Trusts
A trust is a powerful estate planning tool that allows you to manage and protect your assets both during your lifetime and after your passing. By placing your assets in a trust, you can help ensure that they are distributed according to your wishes, often without the delays and expenses often associated with probate. Trusts can also offer privacy, protect your loved ones, and in some cases, reduce taxes. Our role is to help you choose and design ghe right trust for your goals, so you can feel confident that your legacy is in good hands.
There are many different types of trusts. Some of the most common trusts that you may encounter include:
Revocable Living Trusts
A revocable living trust is flexible and can be changed or canceled at any time during your life. It allows you to maintain control over your assets while making it easier for your loved ones to manage your affairs if you become ill or after you pass away. Assets in a revocable trust usually avoid probate, which can save time and maintain privacy.
​
A revocable living trust is "revocable," meaning it can be changed or canceled at any time. It is "living," meaning that it is created during your lifetime and takes effect immediately upon signing. Most often, the individual creating the trust is also named as the trustee of the trust, with the ability to manage the assets in the trust.
​
Why Consider a Revocable Living Trust?
​
1. Avoid probate. Assets in a revocable living trust pass directly to the beneficiaries that you named in the trust without going through an estate administration and probate. This makes transfers after you pass away faster and more private.
​
2. Plan for incapacity. If you become ill or are unable to manage your own affairs, your successor trustee can then step in without having to be appointed to manage your affairs by a court to manage the trust assets on your behalf. This can be more effective and less stressful than relying on a financial power of attorney.
​
3. Maintain privacy. Unlike a will, which becomes public record during estate administration and probate, a trust usually remains private. Your financial details, the nature of your assets, and the names of your beneficiaries are not disclosed.
​
4. Provide for ongoing financial asset management. You can design your trust so that your beneficiaries receive their inheritance immediately upon your death, at specific intervals over time, or only upon reaching a specific age. This could be very beneficial for young beneficiaries or for those who need help managing their money.
​
5. Centralize and organize your estate. By placing assets in a trust, you have a single structure for managing your estate - the real estate, bank accounts, investments, and other property. This can make life simpler for your loved ones after you pass away.
​
Limitations of a Revocable Living Trust:
​
1. No asset protection from creditors during your lifetime. Because you can revoke the trust and maintain control over your assets during your lifetime, the assets are available to you, which in turn makes them available to your creditors.
​
2. The trust must be funded. In other words, you must ensure that you transfer the assets that you want the trust to control into the trust. Unlike a will, which encompasses everything in your estate when you pass away, a trust can only control what you have transferred into it.
​
3. It does not replace a will entirely. Even with a trust, you will still want to have a "pour-over" will to catch any assets that have not been transferred to the trust.
​
4. It requires ongoing maintenance during your lifetime. Since it only controls assets that have been transferred into it, when you accumulate certain types of new assets, those assets must also be transferred into the trust. Also, if you decide to change the trustees or beneficiaries of your trust, you will need to have the trust amended.
​
Irrevocable Trusts
​
An irrevocable trust generally cannot be changed once it is created. While this may sound restrictive, these trusts offer strong benefits, such as protecting assets from creditors, protecting against potential recovery by Medicaid, and potentially reducing estate taxes. They can also be a smart choice for people looking to preserve wealth for future generations or meet specific planning goals.
Special Needs Trusts and Supplemental Needs Trusts
A special needs trust (also called a supplemental needs trust) is designed to provide for a loved one with disabilities without affecting their eligibility for important government benefits. such as Supplemental Security Income (SSI) and Medicaid. This type of trust ensures that your loved one has financial support for extra needs, such as education, transportation, and personal care, while still maintaining their quality of life and independence.
​
There are three primary types of special needs trusts: a first-party special needs trust. a third-party special needs trust, and a pooled special needs trust.
​
A first-party special needs trust is a trust that is set up to hold the assets belonging to the individual with special needs. Think of that individual receiving an inheritance, a legal settlement, or personal savings. This trust is usually set up by a parent, grandparent, legal guardian, or the court for the benefit of the individual with disabilities. When the individual with disabilities passes away, the funds remaining in the trust must be first used to pay back Medicaid for benefits that were provided during the individual's lifetime.
​
A third-party special needs trust is a trust that is set up to hold the assets from someone else such as parents, grandparents, other family members, or friends for the benefit of the individual with disabilities. This type of trust can be within a will or can be a separate, stand-alone trust. Parents often choose to include such a trust in their will so that their child will have lifelong support. However, if the parents choose to set up a separate, stand-alone special needs trust, then other individuals, such as grandparents or other family members, can leave assets to the individual through their own estate documents. Because the assets used to fund the trust are never the assets belonging to the individual with disabilities, there is no Medicaid payback requirement like there is for the first-party special needs trust.
The third type of special needs trust is a pooled special needs trust. This type of trust is often used when the total amount of the assets is a smaller amount or when a trustee is not available. In this type of trust, assets from many beneficiaries are "pooled" together for investment but accounting for each beneficiary is maintained separately. These trusts are managed by a third-party organization. An example where such a trust would be used would be if an individual with disabilities receives a modest inheritance from another family member.
The trust may be funded with assets belonging to the beneficiary (first party) or funded by another individual (third party). If the trust is funded as a first-party trust, then Medicaid must be repaid with any remaining funds before any beneficiaries can receive the them. If the trust is funded by assets belonging to a third party, there is no requirement for Medicaid to be repaid; the remainder can either be donated to the organization to help others or can be paid to other beneficiaries as designated in the trust.
​
"One of the most versatile and effective tools in estate planning is the trust."
​
- Jim McClaflin, EA, NTPI Fellow, CTRC