The ABC’s of Trusts

Trusts are a critical tool used by estate planning attorneys, but non-lawyers are often confused about what they are and why they’re useful. In simple terms, a trust is one of two major vehicles to transfer assets to your heirs and beneficiaries. The other vehicle is an estate. Trusts and estates work in critically different ways. While estates make a one-time transfer after your death, trusts allow you to create ongoing asset transfers during your lifetime and after death.  

What Is a Trust?

A trust is a legal entity created by a grantor that holds and distributes assets according to certain conditions. Assets transferred into the trust remain the trust’s property until they are distributed. Trusts are created as follows:

• The grantor creates a pool of assets
• The assets are handed over to a trustee who will manage and oversee the assets
• The grantor identifies a beneficiary or beneficiaries of the trust who may receive the trust’s assets under certain terms and conditions.

As an example, let’s say that you have accumulated significant financial assets and are a strong believer in higher education. You want your loved ones to benefit from your money and your personal belief about the value of higher education. So here are the steps that you can take:

• As the grantor, you place financial assets in the trust (these assets can include cash, stocks, and other things of value)
• You name a trustee to manage and oversee the assets
• You name the beneficiaries of the trust, who can draw on the account to pay for higher education expenses

As you can see, there are conditions placed on the trust – that is, the assets are to be used for expenses related to higher education. It is the trustee’s responsibility to ensure that these conditions are met and that beneficiaries’ requests are legitimate. 

The money in your trust can be used by your beneficiaries while you are alive. This is known as a living trust. Note that if you had identified these assets in your will, they would only be available after your death. 

Types of Trusts

Most trusts are revocable. This means the grantor can modify, revoke, or even terminate the trust. An irrevocable trust is the opposite. Once it is created, it cannot be modified, changed, or revoked. It belongs to the beneficiaries, even though they must meet the grantor’s conditions to access the assets. The irrevocable trust option is particularly helpful for nursing home and in-home care planning purposes. These types of trusts are often used to transfer assets to ensure that the person creating the trust is eligible for valuable Medicaid benefits. Our Long Island trust lawyer team has particular experience assisting clients in this kind of planning. 

There are several other types of trusts used in special situations. They include the following:

• Special Needs Trusts: These trusts are created to distribute assets to a person who receives government benefits, such as SSI, Medicaid, and other assistance, without making the person financially ineligible to continue receiving those benefits.
• Irrevocable Life Insurance Trusts: These are useful tools that can help prevent life insurance proceeds from being reduced by estate taxes. The trustor/grantor/settlor transfers the life insurance policy to the trust and sets the rules for distribution.
• Charitable Trusts: These tax-deductible trusts are designed to benefit charitable organizations. The beneficiary must qualify as a charitable organization under federal law for the person creating the trust to receive the tax benefit.

This list is not exhaustive by any means, and many other types of trusts exist to help with estate planning, tax avoidance, and other objectives. These include marital trusts, bypass trusts, generation-skipping trusts, spendthrift trusts, and others. Your Long Island trust attorney can help you identify which type of trusts best suit your needs.

Why Create a Trust?

Now that you know a little bit about trusts, why should you create one? In the most basic terms, a trust’s primary purpose is to avoid the probate process. Probate can be long and complex, and is oftentimes costly. It’s also a public process. When you create a trust, you can avoid probate and make the whole asset transfer process easier on your beneficiaries. 

Trusts can remove assets from your estate, reduce taxes, protect against creditors, provide income to multiple generations of beneficiaries, and aid charities. These are all important issues to consider in deciding whether to create a trust.  

In creating a trust, you should take special care in designating your trustee. Often, grantors make a family member or friend the trustee of the trust. But this is often a poor decision. In most cases, it makes more sense to appoint your attorney or the bank that holds the trust account. Appointing a family member can create family resentments and raise charges of favoritism. An outside trustee can help circumvent family strife and disputes, and alleviate the pressure on a family member trustee. 

Keeping Your Trust Current

It’s important to keep your trust current. Trusts are not a “one and done” deal. You should regularly review and analyze your trust, and you may need to make the following modifications:

• Change your trustee if your trustee has passed away or become incapacitated
• Change your beneficiary or beneficiaries
• Transfer newly-acquired assets
• Address tax laws or other changes that impact your asset transfers

Contact Davidow, Davidow, Siegel & Stern, LLP

Ultimately, a trust is only useful when it is soundly structured, properly funded, updated regularly, and placed in the hands of an experienced, competent trustee. Working with a knowledgeable estate planning attorney will ensure that your trust serves its intended purpose and properly protects your family.

Here at Davidow, Davidow, Siegel & Stern, LLP, we have more than 100 years of experience helping our clients with their legal needs. With specialties in estate planning, probate and administration, elder law, and others, we can give you peace of mind as you plan for your future. Contact us today to see how we can help you. 

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