A trust is a legal arrangement through which one person (or an institution, such as a bank or law firm), called a “trustee,” holds legal title to property for another person, called a “beneficiary.”
Trusts fall into two basic categories: testamentary and inter vivos (literally, “among the living”).
A testamentary trust is one created by your will, and it does not come into existence until you die. In contrast, an inter vivos trust, starts during your lifetime. You create it now and it exists during your life and often long enough after your life to do what you want.
There are two kinds of inter vivos trusts: revocable and irrevocable.
Revocable trusts are often referred to as “living” trusts. With a revocable trust, the person who creates the trust, the “settlor” or “grantor,” usually maintains complete control over the trust and may amend, revoke or terminate the trust at any time. This means that you can take back the funds you put in the trust or change the trust’s terms. You reap benefits of the trust arrangement while maintaining the ability to change the trust at any time before you die.
Revocable trusts are often used for the following purposes:
- Asset management. They permit the named trustee to administer and invest the trust property for your benefit and beneficiaries after you die. This is especially useful when used with a power of attorney to avoid the need for conservatorship should you become incapacitated, and to be sure that impaired beneficiaries after you die can be protected from themselves and their creditors. When a child has special needs (like developmental disabilities, mental illness, autism disorders, etc.) and is receiving federal and state benefits, the trusts can protect those benefits.
- Probate avoidance. At the death of the trust grantor, the trust property passes to whoever is named in the trust. It does not come under the jurisdiction of the probate court and its distribution need not be held up by the probate process. However, the property of a revocable trust will be included in the grantor’s estate for tax purposes.
- Tax planning. While the assets of a revocable trust will be included in the grantor’s taxable estate, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, thus avoiding taxes when the beneficiaries die.
An irrevocable trust cannot be changed or amended by the grantor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. For instance, the grantor may set up a trust under which he or she will receive income earned on the trust property, but bars access to the trust principal. This type of irrevocable trust can be used for Medicaid and special needs planning when it is created with careful attention to state and federal Medicaid law.
As noted above, a testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the grantor is probated. 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 reduce estate taxes on the death of a spouse or to provide for the care of a disabled spouse or child.
Supplemental Needs Trusts
The purpose of a supplemental needs trust can be 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 can receive goods and services purchased with distributions by the trustee in the trustee’s discretion. Such trusts can protect the grantor’s assets from the beneficiary’s creditors. In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid and low-income housing. A supplemental needs trust can be created by the grantor during life or by his will.
Credit Shelter Trusts
Credit shelter trusts are a way to take full advantage of state and federal estate tax laws for larger estates.
*This article is provided for persons interested in elder law issues in Virginia and across the United States. This article has been written by a practitioner in the field of elder law, but unless otherwise noted, the writer is not affiliated with ThompsonMcMullan, P.C. Nothing in the newsletter or the articles is, or is intended to be, legal advice or a substitute for legal advice. If you need legal advice of any kind, please consult an attorney with experience in that area of the law, whether in our firm, or otherwise.