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.
A Testamentary Trust is one created by a Last Will and Testament, and it does not come into existence until the creator dies. An Inter Vivos Trust, starts during the creator’s lifetime. The Trust is created now and it will exist during the lifetime of the creator.
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 created the Trust, called the “grantor” or “donor,” maintains complete control over the Trust and may amend the Trust, revoke the Trust or terminate the Trust at any time. This means that the donor/grantor, can take back any and all put in the Trust or change the Trust’s terms. Thus, the donor/grantor is able to reap the benefits of the Trust arrangement while maintaining the ability to change the Trust at any time prior to the death of the donor/grantor.
Revocable Trusts are generally used for the following purposes:
- Asset management.They permit the named Trustee to administer and invest the Trust property for the benefit of one or more beneficiaries.
- Probate avoidance.At the death of the Trust donor/grantor, the Trust property passes to the beneficiaries named in the Trust. It does not come under the jurisdiction of a probate court and the distribution of assets held in the Trust need not be delayed by the probate process. However, the property of a Revocable Trust will be included in the donor/grantor’s estate for tax purposes.
- Tax planning. While the assets of a Revocable Trust will be included in the donor/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 donor/grantor. Any property placed into the Trust may only be distributed by the named Trustee as provided for in the Trust document itself. For instance, the donor/grantor may set up a Trust under which he or she will receive income earned on the Trust property during the life of the donor/grantor, but that bars access to the Trust principal. This type of Irrevocable Trust is a popular tool for Medicaid Planning.
As noted above, a Testamentary Trust is a Trust created by a Last Will and Testament. Such a Trust has no power or effect until the Last Will and Testament of the donor/grantor is probated. While a Testamentary Trust will not avoid the need for probate, and will become a public document as it is a part of the Last Will and Testament, a Testamentary Trust 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 person.
Supplemental Needs Trusts (sometimes referred to as Special Needs Trusts)
The purpose of a Supplemental Needs Trust is to enable the donor/grantor to provide for the continuing care of a disabled person. 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. 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 donor/grantor during the donor/grantor’s life or be part of the donor/grantor’s Last Will and Testament.
Credit Shelter Trusts
Credit Shelter Trusts are a way to take full advantage of state and federal estate tax exemptions. A Credit Shelter Trust is an estate planning tool used for married couples to help reduce, if not eliminate, estate tax due at the death of the surviving spouse. A Credit Shelter Trust is an Irrevocable Trust established after the death of a married spouse for benefit of the surviving spouse. The name of the trust reflects its primary purpose of sheltering the deceased spouse’s available credit against the estate tax.
There is an unlimited estate tax deduction for property left outright to a surviving spouse. This eliminates any estate tax when the first spouse dies, but fails to protect this same property from estate tax when the surviving spouse dies. A common solution is use of a Credit Shelter Trust, which is designed to not qualify for the unlimited marital deduction. However, the estate plan is carefully restricted to cap the amount of property that may be transferred into the Credit Shelter Trust. This prevents taxation of assets beyond that which qualifies for the deceased spouse’s applicable estate tax exemption (currently $11.7 million federally).