In recent years, trusts have become an increasingly popular addition to the average estate plan. The primary reason for the noticeable increase in the use of trusts in estate planning is the flexible nature of a trust agreement. Though once used almost exclusively by extremely wealthy and/or noble families as a way to pass down the family wealth without losing control over how that wealth is used, trusts are now used by the average person as part of a comprehensive estate plan. One of the reasons why trusts have become such a popular addition to the average estate plan is that a wide range of estate planning objectives can be accomplished using a trust. The key is to know what type of trust is needed to accomplish your objective. That, in turn, requires a basic knowledge of how different types of trusts operate. With that in mind, let’s consider three scenarios in which a living trust is the solution to your estate planning needs.
What Is a Trust?
A trust is a relationship whereby property is held by one party for the benefit of another. A trust is created by a Settlor, also referred to as a Maker or Grantor, who transfers property to a Trustee. The Trustee holds that property for the beneficiaries of the trust. Though you may not realize it, you likely enter simple trust agreements on a regular basis. For instance, imagine that your brother asked you to hold onto a vehicle he bought at auction until your nephew can make it back from out of town to take possession of the vehicle. In that case, your brother is the Settlor, you are the Trustee, and your nephew is the beneficiary of the trust.
Testamentary vs. Living Trusts
All trusts are first classified as either a testamentary trust or an inter vivos (more commonly referred to as “living”) trust. A testamentary trust is a trust that does not take effect and become active until the death of the “Settlor.” The Settlor, also referred to as the “Grantor” or “Trustor” is the person who creates the trust. A living trust, on the other hand, takes effect as soon as all of the formalities of creation are satisfied.
To give you an idea of how many uses there are for a living trust, consider the following three very different scenarios in which a living trust may provide a solution:
- Incapacity planning – if you are concerned about who will take over control of your assets in the event of your sudden incapacity, a revocable living trust may be the answer. You are able to appoint yourself as the Trustee and the person you wish to hand over control to as the successor Trustee. You can then transfer assets into and out of the trust as needed and continue to control them as the Trustee unless you become incapacitated. At that time, your successor Trustee will take over automatically.
- Medicaid planning – if there is even a chance that you will not be able to pay the high costs of long-term care when you are older out of pocket — as is the case for the average person – you need to plan ahead to ensure that you will qualify for Medicaid, which will cover the costs. To qualify, however, the value of your assets must not exceed the very low program limits. One way to protect your assets and set yourself up for eligibility is to create a Medicaid trust. A Medicaid trust is an irrevocable living trust into which you transfer your assets. Although you can no longer benefit directly from the assets you can receive the interest earned on them.
- Special needs planning – if you have a child with special needs, estate planning is both more important and more complicated. A special needs trust may be the solution. A special needs trust is also an irrevocable living trust that can provide for your special needs loved one without jeopardizing his/her eligibility for state and federal assistance programs.
If you have questions or concerns regarding trusts and how one might fit into your estate plan, please join us for an upcoming free seminar or contact the experienced New York estate planning attorneys at The Law Offices of Kobrick & Moccia by calling 800-295-1917 to schedule your appointment.