When families and individuals come to me to set up an estate plan, determine how best to protect their assets, or figure out how to provide for a loved one whose circumstances are a bit challenging, a tool I sometimes recommend is a Trust. When I say that word, “Trust,” I tend to get a lot of confused looks. The average person knows very little about Trusts. Movies and television have convinced them that only extraordinarily wealthy people use Trusts. In reality, there are many types of Trusts, and many of them are best suited to help people who are not extraordinarily wealthy.
What exactly is a Trust? On a basic level, a Trust is a set of rules. Those rules identify who has the power to manage, to use, and to receive any property you place in the Trust, and under what circumstances any property can be taken out. The rules set up in a Trust are binding, and will be honored by Courts and government entities. They can impact how taxes will apply to any property in the Trust and whether creditors or courts can invade the trust property. The rules in a Trust can and should be custom tailored, so no two Trusts should be exactly alike. A more important question than “what is a Trust” is “what does a Trust do?” There are several broad categories of Trusts that are designed to accomplish certain goals. In this article, I will cover the types of Trust we use most often to benefit average middle class families.
Special Needs or Supplemental Needs Trusts:
A Special Needs Trust or a Supplemental Needs Trust is set up with the goal of helping a person with a disability or special needs. This is someone who is receiving or is expected to receive some sort of medical or disability benefit that sets restrictions on their ability to own property. A person who receives SSI Disability or Medicaid benefits is limited to only about $2,000 in resources. A caring family member may see their loved one in those impoverished circumstances and want to help. That is a risky situation. If money is just given to the special needs person outright, or even spent on certain items for their benefit, it may make them ineligible for benefits they need to pay for their medical care, and ultimately put them in a worse position. A Special Needs Trust or a Supplemental Needs Trust is designed to allow a caring family member to provide some comfort and security for a loved one with special needs in a way that will allow them to keep receiving those benefits.
You may have in your life a person who you care deeply about and want to help, but for one reason or another, you just don’t think that person is able to manage money for their own benefit. That type of person is called a Spendthrift. A Spendthrift Trust is designed to provide a resource to someone who otherwise might lose the money to creditors, divorce, con artists, gambling, or frivolous spending.
An Addiction Trust is a type of Spendthrift Trust that we have been seeing more often. An Addiction Trust may be designed to help a person who suffers from an addiction and motivate them to work on their sobriety. It may provide a basic food and housing allowance, and can set specific goalposts the beneficiary must meet before receiving anything else.
Irrevocable, Asset Protection Trusts:
This is a type of Trust that protects your property from your own future creditors to ensure it is preserved for your heirs. This cannot be set up to preserve property from a current or known creditor, but rather more generally trying to protect property against the possibility of future creditors. It is something we might use if we are doing long-term planning and thinking about what we want to ensure is kept in the family.
The person who sets up this type of Trust gets to choose the Trustee who is in charge of managing and distributing the property, and the beneficiaries who can receive property from the Trust. They can choose anyone in the world except for themself. Typically, people choose their children. “Irrevocable” means the person who is setting up this Trust and transferring property into it cannot later change their mind and take it back. They are giving up control over the property, and in exchange they get protection from creditors.
This type of Trust also gives tax benefits to your beneficiaries after you pass away. They will not have to pay Pennsylvania inheritance tax on property you put in the Trust at least a year before you passed away. We can also structure the Trust to limit your beneficiaries’ capital gains tax if they sell property they received from the Trust.
A Trust is a non-probate estate planning tool. Your Trustee will be able to distribute the Trust property without going through probate. However, you will probably have other property you kept outside of the Trust for yourself, and that may require probate.
Revocable Living Trusts:
A Revocable Living Trust lets you continue to maintain complete control so long as you are alive and you have capacity. You can be the Trustee and the beneficiary. You can take the property out of the Trust. You can change the rules. You are in charge. You are also still treated as the legal owner of the Trust property. It is not protected from creditors during your lifetime and it is not protected from Pennsylvania Inheritance Tax for your beneficiaries.
The primary benefit of a Revocable Living Trust is a simplified estate administration. A person might put everything they own into a Revocable Living Trust, so their entire estate could be administered through the Trust, without any probate court involvement except for filing the Inheritance Tax Return.
Typically, a Revocable Living Trust is beneficial for someone who is not ready to hand over control of property to another person, is not concerned about creditors, and does not mind their heirs having to pay inheritance tax, but who wants to give their heirs the benefit of a simplified estate administration.
Kelly M. Appleyard, Attorney