Trust

The Function of Trusts in an Estate Plan

Trusts can be used alone or in combination with titled property, beneficiary designations, and other estate planning tools to:

  • Reduce estate taxes;
  • Manage assets for minors;
  • Protect assets from income taxes for adult heirs;
  • Reduce the size of estates to qualify for Medicaid (only for irrevocable trusts).

Trusts supersede the instructions in a will and are excluded from probate. The use of trusts may help reduce the costs and length of time to settle the senior’s probate estate.

A trust is a legal structure created when an individual grantor (also called a settler or trustor) transfers personal assets to the trust and appoints a trustee to hold and manage those assets. Ther person who receives the benefit of the assets in the trust is the beneficiary.

As its name implies, a trust creates a relationship between trustee and beneficiary. The trustee has the power over the assets and must use thme to the advantage and for the best interests of the beneficiary. A common use of a trust is to provide assets to benefit minor children, with a competent adult or a profeesional trust company managing the asssets that a minor obviously cannot (and typically should not) manage.

Several types of trusts are useful instruments in estate planning: testamentary trusts, revocable living trusts, and irrevocable trusts.

Testamentary Trusts

A testamntay trust is established under a will, which describes the terms of the trust, but its not actually created until the will is probated. This means the testamentary trust is irrevocable when the grantor dies but can be changed while the grantor is alive (and as long as the grantor has the mental capacity to change his or her will). A testamentary trust may provide for asset management for minors, asset protection for adult heirs, or estate tax planning. (Seniors can create a similar after-death traust within a revocable living trust, but this is not called a testamentary trust.)

Revocable Living Trusts

A revocable trust must be a living trust, because it can be changed or revoked any time by the grantor who established it. A living trust is also called an inter vivos trust.

Revocable living trusts are popular because individuals can establish them to manage their assets during their lives and revoke or change them as their interests and needs change (Esperti, Peterson, & Moser, 1999). For example, the arrival of grandchildren might cause a senior to make a change in his or her revocable living trust.

The grantor (with grantor’s spouse as a successor trustee) is typically the initial trustee and beneficiary during the grantor’s life. He or she controls the trust’s assets and receives its income. When the grantor dies, the terms of a revocable living trust work like the instructins in a will (or state laws of intestacy) to distribute its assets in the manner the grantor has directed. This means a revocable living trust is not included in probate. But asses in the estate that are not titled in the name of the revocable living trust may have to be probated separately or as part of a pour-over will.

Remember that a revocable living trust will contain the distributions normally provided in a will. A pour-over will make transfers solely to the revocable living trust, which has become irrevocable as of the senior’s death. This trust makes the specific distributions intended by the senior.

Make sure your senior clients understand that, by itself, a revocable living trust:

  • Does not protect their estates against creditors;
  • Does not remove the assets in the trust from the grantor’s estate for the purpose of qualifying for Medicaid;
  • Many not provide any special estate tax savings.

Irrevocable Trust

A senior cannot revoke or change an irrevocable trust after it is created. Only court action can change the terms of an irrevocable trust.

Irrevocable trusts are most commonly created to reduce estate taxes or remove assets from a grantor’s estate for Medicaid-planning purposes. However, the grantor must generally give up all control of the assets in the irrevocable trust to reap its benefits. This may not be a problem for an irrevocable testamentary trust that is created after death, but it can create a significant burden during a senior’s lifetime.

There are important issues involved with the transfer of assets from an estate for Medicaid purposes, especially into an irrevocable trust. Seniors can be greatly damaged by an improper transfer. Make sure to seek advice of an experienced Medicaid attorney before making any transfers of assets from your estates in any form.

Differences between Revocable and Irrevocable Trusts

 

Type of Trust

Gives the Grantor Control Over Assets

Generates Income For Named Beneficiaries

Can Be Modified By The Grantor

When The Trust Can Be Established

Removes Assets For Medicaid-Planning Purposes

Assets Are Included In Probate

Can Reduce Estate Taxes

Protects Estate Against Taxes

Revocable trust

Yes

Yes

Yes

During Lifetime

No

No

May Not

No

Irrevocable Trust

No

Yes

No

During lifetime/after death

Yes

No

Yes

Yes

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved. www.csa.us