A trust is the tool we reach for when a client wants to keep assets from going to the government, to creditors, to in-laws or to a court-supervised process after death or disability. Which trust, and whether it should be revocable or irrevocable, depends on what you are trying to accomplish. Below are the goals a trust can achieve, the difference between revocable and irrevocable trusts, and a note on life insurance trusts.
Protecting assets
Keeping what you own out of the reach of the government, creditors and people outside the family.
Qualifying for Medicaid
Several types of trust can help an individual qualify for Medicaid, including home care and nursing home coverage. The point is to avoid spending your assets on medical and long term care so that they pass to your family instead. Learn more about Medicaid trusts.
Protection from creditors and lawsuits
A properly executed and funded irrevocable trust shields the principal of the trust from creditors and lawsuits.
Protection from your children’s spouses and creditors
Most parents do not want what they leave a child to end up with the child’s spouse in a divorce or as an inheritance, or with the child’s creditors after a lawsuit or bankruptcy. A trust keeps the assets in the blood family rather than with people who are not immediately related to you.
Privacy
Probate proceedings are public record, so any person or organization can find out the extent and location of your assets. A trust is not filed with the court and stays private.
Avoiding court proceedings
Probate, ancillary probate and guardianship are all avoidable with the right trust.
Avoiding probate
Probate can become expensive and delayed. Property you transfer to a trust does not have to go through probate at all.
Avoiding probate in more than one state
If you own property in several states, transferring it into a trust avoids ancillary probate proceedings. On your death the property passes according to the trust, and no multi-state Surrogate’s Court proceedings are required.
Continuity on death or disability
A trust provides for continuous management of your assets, so income and use of the assets are not interrupted when you die or become disabled. Without one, your estate or business may be subject to restrictions imposed by the probate court.
Planning for mental disability
A trust lets you select a trustee, someone you trust to manage your estate on your behalf if you become unable to do so yourself. Read more in Planning for Disability.
Providing for the people you leave behind
Minors, disabled beneficiaries and children who are not ready to handle money.
Managing funds for minor children or grandchildren
Minors cannot manage funds and need a trustee to do it for them. If a child inherits without a trust, the child’s parent or guardian cannot access the money without a lengthy court proceeding and tremendous court oversight: the court endorses every check, and multiple reports have to be filed each year.
Protection from irresponsible or inexperienced children
A trust sets limits on how beneficiaries can spend the assets. For example, you can specify amounts to be paid out on reaching a specified age.
Preserving a loved one’s Medicaid and SSI
If a loved one is disabled and receives means-tested government benefits such as Medicaid or SSI, a special needs trust (also called a supplemental needs trust) preserves their eligibility. They continue to qualify to have the government pay for their care instead of spending down what you leave them.
Saving on estate taxes
Credit shelter, QTIP, charitable and grantor trusts each have a tax job.
Trusts can legally save a substantial amount in estate taxes. How to Avoid Estate Taxes covers the credit shelter trust and the life insurance trust. A QTIP trust or a QDT trust for the benefit of your spouse can further your tax savings goals.
A charitable remainder trust (CRT) or a charitable lead trust (CLT) maximizes the tax advantage per charitable dollar. A grantor retained annuity trust (GRAT), an intentionally defective grantor trust (IDGT) or a unitrust are advanced trusts that remove the appreciation of your property from your estate. Read more in Advanced Estate Planning.
Revocable or irrevocable
Only an irrevocable trust protects assets; a revocable trust still does a great deal.
A revocable trust does not protect assets. Because the person who set it up keeps so much control, up to and including revoking it entirely, the law treats the assets in a revocable trust as still belonging to that person. For asset protection, only an irrevocable trust works. Revocable trusts still have a place: they are flexible, can be changed or revoked at any time for any reason, and become irrevocable when the person who made them dies, so they deliver many of the benefits described above without giving up control during life.
| Feature | Revocable trust | Irrevocable trust |
|---|---|---|
| Can be changed or revoked | Yes, at any time and for any reason | No |
| Who the law treats as owner | The person who set it up | The trust |
| Protection from creditors and lawsuits | None | Yes, if properly executed and funded |
| Avoids probate | Yes | Yes |
| What happens at death | Becomes irrevocable | Continues under its terms |
Life insurance trusts
Keeping the policy proceeds out of the taxable estate.
An irrevocable life insurance trust (ILIT) is set up to own the life insurance policy, so that when the insured dies the proceeds do not become part of the taxable estate. The insured can still pay the premiums by making a “Crummey gift” to the trust. The trust holds the policy for the benefit of your beneficiaries; after three years it is deemed the owner of the policy, which minimizes the chance that your estate pays estate tax on the proceeds and keeps any appreciation in the policy out of your estate. The downside is that the trust cannot be changed once made. The upside, if it is set up the right way, is no estate tax on the proceeds. A life insurance trust must be drafted carefully to meet exacting IRS requirements.
We have drafted trusts, wills and other estate planning and elder law documents for clients since 2008. If you want to know which trust fits your situation, call 212-233-1233 or email [email protected].
