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Trusts: Only for the elderly & wealthy?

May 2018 | Harold E. Gerry, Jr., Esq.
Have you always been told or believed that having a Trust was something that only older and/or wealthy people did? Well, that is not necessarily the case. Yes, there are trusts that are useful in estate tax planning, business succession planning and planning when looking to generation skip, but these are not the only times that trusts can be utilized. Trusts can also be used by younger generations and the “middle class” for a number of reasons and can come in several forms.

First, we’ll take a look at what types of trusts exist. In the broadest terms, there are two main types of trusts: Testamentary and Inter-vivos. A testamentary trust is a trust that is created at the time of someone’s demise, usually within a Last Will & Testament (hence the origin of the name). Meanwhile, an Inter-vivos Trust is one that is created during someone’s lifetime.

Each type of trust will have someone designated to manage the trust and follow the terms set out in the trust, known as the Trustee. This individual can be given as much or as little authority as you feel is appropriate. Keep in mind, though, that the authority of the Trustee can be limited by the laws or benefit program for certain types of Trusts that are created to comply with certain laws or retain/gain access to certain government benefits.

Testamentary Trusts created in someone’s Last Will & Testament can be very useful to handle a broad range of situations for both younger and older individuals. If you want to leave assets for a minor child, a disabled child or a child who has difficulty managing money, a Minor’s Trust, a Supplemental Needs Trust or Spendthrift Trust, respectively, would allow you to leave your assets for that child in a way that does not cause adverse consequences to that child or the family as a whole.

Each type of trust can spell out when and how much money should be used or distributed to the child or beneficiary. The trusts can essentially take your place as the “parent” of the child or beneficiary and make the decisions that you would have made for the benefit of the child or beneficiary. The Supplemental Needs Trust can also preserve or allow access to government benefits like Supplemental Security Income (SSI) and Medicaid for people with special needs.

Inter-vivos trusts typically come in two forms: Revocable and Irrevocable.  Revocable trusts are a type of trust that the creator, known as the Settlor or Grantor, can change (on their own) virtually anything about the trust, including putting in or taking out any asset they wish, and even terminating the trust.

An Irrevocable trust is one that typically the creator cannot change or terminate themselves and has restrictions on how and when the assets in the trust can be utilized or withdrawn from the trust.

Inter-vivos trusts avoid the need for a Probate proceeding (the Court proceeding that gives the Executor of a Last Will & Testament legal authority to act as Executor) for any assets owned by the trust upon someone’s demise. Avoiding the need for a Probate proceeding upon your demise can save money and time, something that can benefit people in any economic bracket. Avoiding Probate is particularly useful when someone owns property in multiple states, avoiding the need for Ancillary Probate proceedings in the non-domiciliary state.

Irrevocable Inter-vivos trusts are oftentimes used when seeking some government benefit either in the form of a tax break or meeting eligibility requirements of a government program such as Medicaid. In their proper form, irrevocable trusts can allow someone to protect their assets should they need long-term care in the future. With the proper provisions and procedures being followed, they can also reduce potential estate taxes on funds derived from life insurance payouts.

With the appropriate provisions, an Inter-vivos trust (typically in the form of a revocable trust) can be named as the beneficiary of retirement accounts such as an IRA , 401(k), 403(b) or Tax-Deferred Annuity. Naming the Trust, with the right provisions, as the beneficiary of a retirement account can be extremely useful when the intended beneficiary is a minor or disabled child.

Younger individuals or couples who have minor children (and the majority of their accumulated assets in retirement accounts) can face daunting income tax consequences upon their demise if the beneficiary designations of the accounts are not done correctly. They can also face unintended consequences, such as Court restrictions on access to funds, the child being “on their own” when they reach age 18 or having someone they did not choose in control of the funds for the child, if the beneficiary designation of a retirement account is not thoroughly thought out.

Individuals who have a child with special needs face similar, if not worse, issues if the beneficiary designations are not done correctly. A disabled child’s benefits may be lost if the child is named as the direct beneficiary of a retirement account. In addition, significant income tax consequences may result if the retirement accounts are left with no beneficiary designation at all.

Testamentary and Inter-vivos trusts can be a useful planning tool for people of all ages and economic standing. The key to utilizing the correct planning tool for your specific situation is to seek the advice of an experienced attorney.

If you have any questions about the matters discussed in this article, please contact your Legal Service Plan’s National Legal Office at 800-292-8063 or 631-231-1450.