Serving Massachusetts and

New Hampshire since 1992.

TRUSTS

          A Trust is a more powerful estate planning tool than a Will.  With a trust you have more flexibility in the handling of assets and the eventual use of those assets.  Trusts are especially useful in certain tax situations, and when you have heirs who you want to benefit, but to whom you would not want to give large amounts of unrestricted assets.

• BASIC DEFINITION

          A trust is an arrangement that transfers legal ownership of property (usually money or real estate) from an individual to a trustee who holds, manages and distributes the property for the beneficiaries of the trust.  The written terms of the trust control the use and distribution of the property.

• LIVING TRUST vs. TESTAMENTARY TRUST

          A “testamentary” trust is part of a Will.  The terms are written in the same document as the Will, and are effective only upon death.  A Will, including the terms of the trust, becomes a public document in the probate process.  The handling of a testamentary trust is subject to the oversight of the Probate Court.  A Will with a testamentary trust must be executed with all of the formalities of a Will.

          A trust that is a separate document from a Will is created the moment it is signed.  Thus the creator is "living" when the trust terms come in to effect.  (The Latin word is “Intervivos" - “between the living.”)  The formalities for creating and changing a living trust are relatively simple.  Most Trusts are not subject to the jurisdiction of the Probate Court.

• REVOCABLE vs. IRREVOCABLE

          If the trust, by its terms, can be changed, modified, or terminated, it is called “revocable.”  An “irrevocable” trust is unchangeable and cannot be terminated except within its own terms.  Most living trusts are revocable, but only irrevocable trusts provide asset protection.

• HOW DOES A TRUST AVOID PROBATE?

          The probate process controls the transfer of assets from someone who has died, to those still living.  The probate process ensures that the assets go to the people named in a Will, or to those who are to receive them by law when there is no will.  This process only transfers assets that the deceased person owned solely in his own name.  The process does not handle property not owned by the individual.  Trust property is "owned" by the Trustee.  All property owned by a trust is handled by the trustee according to the terms of the trust, and does not go through the probate process.

• HOW DOES A TRUST REDUCE ESTATE TAXES?

          One of the most common uses for a trust is to “shelter,” or make use of, the Federal estate tax credit.  Each individual can shelter up to $2,000,000 from estate taxes.  A couple can shelter $4 million provided they both fully use their estate tax credit.  If one spouse leaves everything to the other outright the credit is lost.  Although no tax would be due upon the death of the first spouse, when the second spouse dies, there may be a large estate tax due.  Instead each spouse could leave up to $2,000,000 to a bypass trust and the rest to the other spouse.  The trust can be designed to pay income to the surviving spouse, and even allow some access to the principal.  Use of two estate tax credits rather than one increases the amount exempted from tax and thus reduces estate taxes.

• HOW CAN A TRUST AVOID GUARDIANSHIP?

          Only you can handle your own affairs, unless you appoint someone to do so for you.  You can appoint a person to handle your own affairs with a Durable Power of Attorney.  When you transfer assets to a trust, the trustee is automatically the person who will handle those assets.  You can name yourself as trustee, with another person chosen as successor.

          If you cannot handle your own affairs, and have failed to name an agent, then only the Court can appoint a guardian to handle your affairs.  If you have transferred most of your assets to a trust, your successor trustee can handle those assets without court approval or delay.

          A trust (or trustee) cannot handle your medical decision making.  For that, you must have a Health Care Proxy (Durable Power of Attorney for Health Care.)

• HOW CAN A TRUST ENSURE MY PROPER CARE?

          Trust terms can be as general or specific as you want.  You can tell your trustee exactly what to do with the trust assets, or you can give general directions and allow your trustee the flexibility to do what is necessary under the circumstances as they arise.

          Some trusts only give general directions as to caring for the person who created the trust, and so may require that the trustee balance your needs, with the needs of the beneficiaries who will receive the trust property after you have died.

          You can ensure your proper care by having trust terms that require the trustee to pay for your medical or nursing home care, provide for your additional needs, and to disregard the needs of the future beneficiaries while you still need the benefits of the trust assets.

          You can also instruct the trustee to provide care for your family in addition to your own care, so the trust assets can be spent as you would spend them.  Sometimes trusts do not allow for continued care of loved ones and require the trustee to only care for the creator of the trust.  You should seek the appropriate balance between your needs and your family's needs.

• DO LIVING TRUSTS PROVIDE MEDICAID PLANNING?

          Generally no, but they can.  The assets of a Revocable Living Trust are "countable" for Medicaid purposes, and will not be shielded from nursing home costs.  Your primary residence is not a countable asset for determining Medicaid eligibility.  However, if your home is placed in a trust, it becomes countable, and may make you ineligible for assistance.  An Irrevocable Income Only Trust is sometimes used for Medicaid planning purposes.

• IRREVOCABLE INCOME ONLY TRUST

          An Irrevocable Income Only Trust (IIOT) is a type of trust used specifically for Medicaid planning.  The assets of the trust are considered non-countable for Medicaid purposes and are protected for the next generation.  The general terms of an IIOT are that the creator gives up all rights to the principal assets of the trust, but reserves the right to all income generated by those assets.  If real estate is owned by the trust, the creator reserves the right to use and live in that real estate.

          An IIOT provides flexibility because real estate can be sold, and a new home purchased by the trustee, while keeping the principal assets protected.  In contrast, with a life-estate deed, any sale of the real estate will return principal to the life-estate owner and those funds will not be protected.

          An IIOT is irrevocable.  You cannot change your mind later.  Once you transfer assets to the trust, you can never get them back.  Without a Trust, you can sell your home and use the money for a trip around the world or the monthly fee at a retirement home, and you may spend it or give it away as you want.  Once you transfer an asset to an Irrevocable Trust, your use of that asset will be restricted forever.

What you gain, of course, is the assurance that your chosen heirs (the future beneficiaries of the trust) will inherit the asset, and it won’t have to be sold and spent on your nursing home care.

          The transfer to an IIOT causes a disqualification of up to five years from receiving Medicaid benefits, so it should only be used when a nursing home stay is relatively unlikely in the next five years.

• IRREVOCABLE “LIFE INSURANCE” TRUSTS

          This type of trust is used to remove the value of a life insurance policy from your taxable estate.  If your estate is larger than $2,000,000, including your life insurance death-value, then your heirs might lose some of that value to the IRS.  If your life insurance is owned by a separate legal entity (the trust) then it is not included in your taxable estate, and it will pass to your chosen beneficiaries in full.

          This type of trust is also irrevocable.  You give up the rights to the insurance policy, including the right to change the beneficiaries, the right to borrow against the policy, and the right to cash it in and get any residual value of the policy.

          Use of this trust can reduce or eliminate estate taxes and save your heirs tens of thousands of dollars, so it can be very useful if your estate is currently taxable because of a large insurance policy.

Edward H. Adamsky, Attorney At Law ♦ Licensed in Massachusetts and New Hampshire ♦ 269 Middlesex Road, Tyngsboro, MA 01879  978-649-6477