Trusts are not JUST for the Wealthy!

Ever since watching Gilligan's Island as a kid I have secretly wondered how and what Thurston Howell, III and Lovey Howell meant when they mentioned their "Trust Accounts." I thought it was something only related to rich people. Now I know it is not about being rich as much as it is about being smart.

What is a trust and why should I have one in my estate plan?

Trusts have been used for estate planning and asset protection for centuries. Their usefulness and flexibility for these purposes have been proven by the test of time. The origin of trusts can be found in the eleventh century crusades. Crusading English knights left their manors and estates in the care of trusted friends for safekeeping while themselves away on crusade. However, trusts are not just some dusty, antiquated notion from manorial England! 

A trust is a separate legal entity for holding and investing property. One or more persons (the “trustee”) holds property, usually real estate or investments, for the benefit of another or several other people (the “beneficiary”). The person who gives the property for the trust is known as the “donor” or “grantor” or “settlor.” The trustee holds legal title or interest and is responsible for managing, investing, and distributing the assets or property of the trust. The beneficiary holds an equitable or beneficial interest.

• What are the benefits of establishing a trust?

Depending on your situation, there can be several advantages to establishing a trust. The most well known benefit is avoiding probate. That is, in a trust that terminates with the death of the donor, any property in the trust prior to the donor’s death passes immediately to the beneficiaries by the terms of the trust without requiring probate. This can save time and money for the beneficiaries. Certain trusts can also result in tax advantages both for the donor and the beneficiary. Or they may be used to protect property from creditors, to help the grantor qualify for Medicaid, or simply to provide for someone else to manage and invest property for the grantor and the named beneficiaries. Trusts are private documents and only those with a direct interest in the trust need know of trust assets and distribution. If well drafted, another advantage of trusts is their continuing effectiveness even if the donor dies or becomes incapacitated.

• What kinds of trust are there?

There are several types of trusts, some of the more common of which are discussed below:

• Revocable Trust

A revocable trust is sometimes referred to as a “living” or “inter vivos” trust. Such a trust is created during the life of the donor rather than through a will. With a revocable trust, the donor maintains complete control over the trust and may amend, revoke, or terminate the trust at any time. So, 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 countable to the donor for purposes of determining Medicaid eligibility and does not provide protection against creditors or in the event of a divorce.

• Irrevocable Trust

An irrevocable trust is created during the life of the donor, who thereafter may not change or amend the trust. Any property placed into the trust may only be distributed by the trustee as provided for in the trust instrument itself. For instance, the donor can provide that he or she will receive income earned on the trust property. An irrevocable trust that provides for the donor to retain the right to income only is a popular tool for Medicaid planning.

• Testamentary Trust

A testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the donor is probated upon his or her death. Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used to provide funds for the surviving spouse in a form that should neither be considered available nor have to be spent down if he or she should seek Medicaid eligibility to pay for long-term care. Though a testamentary trust is an available tool for estate planners, it is rarely used as there are better more effective trusts that can achieve the same goals as a testamentary trust without the possibility of probate court involvement.

• Supplemental Needs Trust

A supplemental needs trust can be created by the donor during life or as part of a will. Its purpose is to enable the donor to provide for the continuing care of a disabled spouse, child, relative or friend. The beneficiary of a well-drafted supplemental needs trust will have access to the trust assets for purposes other than those provided by public benefits programs. Thereby, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid, and low-income housing.

• How can I find out if I should have a trust?

As with all estate planning, anyone considering a trust should contact our office at (401) 274-0300 to schedule a free consultation to discuss how trusts can best work for you.