Trusts by Massachusetts Estate Planning Attorneys
With so Many Choices, Which One is Right for You?
A trust is a legal agreement that allows an individual, often called either a “donor” or a “grantor,” to transfer assets a “trustee.” The trustee holds title to the property for another, called a “beneficiary.” Trusts are created for many reasons, such as to avoid probate court proceedings, to provide long-term management of property being held for the beneficiaries, to provide for certain tax exemptions and planning, and to ensure assets are protected from creditors, particularly in instances of Medicaid or Mass Heath applications. Nevertheless, many choose to include provisions to protect assets from the hands of creditors or other persons not beneficiaries of the trust, including, but not limited to a spouse. There are many different types of trusts depending on your current needs and future plans.
A Revocable Trust, sometimes called a “Living Trust,” allows the donor, or person who created the trust, to maintain complete control over the Trust and the assets placed into the Trust. He can modify the terms of the Trust, revoke certain assets, or even terminate completely at any time prior to his death. While the donor has full access to the principal as well as rights to the income on the principal, the trustee maintains the right to invest the trusted property for the benefit of the beneficiaries. When the donor dies, the assets are passed to the beneficiaries.
Revocable Trusts provide other advantages, like probate avoidance and tax planning. When a donor creates a Trust, his assets do not become a part of his estate to be processed by probate upon his death, oftentimes resulting in lengthy and expensive court proceedings. Instead, the assets will pass directly to the beneficiaries named in the Trust. Despite exclusion from his estate for probate purposes, the assets will be included in the donor’s estate for estate death taxes. However, with proper planning, the Revocable Trust can be drafted in a way so as to later exclude the property in the estates of the beneficiaries, allowing the assets to avoid a tax when the beneficiary dies.
We help our clients determine the right trust or most appropriate estate plan for them. Our Massachusetts estate planning attorneys draft trusts to deal with your unique planning needs. For a complimentary review of your Massachusetts estate plan call 800-701-0352.
Irrevocable Trusts differ from Revocable Trusts in that the donor does not have direct access to the principal, although he can continue to use certain property like real estate. While the language of the Trust may allow the trustee to make distributions of the principal to the donor, the donor’s children, or other beneficiaries, the property in the Irrevocable Trust is not considered a countable asset of the donor and generally remains in the trust until the donor’s death.
Because the trusted assets are not considered to be property of the donor, Irrevocable Trusts are very helpful when planning for Medicaid. In order to qualify for Medicaid, the total value of your assets must be under a certain dollar amount. By placing your assets in an Irrevocable Trust, they are preserved, meaning the property will not be counted on your Medicaid application nor will it be reachable by nursing homes to cover the cost of your care.
It is good to create an Irrevocable Trust prior to any immediate need for Medicaid as there is a period of ineligibility for Medicaid once your assets have been transferred into the trust.
A Charitable Trust is a type of Irrevocable Trust that allows the donor to leave assets to a charity or charities of choice. The donor can serve as trustee with the power to control how the assets in the trust are invested. The donor can also change the beneficiaries at any time. Because it is irrevocable, the donor cannot choose to revoke the Trust or pull assets out. However, the Trust can be drafted to allow the donor to receive the income on the trusted property. While that income is subject to income taxes, there are some tax benefits that become available when a Charitable Trust is founded. Upon creation, there is an income tax deduction for charitable giving, and at the death of the donor, the assets are eligible for an estate tax charitable deduction. In addition, any sale of investments in the Trust is not subject to a capital gains tax.
Special Needs Trust
A Special Needs Trust, sometimes called a “Supplementary Needs Trust,” allows a donor to provide for a disabled spouse, child, relative, or other beneficiary who is under the age of 65. While funding for the beneficiary’s basic needs should be supplied by public assistance programs like Supplementary Security Income, Medicaid, or low-income housing, the Trust is intended to pay for comforts and luxuries, which may include education, recreation, and medical attention that reaches beyond what may be required, like counseling, training, dental expenses, transportation, or special diets. The Special Needs Trust does not interfere with the beneficiary’s eligibility for public benefits because the trusted property is not considered property of the beneficiary. However, once the disabled beneficiary dies, the state must be reimbursed for any Medicaid funds that were spent on their behalf.
As a note, the creation of a Special Needs Trust does not trigger a period of ineligibility for Medicaid for the donor.
Irrevocable Life Insurance Trust
Life insurance policies are a part of your estate, meaning they are subject to an estate tax at the time of your death (unless the beneficiary of the policy is your spouse). An Irrevocable Life Insurance Trust can be created as a means of avoiding estate taxes. The donor creates the Trust, and the Trust becomes both the owner and the beneficiary of the life insurance policy. Because the Trust becomes the owner of the policy, the donor cannot change the policy once the Trust is created. The donor then determines beneficiaries of the Trust, typically the intended beneficiaries of the policy.
It is important to create an Irrevocable Life Insurance Trust as soon as possible because the policy remains taxable for some time after it is transferred to the Trust.
A Dynasty Trust is created by donors to provide financial cushion for their children and possibly grandchildren and/or further removed descendants. It provides inflexible protection against foolish investments or spending to ensure that the funds are preserved in the event of necessity or emergency. The Trust continues after the parents’ death through the lives of the children and possibly during the lives of future generations. However, the beneficiaries do not have control of the funds, and limits are placed on access. The donor can elect for the principal to be distributed according to necessity (food, clothing, health, and education), by an annual distribution of up to 5% of the principal, or at the discretion of the trustee, typically an independent, professional trustee to guarantee asset security.
A Dynasty Trust offers many benefits as well. For example, the Trust funds are protected from creditors and plaintiffs in lawsuits, as the assets are treated differently than other property of the beneficiary. Similarly, they are not considered marital property subject to division in the event of a divorce nor can they be counted toward a beneficiary’s assets when applying for Medicaid. In addition, a Dynasty Trust is excluded from the beneficiary-child’s estate, allowing it to pass to future generations tax free.
A Nominee Trust is different than a typical trust. The beneficiaries, whose identities are withheld from the public, are given the power to direct the trustee regarding the trusted property. This is the opposite of most trusts, where the trustee typically instructs the beneficiary on what the trust allows him to do. Although the trustee remains in possession of the legal title to the trusted property, the beneficiary maintains controlling powers and the trustee’s actions are relatively limited. In this way, the trustee acts as an agent of the beneficiary. Nominee Trusts are commonly created for holding title to real estate. Like other trusts, the trusted assets pass to the beneficiaries without probate proceedings, and tax advantages are available.
Intentionally Defective Grantor Trusts
Like other trusts, an Intentionally Defective Grantor Trust allows a donor to secure certain assets to be passed to the beneficiaries of the Trust without having to pass through probate, thereby lowering her taxable estate. However, although the donor is not considered the owner of the trusted property for estate tax purposes, she is treated as the owner for purposes of income taxes. This applies whether the donor collects the income of the Trust or not. Because the Trust is not separate from the donor for purposes of income tax, the Trust is “defective.” However, the Trust is still effective for protecting the assets from estate tax. As the donor pays the income taxes on the property contained in the Trust, she continues to lower her taxable estate while simultaneously allowing the trusted assets to grow without reductions for income taxes.
The donor creates the rules of the Trust, including distribution rules, access to principal by the beneficiary, and powers of the donor. While some powers granted to the donor may create an ownership interest that causes the trust property to become a part of his or her estate, many powers can be assigned that do not, such as the ability to remove and replace Trustees.