This is one of the most common questions we hear. Read on for information to help figure out whether you need a trust and, if so, what kind fits your specific situation.
For example, maybe you have a disabled child and you want a trust to permit that child to inherit without losing government benefits. Maybe your or your spouse’s health is heading into difficulties and you can foresee eventually needing long-term care benefits. Trusts can avoid an expensive, public, and lengthy probate process before your beneficiaries can inherit after you pass. Or, you might be in the classic “trust fund” situation, where you’re concerned that your children won’t be able to manage money wisely.
All these are excellent reasons to consider a trust. But what kind of trust? A quick count shows there are at least thirteen different varieties. Which one is best suited to your needs? We’ve outlined the basic concepts below, but if you would like more detailed information and to discuss what type of trust may suit your needs, please don’t hesitate to call Hodgkins Law at (207) 358-3270 or visit our website: www.hodgkins.law.
What is a Trust?
Think of a trust like a treasure chest. You originally bought property or earned money in your own name. You then transfer those assets into the trust’s name – into your treasure chest, in other words. The trust treasure chest becomes a legal entity separate from you, which now holds your property in its name, and, more notably, no longer in your own.
As part of this process, you also identify people who will occupy the three roles involved in managing trust property. First, you are the grantor, or settlor, or trustor – all those words mean the same thing, the “you” in this case. Second, you appoint a trustee. That person or entity is responsible for managing trust assets and following directions contained in the trust document. Third, you decide whom you want to receive trust assets – your beneficiary or beneficiaries, in other words.
In legal terms, a trust is a fiduciary agreement among you the original property-owner, your trustee, and your beneficiary. The trust document contains instructions for what you want done with trust property, both for how you want it invested and, also, for how you want trust assets to be distributed when you pass. Trusts are, thus, a highly efficient hybrid between a power of attorney, an asset-management vehicle, and a last will and testament, all rolled into one legal entity and document.
There are two basic kinds of trusts to understand, before they split off into their thirteen-or-more different flavors: revocable or irrevocable trusts.
The Revocable Trust
A revocable trust can be thought of like the treasure chest with the open lid. As grantor/settlor/trustor of a revocable trust, you can get at trust assets freely.
You yourself can also occupy all three roles in a revocable trust – trustor, trustee, and beneficiary. If need be, you can also tinker with trust terms, by freely amending them to change the directions, beneficiaries, or trustees. You can also revoke the whole thing as the name suggests. Before that point, though, the trust document will be there to take care of everything you want it to.
If you should have an accident and lose capacity, the terms of your trust will designate a person to step in on your behalf and, thus, avoid the need to go to court to get a guardian for you. The trust will also direct who inherits your assets, thus keeping your affairs private and out of probate court.
The Irrevocable Trust
This is the trust for you if you’re seeing the need for Medicaid (known as MaineCare within the state) long-term care benefits in your future, or you work in a field where lawsuits are common, such as owning a small business or in the construction industry.
The disadvantage to an irrevocable trust, however, is that you will be sacrificing all or almost all control over trust assets, unlike in the revocable trust situation. Once an irrevocable trust is established, you as grantor/settlor/trustor cannot directly alter the terms and, generally speaking, your access to trust money is restricted or entirely precluded – as is required in order to enjoy the potent benefits of this kind of trust.
Think of an irrevocable trust as being like the treasure chest with the locked lid. Your trustee – who generally cannot be you – is the one with the key. You yourself can no longer reach your assets. This relinquishment of control is necessary to shelter your assets from creditors, or to protect your assets when entitlement to government benefits would otherwise require you to spend almost all you own first.
There are ways to draft an irrevocable trust carefully, so you can still exert your will over how assets are to be used. Just as in the revocable situation, you can impose conditions that must be met before a beneficiary can receive funds. You can designate how trust income is to be used for specific purposes like college tuition, a business start-up, or travel. You can also authorize a person or entity as “trust protector,” who can alter trust language, correct drafting errors, or create a new similar trust if the law changes.
And there you have the basics. Now you’re ready to decide whether you need a credit shelter trust, or a charitable trust, or a qualified terminable interest trust, or a blind trust, or…well, just come see us to figure out all the rest!
A Few Trust Caveats
Some sophisticated trusts do convey tax benefits, but, for the most part, IRS considers revocable trusts to be invisible. You as grantor/settlor/trustmaker will still pay tax on the revocable-trust income, albeit at your individual rate and not at the higher trust rate.
As for estate taxes, revocable trusts have no effect – but, at least regarding federal estate taxes, those are currently moot for most people. They are not incurred until the value of the estate exceeds $11.4 million as of 2019. Some states also impose estate taxes, including Maine; currently, the state tax only applies to estates worth more than $5.7 million.
Also, keep in mind that revocable trusts provide no protection against creditors. If you lose a legal action, a judge can force you to change the beneficiary of your trust to the winner. Irrevocable trusts are free from that kind of interference.
Still, irrevocable trusts must be established long before you run into that kind of trouble. If you create such a trust while credit problems are looming or have already arrived, you risk that your trust will be undone as a fraudulent conveyance.
Trust Your Attorney
Consult an estate planning firm, like ours, who has experience and expertise in the trusts and estates area. At Hodgkins Law, our sole purpose is creating a legacy plan that fits your needs precisely, and we believe our clients deserve the peace of mind and clarity that comes with knowing your legacy is well looked after.
To get more information on Revocable Living Trusts or MaineCare & Long Term Care Planning, please visit our website. You can also sign up for one of our upcoming free seminars to learn more by simply calling (207) 358-3270 or visiting our website: www.hodgkins.law.