What is a Trust and Do You Need One?

How a Trust Can Be Part of Your Plan

WHAT IS A REVOCABLE TRUST?

WHAT IS AN IRREVOCABLE TRUST?

by Matthew J. Dorsey for Saratoga

Today

There is a great deal of misinformation and misunderstanding about what a Trust is and how it can potentially be part of your estate plan. By reviewing the different types of Trusts frequently used in estate planning, we can hopefully provide some useful information and eliminate some of the common misunderstandings.

A Revocable Trust holds assets for you during your lifetime. You can revoke the Trust and take back ownership of the assets at any time that you choose. Revocable Trusts are generally also amendable, which means you can modify their terms however you see fit over time. Revocable Trusts are sometimes used in the place of Wills in order to avoid the probate process. In those cases, attorneys generally suggest you still do a “Pour Over Will”, which directs anything in your probate estate to be distributed to your Revocable Trust. This is done so that if you die with probate assets, despite your efforts to avoid doing so, those assets are distributed pursuant to the terms of your Revocable Trust. Probate assets are assets owned solely by you and not held jointly with someone else, payable to a named beneficiary, or held in trust.

An Irrevocable Trust cannot be revoked by the creator and is often used in asset preservation planning to assist the creator in later qualifying for Medicaid to pay for nursing home care. Anything transferred into a properly drafted Irrevocable Trust more than five years before a Medicaid application is filed will not be counted as an asset of the Medicaid applicant. Irrevocable Trusts are also generally not amendable, however certain changes may be possible after their creation. For example, Irrevocable Trusts used for Medicaid planning often include a limited power of appointment, which will allow the Trust creator to change the beneficiaries of the Trust.

WHAT IS A THIRD PARTY SUPPLEMENTAL NEEDS TRUST?

A Third Party Supplemental Needs Trust can be set up for the benefit of a disabled person by a third party. For example, a father may set one up for his disabled child in his Will, so that money will be available for the child’s care after the father’s death. This type of Trust does not affect the eligibility of the disabled child for governmental benefits, such as SSI or Medicaid. One of the advantages of a Third Party Supplemental Needs Trust is that the remaining principal of the

Trust can be left to other family members after the death of the disabled person.

WHAT IS A SPECIAL NEEDS TRUST?

A Special Needs Trust is similar to a Third Party Supplemental Needs Trust in that it does not affect the eligibility of a disabled beneficiary for governmental benefits. A Special Needs Trust, however, is set up with the disabled person’s own funds. In some cases, the funds may be made up of the proceeds of a personal injury settlement. In addition, funds left in the Trust after the disabled person’s death must be used to pay off any lien Medicaid has for providing medical care during the disabled person’s lifetime.

WHAT IS AN IRREVOCABLE LIFE INSURANCE TRUST?

An Irrevocable Life Insurance Trust (ILIT) is often used to assist with the payment of potential estate taxes. When the ILIT is established, the creator gifts money to the Trust to purchase a life insurance policy on his or her life. Over the course of the creator’s life, he or she gifts additional money to the ILIT to pay annual premiums, keeping the annual gifts below the annual exclusion amount for federal gift tax purposes. This allows the value of the insurance policy to grow outside of the taxable estate of the creator. Upon the creator’s death, the death benefit paid under the life insurance policy is not part of the creator’s taxable estate and is therefore available to help pay any estate taxes that are levied on the creator’s estate.

CAN I HAVE A TRUST AND A WILL?

Yes. In fact, it is quite common to have Trusts set up within a Will. These Trusts are known as Testamentary Trusts. When the person doing the Will has younger children, a Trust is often set up in the Will to manage the assets for the children until they are older. In addition, Revocable or Irrevocable Trusts can work in conjunction with a Will, based on the individual needs of the client.

Whether a Trust should be part of your estate plan is a discussion you should have with your attorney. As you can see, Trusts come in a great variety of types and serve many purposes. An experienced professional can help you make the right decisions based on your personal circumstances.

Matthew J Dorsey, Esq. is a Partner with O’Connell and Aronowitz, 1 Court St. Saratoga Springs. Over his twenty-six years of practice, he has focused in the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at 518584-5205, mdorsey@oalaw.com and www.oalaw.com.

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