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Do You Need a Trust?

Contrary to common myth, trusts are not just for the rich. You don’t have to be “high-net-worth” to benefit from a trust, and its use extends beyond potential tax benefits. 

In fact, trusts can be a great estate planning tool even for people who are middle classed or have modest means. 

Trusts can be very effective for anyone with complex estate planning needs or anyone looking to specifically tailor their estate plan beyond what’s provided by standard beneficiary designation, title registration, or a will. A trust allows you to personally customize how, when, and to whom your assets are to be distributed, with specifically defined conditions. And trusts can be defined in many ways, so let’s look at the various trust types that may apply to the average person, who is not wealthy.

Revocable Vs. Irrevocable Trusts:

Among the general categories of trusts, two particular types are important to understand:  revocable and irrevocable.

  • In a revocable trust (aka “living trust”) the grantor (the person creating the trust) retains the right to alter or terminate the trust during their lifetime, providing greater flexibility and control. The most common purpose for a revocable trust is to proactively plan for incapacity, bypass the lengthy and costly probate court process, and maintain privacy (unlike a will). Also, a revocable trust can be especially effective if you own property in multiple states; without a revocable trust owning those properties, your properties may become subject to probate in each state when you pass away. In many cases, the grantor pays the income taxes created by assets in the trust. In addition, because the grantor still maintains control, a revocable trust does not provide creditor protection or estate tax reduction.
  • In contrast, with an irrevocable trust, the grantor cannot alter or revoke the trust. Generally, an irrevocable trust offers greater asset protection, eligibility for government programs, and estate tax shelter for the grantor, but at the cost of less flexibility and control. Keep in mind, a revocable trust becomes irrevocable upon the grantor’s death.

Examples of Trusts Potentially Applicable for People with Middle-Class Wealth or Modest Means:

  • Special Needs Trust. If you are concerned about providing for a disabled family member, a special needs trust deserves strong consideration. Otherwise, if you were to leave an inheritance outright to a special needs beneficiary, they could fail to qualify for governmental benefits (such as Supplemental Security Income, Medicaid, and housing benefits). People with disabilities who would otherwise qualify for public benefits may no longer qualify if they inherit assets outside of a trust, or if they directly receive a settlement related to their disability. To get around this pitfall, special needs trust provides financial support to disabled individuals while still allowing them to qualify for needs-based public benefits.  For example, parents of a child with autism may create and fund this trust to pay for the child’s various expenses – medical equipment, education, home furnishing, etc.  A special needs trust may be revocable or irrevocable.
  • Minor’s Trust. Trusts come in handy when minor children are involved, since anyone under 18 cannot legally own property.  So, when you leave property to a minor, that property must be managed by an adult at least until the child turns 18.  To address this, a trust can be set up to specify your intentions and conditions for the child to access the funds.  An example is Section 2503(c) irrevocable trust which can extend the grantor’s control over the assets until the child reaches age 21.  If the grantor’s goal is to control the trust assets beyond age 21, a Crummey irrevocable trust would be the alternative. 
  • Spendthrift Trust. Grantor would utilize this trust to address fears of a spendthrift heir who is not financially responsible and may squander the inherited money.  The grantor can design the trust with guardrails, so that the beneficiary receives a monthly stipend or gets access to funds at a certain age or upon the attainment of certain benchmarks, such as college graduation. Assets in this trust are not subject to the beneficiary’s creditor claims or divorce proceedings. Spendthrift trusts can be revocable or irrevocable.
  • Medicaid Asset Protection Trust (MAPT). Someone who doesn’t have long term care insurance might use a trust to protect assets meant for their heirs and ensure they aren’t taken by a nursing home or Medicaid. Such a trust is irrevocable and designed to protect assets from being counted for Medicaid eligibility. As long as the trust is created and assets transferred five years before the grantor applies for Medicaid long-term care benefits, the trust assets are excluded for Medicaid eligibility purposes. So, after the five-year look-back period, as long as the trust owns the assets, Medicaid cannot count the asset and the asset cannot be seized to reimburse long term costs. The downside is that, because these are irrevocable trusts, the grantor loses control of the assets.
  • Qualified Terminable Interest Property (QTIP) Trust. This trust can be especially useful for a blended family.  It allows the grantor to provide for a surviving spouse yet maintain control of how the trust's assets are distributed once the surviving spouse dies. Trust income is provided to the surviving spouse, but upon the surviving spouse’s death, the principal passes to the grantor’s specified beneficiaries.  Thus, the grantor spouse maintains post-mortem control over eventual disposition of the principal after the surviving spouse’s death.  

Beyond those covered above, the trust universe is lined with many other types.  But the ones mentioned here would have more relevance to people with middle class wealth or modest means. 

To summarize, you don’t have to be rich to benefit from a trust. Consider whether trusts make sense for your legacy plan.  To further explore opportunities, seek guidance from your financial planner, tax advisor, and most importantly your estate planning attorney who can serve as the point person in crafting the best strategy.   


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