Planning with Trusts

What is a Trust?

A trust is a flexible, efficient instrument that can be used for a wide variety of purposes. It is a tool for holding property, and there are certain types of trusts more commonly used in estate planning. 

A settlor (or donor or grantor) transfers assets with the intent that the recipient (trustee) hold the property for the benefit of someone else (a beneficiary). The trust instrument will provide instructions for the trustee about how to manage and disburse the trust property. 

What are the benefits of trusts?

Depending on the situation, there can be a number of advantages to creating a trust.

1. Probate avoidance -- Upon the death of the donor, the trust will either continue for beneficiaries or terminate, depending on the terms of the trust. Either way, this avoids the time and expense of probate.

2. Privacy -- Unlike a will, a trust is a private document.

3. Tax savings -- Certain trusts can create estate tax advantages, such as "life insurance" or "credit shelter" trusts.

4. Asset management -- Trusts provide continuity of management in the event the donor becomes incapacitated, or dies with minor children, allowing trusted family members or professionals to step in and help.

5. Special needs planning -- Provides for financial management and protects assets, in addition to preserving public benefits for people with special needs.

There are 2 basic categories of trusts: Revocable and Irrevocable

A revocable living trust gives the donor control over the trust. He or she may alter, amend, or revoke (terminate) the trust at any time. As noted above, the continuity of management with revocable living trusts is useful if a donor becomes incapacitated or dies with minor children. These revocable trusts often become irrevocable at the death of the donor.

An irrevocable trust cannot be changed or amended by the donor. Irrevocable trusts are often used in MassHealth planning or with life insurance policies as an estate tax planning tool. Irrevocable trusts must obtain their own tax id number and file an annual tax return, where most revocable trusts use the social security number of the donor.

Trusts are often part of a comprehensive estate plan that would also include a will, durable power of attorney, health care proxy, HIPAA releases, and advance medical directives.