PBM
Understanding the Common Types of Trusts
Patricia Bloom-McDonald • Apr 20, 2021

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

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:

  1. Asset management. They permit the named Trustee to administer and invest the Trust property for the benefit of one or more beneficiaries.
  2. 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.
  3. 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.

Irrevocable Trusts

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.

Testamentary Trusts

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).

The post Understanding the Common Types of Trusts appeared first on .

Using a Credit Card When You Have a Special Needs Trust

25 May, 2023
A special needs trust (SNT) allows you to meet your needs while receiving government benefits, such as Medicaid/MassHealth and Supplemental Security Income (SSI). When you have a special needs trust, you can use it to pay for goods and services government benefits do not cover, such as therapy, education,and housing. Since receiving income directly from your trust would jeopardize your eligibility for benefits, your trustee cannot give you cash from your SNT. When you use a credit card for permitted transactions, and your trustee pays off the balance with funds from your trust, these payments to a credit card company are not considered income. An SSI or Medicaid/MassHealth recipient who is capable of managing their own affairs can therefore use a credit card to make small purchases, and the trustee of the special needs trust need not micromanage every transaction. In the past, beneficiaries of SNTs sent their bills to their trustees for payment. Today, an individual with an SNT who qualifies for a personal credit card may find that using a credit card is more convenient. Credit cards have several benefits. Using a credit card to manage payments from your special needs trust allows you to maintain independence, gain access to some of the advantages of a credit card, and easily keep records while preserving your eligibility for Medicaid/MassHealth and SSI. Although credit cards can help people manage their special needs trusts, there are also several important restrictions and considerations to keep in mind. Consult with a special needs planner to ensure all transactions are acceptable under the trust's rules and comply with government regulations. The Benefits of Using Credit Cards When You Have a Special Needs Trust If you have a special needs trust, using a credit card has many benefits, including: Independence : Allowing you to maintain your independence. You can use your card to make qualifying purchases yourself. Your trustee does not have to make the transactions for you. Access to the Typical Advantages of a Credit Card : Using it responsibly can help you establish or build credit history, which may be important for your future financial needs. Record-Keeping : Credit cards provide easy record-keeping and a convenient way to monitor transactions from your special needs trust, which can also help special needs trustees fulfill their duty to maintain records. When you use your card, your trustee can observe your purchases and ensure that all expenses are allowable under the trust’s rules. Your statements can help your trustee keep track of funds leaving the trust. Benefits Eligibility : While adhering to Medicaid/MassHealth and SSI’s income and asset limits, you can access funds from your SNT. Credit cards can help prevent your trustee from accidentally providing you with cash payments that could affect your eligibility for government benefits. Considerations When Using a Credit Card for Your Special Needs Trust While you can use a credit card to access funds from your special needs trust for certain transactions , restrictions apply. If your trustee sees a charge on your card that could affect your benefits eligibility , they can flag it for review. You cannot use your credit card to pay for food and shelter, which SSI would cover. When administering your funds, your trustee must ensure that any expenditures are for your sole benefit if you have a first-party special needs trust. While using a credit card is appropriate, you should not use a debit card. Debit cards are considered cash income. Best Practices When using a credit card for a special needs trust fund, remember several best practices. Choose a card with low fees and interest rates. Set a clear budget and monitor transactions regularly. Keep thorough records and receipts of expenses. Consult with your special needs planning attorney. A special needs planning attorney can help you navigate the rules that apply to your trust and understand how to use a credit card to preserve your Medicaid/MassHealth and SSI eligibility. 

How an ILIT can help offset estate taxes

12 May, 2023
With the Federal estate tax exemption possibly about to be lowered, it may be time to think about steps you can take to keep your estate from being taxed. An irrevocable life insurance trust allows you to pass on money to your heirs while avoiding both the federal estate tax, as well as any applicable state estate tax which is currently $1 million in the Commonwealth of Massachusetts. Senate Democrats have proposed lowering the current estate tax exemption from $11.7 million for individuals and $23.4 million for couples to $3.5 million for individuals and $7 million for couples. While it is unclear if this proposal will pass, it is likely that some change to the estate tax is coming. Even if Congress does not take any action, the current rate will sunset in 2026 and essentially be cut in half, to about $6 million per individual. In the Commonwealth of Massachusetts, the current estate tax exemption is $1 million for individuals and is taxed at dollar $1.00. A proposal to raise it to $3 Million and the tax to start at $3 Million (not at $1.00) has been submitted in the legislature but has not yet been voted on or enacted. One way to make up for any estate tax your estate may have to pay is by setting up an irrevocable life insurance trust [ILIT]and funding it with a policy that has a death benefit that would pay your heirs some or all of the amount your estate will be taxed. If you purchased such a life insurance policy directly, it could end up being taxed as part of your estate. But if a trust owned the policy, it could pass outside your estate. While a life insurance trust can be highly beneficial, it is also complicated to set up and maintain properly. The following are some of the requirements: Trustee . If you are setting up the trust, you cannot also serve as a trustee. If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. You will need to name another trusted person or financial institution to act as trustee. Policy ownership . The trust must own the life insurance policy. If you transfer an existing policy to the trust and die within three years, the policy will still be considered a part of your estate. To avoid this risk, the trust can purchase a policy directly rather than receive an existing policy. Premiums . You need to transfer funds to the trust to pay the policy premiums, which creates an issue with gift taxes. A transfer to a trust is usually not subject to the $15,000 yearly gift tax exclusion. For a gift to qualify for the exclusion, the recipient must have a "present interest" in the money. Because a promise to give someone money later does not count as a present interest, most gifts to trusts aren't excluded from the gift tax. To avoid this, you can use something called a “Crummey” power which gives beneficiaries the right to withdraw the funds transferred to the trust for up to 30 days. As part of the process, the trustee needs to send them a letter, known as a Crummey letter, letting them know about the trust funding and their right to withdraw the funds. After the 30 days have passed, the trustee can use the funds to pay the annual insurance premium. You run the risk of the beneficiaries withdrawing the funds, but if they know that by allowing the money to stay in the trust they will receive more money later, it shouldn’t be a problem. Beneficiaries . The beneficiary of the life insurance policy is usually the trust. Once the funds are deposited in the trust, the trustee can distribute the assets to the beneficiaries in the way specified by the trust. For example, if your beneficiaries are minors, you can wait to have the trustee distribute the assets. Keeping the assets in the trust will also protect them from your beneficiaries’ creditors. The downside of an irrevocable life insurance trust is that you do not have the ability to change it once it is set up, although the policy would effectively be canceled if you stopped paying the premiums. If you are considering this type of trust, discuss it with your attorney.
Share by: