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A trust can be used to perform many different functions, such as reducing or avoiding tax liability, easing lifetime financial management, protecting assets, preserving family wealth, ensuring continuity of a family business, donating to charities, voiding forced heirship laws, or create a pension scheme for employees or dependents. A properly structured and administered trust may produce substantial savings in income tax, capital gains tax and inheritance tax/estate taxes. By establishing a trust, probate delays, expenses, and requirements can be avoided. A trust allows a person to provide for those who may be unable to manage their own affairs such as infant children, the aged, or persons suffering from certain illnesses. Trusts provide flexibility in distributing its assets to beneficiaries according to the terms of the trust document. Rather than distributing shares to heirs, wealth may be retained in one fund and distributed in a specified manner, protecting trust beneficiaries from spending all their inherited property.
The living trust is created with the execution of Declaration of Trust by the Grantor(s). The declaration will detail the terms and conditions of the living trust, including who will serve as the Trustee. Once the trust is created, assets are transferred to it. This is called "funding the trust." If real estate is to become part of the trust, a deed must be executed properly, naming the Trust as the Grantee. The deed then must be property recorded. A warranty deed or quit claim deed is commonly used to transfer real property to the trust. If a husband and wife established a trust, they will generally take title to assets in their names as—"Frank R. Smith and Martha T. Smith, Trustees of the Frank R. Smith and Martha T. Smith Living Trust dated July 24, 2010." Changes to the owner and beneficiary designations of annuity contracts are normally advisable when a living trust is created. However, the relationship between the trustor and annuitant coupled with the desire for extended tax deferral will dictate the optimum combination of owner and beneficiary designations. You should work with your agent on this matter before making any changes.
A trust can be created during a person's lifetime and survive the person's death. A trust can also be created by a will and formed after death. Once assets are put into the trust they belong to the trust itself, not the trustee, and remain subject to the rules and instructions of the trust document. Most basically, a trust is a right in property, which is held in a fiduciary relationship by one party for the benefit of another. The trustee is the one who holds title to the trust property, and the beneficiary is the person who receives the benefits of the trust. While there are a number of different types of trusts, the basic types are revocable and irrevocable.
A revocable living trust may be amended or revoked at any time by the person or persons who created it as long as he, she, or they are still competent. A living trust agreement gives the trustee the legal right to manage and control the assets held in the trust. It also instructs the trustee to manage the trust's assets for your benefit during your lifetime and names the beneficiaries (persons or charitable organizations) who are to receive your trust's assets when you die.
The trust document gives guidance and certain powers and authority to the trustee to manage and distribute your trust's assets. The trustee is a fiduciary, which means he or she holds a position of trust and confidence and is subject to strict responsibilities and very high standards. For example, the trustee cannot use your trust's assets for his or her own personal use or benefit without your explicit permission. Instead, the trustee must hold and use trust assets solely for the benefit of the trust's beneficiaries
Irrevocable trusts are trusts that cannot be amended or revoked once they have been created. These are generally tax-sensitive documents. Some examples include irrevocable life insurance trusts, irrevocable trusts for children, and charitable trusts. With an irrevocable trust, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. They may also be used to plan for Medicare eligibility if a parent enters a nursing hiome.
A trust created in an individual's will is called a testamentary trust. Because a will can become effective only upon death, a testamentary trust is generally created at or following the date of the settlor's death. They do not address the management of your assets during your lifetime. They can, however, provide for young children and others who would need someone to manage their assets after your death.
An asset protection trust is a type of trust that is designed to protect a person's assets from claims of future creditors. These types of trusts are often set up in countries outside of the United States, although the assets do not always need to be transferred to the foreign jurisdiction. The purpose of an asset protection trust is to protect assets from creditors.
These trusts are typically restricted by being irrevocable for a number of years and not allowing the trustmaker to benefit from the trust. Typically, any undistributed assets of the trust are returned to the trustmaker upon termination of the trust. The asset protection trust is basically a trust containing a spendthrift clause preventing a trust beneficiary from alienating his or her expected interest in favor of a creditor.
A Tax By-Pass Trust or A/B Trust is a type of trust that is created to allow one spouse to leave money to the other, while limiting the amount of federal estate tax that would be payable on the death of the second spouse. While assets can pass to a spouse tax-free, when the surviving spouse dies, the remaining assets over and above the exempt limit would be taxable to the children of the couple, potentially at a rate of 55%. A Tax By-Pass Trust avoids this situation and saves the children perhaps hundreds of thousands of dollars in federal taxes, depending upon the value of the estate.
Supplemental needs trusts (also known as "special needs" trusts) allow a disabled beneficiary to receive gifts, lawsuit settlements, or other funds and yet not lose her eligibility for certain government programs. Such trusts are drafted so that the funds will not be considered to belong to the beneficiary in determining her eligibility for public benefits. As their name implies, supplemental needs trusts are designed not to provide basic support, but instead to pay for comforts and luxuries that could not be paid for by public assistance funds. These trusts typically pay for things like education, recreation, counseling, and medical attention beyond the simple necessities of life. (However, the trustee can use trust funds for food, clothing and shelter, if the trust provides him with such discretion, if the trustee decides doing so is in the beneficiary's best interest despite a possible loss or reduction in public assistance.) This trust is most often a stand alone document, but it can form part of a Last Will and Testament.
Very often, supplemental needs trusts are created by a parent or other family member for a disabled child (even though the child may be an adult by the time the trust is created or funded). Such trusts also may be set up in a will as a way for an individual to leave assets to a disabled relative. In addition, the disabled individual can often create the trust himself, depending on the program for which he or she seeks benefits. These "self-settled" trusts are frequently established by individuals who become disabled as the result of an accident or medical malpractice and later receive the proceeds of a personal injury award or settlement.
Each public benefits program has restrictions that the supplemental needs trust must comply with in order not to jeopardize the beneficiary's continued eligibility for public benefits. Both Medicaid and SSI are quite restrictive, making it difficult for a beneficiary to create a trust for his or her own benefit and still retain eligibility for Medicaid benefits. But both programs allow two "safe harbors" permitting the creation of supplemental needs trusts with a beneficiary's own money if the trust meets certain requirements.
The first of these is called a "payback" or "(d)(4)(A)" trust, referring to the authorizing statute. "Payback" trusts are created with the assets of a disabled individual under age 65 and are established by his or her parent, grandparent or legal guardian or by a court. They also must provide that at the beneficiary's death any remaining trust funds will first be used to reimburse the state for Medicaid paid on the beneficiary's behalf.
Medicaid and SSI law also permits "(d)(4)(C)" or "pooled trusts." Such trusts pool the resources of many disabled beneficiaries, and those resources are managed by a non-profit association. Unlike individual disability trusts, which may be created only for those under age 65, pooled trusts may be for beneficiaries of any age and may be created by the beneficiary herself. In addition, at the beneficiary's death the state does not have to be repaid for its Medicaid expenses on her behalf as long as the funds are retained in the trust for the benefit of other disabled beneficiaries. Although a pooled trust is an option for a disabled individual over age 65 who is receiving Medicaid or SSI, those over age 65 who make transfers to the trust will incur a transfer penalty.
Income paid from a supplemental needs trust to a beneficiary is another issue, particularly with regard to SSI benefits. In the case of SSI, the trust beneficiary would lose a dollar of SSI benefits for every dollar paid to him directly. In addition, payments by the trust to the beneficiary for food, clothing or housing are considered "in kind" income and, again, the SSI benefit will be cut by one dollar for every dollar of value of such "in kind" income. Many attorneys draft the trusts to limit the trustee's discretion to make such payments.
There are very strict requirements that must be followed in drafting and administering Special Needs Trusts in order to have the intended effect of qualifying the beneficiary for need-based benefits. Depending on the source of the trust funds, some special needs trusts must be court-approved and age restrictions may apply. Filing requirements depend on the type of trust involved. For example, if the person with disabilities is receiving SSI, a Self-Settled Special Needs Trust should be filed with the Social Security Administration. Special Needs Trusts are complex because they involve state and federal government benefit laws and regulations as well as trust laws. I suggest you contact a local attorney who can review all the facts and documents involved.
If the trust is intended to supplement, rather than replace, government benefits, it must be properly drafted. Although requirements vary according to state law and the type of trust being established, some general rules include:
• Generally, only a parent, grandparent, legal guardian, or court can set up a special needs trust. The disabled person, no matter how competent, cannot be the "creator" of the trust (even if the trust is funded by his or her personal assets).
• Funds may not be available to the disabled beneficiary.
• The beneficiary cannot revoke the trust.
• The individual with special needs must be considered "permanently and totally disabled" under SSI criteria. Different rules apply to adults and children.
• Under the terms of the trust, the trustee may not be allowed to make payments or distributions that might interfere with government benefit eligibility (e.g., distributions cannot be made directly to the beneficiary).
• Special needs trusts may be created as part of a will or during the creator's lifetime.
• Special needs trusts have no limit on the amount of funds included and can be added to at any time.