Many people choose to use a trust as the vehicle for holding and distributing their assets. Trusts that are set up during a person's lifetime are called intervivos trusts, or living trusts. Most intervivos trusts are revocable trusts, in which the client acts as trustee and maintains complete control over his or her assets. If a client sets up an intervivos trust and transfers assets into the trust before death, those assets will not pass under the client's Will and will not be subject to the automatic jurisdiction of the Probate Court. Many people consider trusts to be an attractive estate planning option because they do not wish their assets to pass through probate and be a matter of public record.
In some circumstances, clients choose to create an intervivos trust, but do not transfer their assets into the trust prior to death. In most of those cases, the Will provides that the client's assets will pass into the trust at death, to be distributed according to the terms of the trust. This use of a trust will not shield the client's assets from probate, but may lessen the costs associated with trust administration after the client's death.
Another form of intervivos trust is an irrevocable trust. Irrevocable trusts are often used to remove assets from the client's estate for federal tax purposes. As the name implies, irrevocable trusts cannot be changed once they are established. Therefore, it is important that clients fully consider the consequences before a transfer into this type of trust.
There are many types of irrevocable trusts. One type of irrevocable trust that some clients choose to establish is a charitable remainder trust. The client, or another designated individual, receives an income stream from a charitable remainder trust for a term of years or for life, after which time the assets pass to a designated charity. Another irrevocable charitable trust is a charitable lead trust, in which the individual beneficiary gets the remainder interest with the charitable organization having the initial benefit. The client receives charitable deductions for income and estate tax purposes for establishing charitable trusts.
Another type of irrevocable trust that some clients choose to establish is an irrevocable life insurance trust. This trust may be drafted so that payments of annual premiums on life insurance policies qualify for the gift tax annual exclusion, and, if the trust purchases the life insurance policy or if the client/owner of an existing policy lives for three years after the transfer of the policy to the trust, the proceeds are not included in the client's estate.
Intervivos trusts, whether revocable or irrevocable, are ideal planning tools for those clients whose estates may be subject to estate taxes. Trusts can be structured in a way that enables the client to manage assets during lifetime, direct the ultimate disposition of assets at death, provide for the support of the client's surviving spouse or children, and minimize the burden of estate taxes.
Testamentary trusts are trusts that are created within a Will itself. In the past, many people established testamentary trusts to avoid outright gifts to minor children or to provide for the support of a surviving spouse. Today, it is much more common to use intervivos trusts for those purposes. Unlike intervivos trusts, testamentary trusts are subject to ongoing Probate Court supervision, with the accompanying expense and publicity of providing annual accounts of the trust to the court, unless waived in the will or by the beneficiaries of the trust. We do not generally recommend the use of testamentary trusts, although under certain circumstances, it would be appropriate to use a testamentary trust when planning for the care of a spouse who is receiving public assistance to pay for nursing home care.
Special needs trusts are either self-settled trusts (created with the beneficiary's own assets) or third-party trusts (created with someone else's assets). It may be beneficial to create a special needs trust for persons who will require substantial medical treatment in the future and may receive Medicaid assistance. This type of trust will preserve the assets for the lifetime benefit of the beneficiary and is available through a limited exception to the rules concerning Medicaid eligibility for self-settled trusts. That exception provides that the assets of a disabled individual under age 65 transferred to a trust established by a parent, grandparent, legal guardian or court for the benefit of the disabled individual will not disqualify the individual from receiving Medicaid benefits if the state will receive trust assets upon death of the beneficiary up to an amount equal to the total benefits paid on behalf of the beneficiary. Third-party special needs trusts do not reimburse the state for Medicaid benefits, but must restrict the beneficiary's access to the funds in those trusts.