Schmidt & Sikes, P.C.

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June 22nd, 2015 by Marilyn J. Schmidt, Esq.

Should I Be Putting My Estate Into a Trust?

Defining a Trust

A trust is a legal instrument that holds property for the benefit of named beneficiary/beneficiaries and is controlled by the “trustee.”  The creator of the trust is known as the settlor.  She/he has the ability to name the trustee, define the purpose of the trust, and provide guidelines or rules for the disbursements.  The trustee has a duty to manage the property and to distribute income or principal from the trust, along the lines specified in the trust instrument.   A trust can be created and funded while you are still living; or it can be created and funded upon your death, through provisions in your will.  A trust may be revocable (meaning that you can amend it or abolish it at any time) or irrevocable (where you give up control over the trust and its assets in order to gain some other advantage, such as preserving government benefits).

Protecting Your Loved Ones’ Financial Needs

One common type of trust is set up by a parent or a grandparent and allows the assets to benefit a child until she/he reaches a certain age (this age is commonly 22 or 25).  This way, the child can be provided with support (such as college tuition), but cannot access (and potentially waste) the assets of the trust. The trust instrument may give the trustee discretion over how much to distribute to the beneficiary/beneficiaries.  Alternatively, the trust may be very specific under what circumstances, and how much, income or principal can be distributed.

Preserving Eligibility for Government Benefits of Someone with Special Needs

A supplemental needs trust is set up for the benefit of someone with special needs.  There are many federal or state programs that have asset or income limits, including MassHealth, Section 8 housing and food stamps.  By creating an irrevocable Special Needs Trust, the Settlor can provide the individual with financial support or services without jeopardizing his/her eligibility for those benefits.   Note that the trust cannot be revocable; the government will then consider the assets in the trust to be available to the beneficiary, so she/he no longer qualifies.  Most importantly, there are restrictions on the use of the trust funds.  The funds cannot be used for food or shelter or other basic needs.  They can be used for “supplemental” needs, such as clothing, recreation, care managers or paid companions.  Most importantly, a supplemental needs trust cannot be set up with the assets of the beneficiary; they must be set up as a gift or an inheritance.  In general, the government does not condone people impoverishing themselves by gifting their money away, or putting it in a trust, and then asking for their own care to be paid for by the state.

If the supplemental needs trust is to be set up with assets that already belong to the individual with special needs, the only viable option, under state and federal law, is a pooled trust.  There are certain non-profit entities that are authorized to hold the assets and to control their disbursement.  Each entity has its own required trust document.  The settlor can name residual beneficiaries of the trust.  When the beneficiary passes away, the state will take from the remaining funds in the trust reimbursement for its expenditures for the beneficiary (such as payment of a nursing home for a set number of months).  After that, if there are any trust assets left over, they get passed onto the named residual beneficiaries.  Meanwhile, the individual with special needs gets to keep their government benefits, and the quality of his/her life may be enhanced with things like education, recreation, and supplemental services.

Estate Planning

A trust can also be an important estate planning tool for minimizing, or even avoiding, taxes. Under federal law, estates get taxed if they are worth more than 5.4 million dollars; not a worry for most people.  However, in Massachusetts, an estate worth one million dollars or more can be subject to state taxes.  Note that this includes your real property, bank accounts and valuables. It does not include retirement accounts or insurance policies where there is a provision for named death beneficiary/beneficiaries.  This is because when the retiree or the insured passes away, those assets do not go into the estate of the deceased.  Instead, they are paid directly to the named individual(s).

For some, the best benefit of a trust is that it avoids probate court.  This saves legal fees and court costs.  It also keeps their financial information confidential, instead of having the details filed in a public forum – court.

Who Should Serve as Trustee?

Anyone can serve as trustee, including the settlor, a family member, a friend, an attorney, or a financial institution.  In fact, more than one person or organization can serve as co- trustees.  The trust may provide for payment for the trustee’s services. The trustee has a fiduciary obligation to the beneficiaries of the trust. She/he must follow the instructions of the trust when distributing income or principal. Generally, a trust is not subject to court oversight. To protect the best interests of your beneficiaries, it is important to choose someone you “trust.”  You can certainly add a provision to the trust instrument allowing you or the beneficiary to receive an accounting of the financial transactions of the trust.

Should Your Estate Planning Include a Trust?

A simple consultation with an elder law attorney can help you decide if a trust is right for you or your family.  You may want to be sure that this attorney is a member of the National Academy of Elder Law Attorneys.  That way, you can be assured that they have the required expertise to guide you.