Creating a comprehensive estate plan is important to protect assets during your lifetime and to ensure they're passed on to beneficiaries in the way you intend. A trust can be an important part of your estate plan that can protect your assets from creditors, avoid probate, and provide other benefits.
However, it can be confusing to know what type of trust will best meet your particular circumstances. As there are many types of trusts in Massachusetts, you need the assistance of an experienced estate planning attorney to determine which one
is right for you.
What Is a Trust?
A trust is a legal document that allows a person—referred to as the donor or grantee—to transfer his assets to a trustee. The trustee holds and distributes this property under the terms stated in the trust to the designated beneficiaries.
Trusts can be a living trust or testamentary trust. A living trust is set up during the donor’s lifetime. A testamentary trust is commonly created in a will and only goes into effect after the person’s death.
A revocable trust is also known as a living trust. It's created during the grantee’s lifetime, and he retains complete control over it and the assets placed in it. He has the right to access the principal and any income generated from the trust, and to terminate it if he chooses at any time before his death. If the trust is in existence at his death, his assets would be distributed to his beneficiaries pursuant to the terms of the trust.
A revocable trust doesn't protect a person’s assets from his creditors. These assets are also included in the person’s estate for estate tax purposes. However, it does provide other benefits that include:
- It allows for the distribution of assets to beneficiaries directly when the grantee dies without the need for the estate to be probated, which can be a lengthy and expensive probate court proceeding.
- If drafted in a certain fashion, the property given to beneficiaries can be excluded from their estates, which avoids their own beneficiaries from owing taxes on the assets.
Irrevocable trusts cannot be modified or terminated once created, and no property can be taken out of the trust once placed in it. Unlike a revocable trust, the donor doesn't have direct access to the principal. However, he may be able to use trust property, such as real estate. The trust can also give the trustee the authority to distribute principal to the grantee, his children, and other beneficiaries. However, the assets of the trust aren't considered a countable asset of the donor.
One of the benefits of an irrevocable trust is that any assets in the trust aren't considered those of the donor for Medicaid purposes. A person is only allowed assets up to a certain value to qualify for Medicaid. So an irrevocable trust can protect assets if a person needs to go into a nursing home and is applying for Medicaid/MassHealth. However, it's important to create an irrevocable trust well before it's needed to qualify for MassHealth, because there's a period of ineligibility once a person transfers assets into an irrevocable trust.
Other Common Types of Trusts
There are many other trusts you may want to consider depending on your particular needs, such as:
- Charitable trust. A charitable trust allows the grantee to leave assets to a charity or charities of his choice. A grantee is allowed to be the trustee. He can change the beneficiaries of the trust and control how trust assets are invested. However, this type of trust is irrevocable, and the principal cannot be taken out of the trust. One benefit of a charitable trust is tax planning. Once created, the donor may be able to take an income tax deduction, and the assets may be eligible for estate tax deductions when he dies.
- Special needs trust. If a grantor has a disabled child, spouse, relative, or another beneficiary under 65, he can provide assets to pay for this person’s needs after death through a special needs trust. This is also referred to as a Supplemental Needs Trust. Its benefit is that it doesn't make the person ineligible for the government benefits he's receiving, such as Supplemental Security benefits, Medicaid, and low-income housing. In the trust, a person can provide for luxuries and comforts, such as additional medical care, education, and other needs the beneficiary’s benefits don't cover.
- Spendthrift trust. A spendthrift trust prohibits beneficiaries from selling or otherwise giving away trust assets. It protects the trust from a beneficiary’s creditors until the trust assets are distributed to him.
- Tax-by-Pass Trust. This type of trust allows an individual to transfer assets to his spouse tax-free, while also limiting the amount of estate tax that would be owed upon the second spouse’s death. This can save beneficiaries of the second spouse, such as children, significant estate taxes.
Let Us Help You Create the Right Trust
If you're creating an estate plan, you need to consider how a trust can protect assets and provide for your family upon your death. Attorney Michael Monteforte, Jr. will analyze your situation with you and help develop an estate plan customized to meet your needs. To learn more about trusts and to discuss your concerns, call our office or fill out the short contact form on this page to schedule your Strategic Planning Session.