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Trusts 101


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A trust is a legal entity that acts like a paper bag into which you (the "Grantor") put whatever assets you want. On the bag, you put instructions for use of the contents. You can hold onto the bag or give it to someone else. The person who holds the bag must follow the instructions.

Trusts are used in financial planning for a variety of purposes. For example:

  • A trust can be used to provide an income to a person while limiting access to the asset which creates the income. If done far enough in advance of the need, this kind of use can help people qualify for Medicaid long term care.
  • A trust can be used to provide supplemenetal benefits for a person who receives a benefit from the government which is dependent on having limited assets and resources, such as Supplemental Security Income (SSI) and/or Medicaid. (A "Supplemental Needs Trust").
  • A trust can be used to protect assets from creditors.
  • A trust can be used to give an asset that has appreciated in value to charity in a tax advantaged manner. The donor (grantor) or other people can receive an income from the asset before it is ultimately given to charity. These trusts are known as "Charitable Remainder Trusts".

Trusts can also be used in estate planning. Trusts can generally do everything a Will can, and sometimes can do things a Will cannot. For example:

  • A trust can be hold assets for a minor beneficiary, paying living, medical care and education expenses. The trust can be set up to hold the assets indefinitely. A trust can also be set up for a specific time, such as when the child reaches a certain age. At that  time, either the income or principal or both can be passed to the beneficiary or to someone else.
  • A trust can be used to minimize estate taxes. Examples are:
    • A "Bypass trust" where legally wedded spouses take advantage of a combination of the exemption from tax and the passage of assets from one spouse to another tax free.
    • An "Irrevocable Life Insurance Trust" which removes the insurance proceeds from your estate for estate tax purposes.
  • A trust can be used to avoid probate so assets move to heirs without the delay caused by probating a Will and without being subject to public scrutiny.
  • A trust can be used when a fight is expected about which beneficiary gets what. It is more difficult to attack the provisions of a trust than of a Will.

Trusts can be created while you are alive (Living Trusts) or through a Will (Testamentary Trusts).

A Living Trust can either be Revocable (it can be revoked or changed by the person who set it up) or it can be Irrevocable (it cannot be changed after it is created.)

The most popular form of trusts these days is known as a Revocable Living Trust. It is a trust which is creating during the Grantor's life time. The terms can be changed at any time until the Grantor's death at which point the terms become locked-in.

Trusts are sophisticated and complex. While there are many self-help books on the subject, it is advisable not to consider creating any type of trust arrangement without at least consulting an experienced lawyer. As Alexandra Cohn, Esq., a Trust and Estate attorney points out: "Setting up the wrong kind of trust or getting the timing wrong, can result in some pretty expensive mistakes (and that can include significant professional fees in addition to taxes.)"  Plus: "There can be significant differences between the states, so where a person lives makes a difference as to what one chooses to do regarding an estate." A consultation does not have to be expensive. 

A trust does not replace the need for a Will. For information about wills, see Wills 101

For additional information, see:

Edited by: 
Jerry Simon Chasen, Esq. 
Chasen & Associates, P.A. 
Miami, Florida

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