It’s common to hear attorneys and others refer to trusts, but you may not know exactly what they are or why they are needed. A trust is similar to an entity, such as a corporation or an LLC, in that
A trust is founded by its “settlor”, and the people the trust will benefit are its “beneficiaries”. The administration of the trust is governed by a “trust agreement”, and the person who manages the trust is its “trustee”. The trustee is responsible for safeguarding the trust’s assets and distributing the assets to the beneficiaries in accordance with the instructions provided in the trust agreement. Trusts have two general forms: revocable and irrevocable. Revocable trusts can be amended or even, as the name indicates, be revoked and that revocability usually terminates at the settlor’s death. The most common type of revocable trust is referred to as a “living trust.” Attorneys generally form living trusts as a substitute a Last Will & Testament.
The settlor and others, following the formation of the trust, may provide the trust with assets immediately or may wait until some later time. Often, the trust may not even be funded until the settlor’s death. To fund the trust at death, the settlor in their Last Will & Testament may leave a bequest to the trust stating, for instance, “I hereby give X dollars and my house to the John Smith, Jr as Trustee of the John Smith, Sr Irrevocable Trust”. This allows the settlor to have access to the funds throughout their
While the settlor has the option of forming and/or funding a trust during their lifetime, the trust can also be formed within the settlor’s Last Will and Testament. A trust formed during the life of the settlor is called an intervivos trust, while a trust formed at death is called a testamentary trust. In the case of testamentary trust, the settlor’s Last Will and Testament will likely state something such as “I hereby form the Tom Smith Testamentary Trust” and will then provide the terms of the trust agreement. A testamentary trust can receive its assets by bequests from the Last Will & Testament or by beneficiary designations, such as the proceeds of a life insurance policy or a retirement account.
People form trusts for many reasons and often for combinations of reasons. The most common reason, of course, is for estate planning purposes. For estate planning purposes, it will usually be to minimize taxes, avoid probate, or to avoid giving assets directly to a beneficiary. Sometimes, the settlor wants the money to be distributed over a period time, maybe wanting the funds to last multiple generations. In such cases, the trust agreement may provide a criteria for when money can be distributed. Maybe the settlor will want the trust to allow its funds to be used for fairly broad purposes and includes the common “HEMS” standard for Health, Education, Maintenance, and Support. Or, maybe the settlor will want trust funds to be used for very specific purposes and will have the trust agreement say it can only be used for Catholic high school education, or down payments on houses, or Orioles World Series tickets, or any other uses the settlor may wish. It may seem like the person is attempting to control their family from the grave, and in some cases that may be true, but some family members may need someone, like a trustee, standing between them and uncontrolled access to money.
Settlor’s may sometimes have a particular beneficiary in mind when setting up the controls in the trust. Maybe their child/beneficiary has marital problems, a drug addiction, gambling issues, or simply cannot control their spending. In such cases, the trust can specifically address those issues. Other times, the settlor just realizes that giving someone uncontrolled access to large amounts of money, particularly at a younger age, can attract those problems and numerous others, particularly if they’ve lost one or both parents. A trust can be used to distribute the minimal funds needed for education and other necessities and then distribute larger amounts after certain ages that you can choose based upon your knowledge of the child. Maybe your child will eventually appreciate that you didn’t allow him to blow the money on their former girlfriend when it later comes time to buy a home with his wife?
In still other cases, the beneficiary may have known or foreseeable health issues that make receiving an inheritance an issue if the beneficiary would otherwise be eligible for Medicaid. In such cases, if the beneficiary receives your inheritance directly in their name then those assets will likely prevent the beneficiary from qualifying under Medicaid and Social Security’s asset tests. Instead, those assets should be put into a Special Needs Trust so those assets are not counted for federal and state benefit programs.
Trusts are great tool planning tools, and the reasons for using trusts are as diverse as families themselves. Attorneys with knowledge of trusts can draft trust agreements necessary to meet many client needs.
For additional information or to discuss wills, trusts, estates, or probate matters, please contact Jeff Rogyom at (410) 929-4578.
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