testamentary trust has no power or effect until the will of the donor is probated. Although a testamentary trust must be probated and thus, become a public document (as it is part of the will), it can be useful in accomplishing other estate planning goals. For example, a testamentary trust funded through the estate of a spouse is treated as a protected, noncountable asset if the surviving spouse applies for nursing home Medicaid benefits.
Trusts for Estate Taxes
Trusts can also be used to minimize estate taxes. However, this is somewhat less of a critical issue for wealthy clients as the federal estate tax limit has increased over approximately the last five years. In addition, under federal law, an individual's estate tax credit can be utilized by his spouse without a trust. However, the Massachusetts estate tax threshold remains at only one million dollars. In addition, if a spouse does not utilize his credit either while alive or at death, the credit disappears. Consequently, so called, credit shelter trusts are still useful to minimize Massachusetts estate taxes. In order to reduce any tax liability, roughly half of the assets are held in a credit shelter trust of the first spouse to die. These trust assets are available to the surviving spouse should he need them; however, the trust assets are at least partially excluded from the estate of the second spouse to die when the IRS and the Department of Revenue (the Massachusetts tax authority) calculates the amount of estate taxes owed.
Trusts can also be utilized to own life insurance as a means of minimizing estate taxes. If a trust purchases the life insurance policy and pays the premiums directly, the death benefit will not be counted as part of the taxable estate at the death of the insured individual.
Pet Trusts
Since 2010, Massachusetts pet owners can create a trust for a pet's benefit. The trust can nominate a person to care for the pet in the event of the owner's death or incapacity and also specify how the funds set aside for the pet's care and maintenance will be managed. Unlike prior trust law which did not impose any legal obligation on the estate to honor trust provisions relating to pets, the new law requires the named trustee to create an account and use the funds throughout the animal's lifetime.
Conclusion
As you can see, there are several different types of trusts that serve many different purposes. Keep in mind that not everyone needs a trust. Don't assume that just because you know someone that has a trust that you also need one. As always, it is important to consult with your attorney to get help in clarifying your goals so that you can then determine the most effective and cost efficient means of achieving those goals.
