People ask me about trusts in estate planning. They hear about a friend who used a trust or a financial advisor who said a trust will protect their assets from long-term care costs or reduce taxes. Trusts can be helpful but only if you understand what they can and cannot do. At Slutsky Elder Law, we use trusts for some of our clients depending upon their needs.
The first thing you need to know about trusts is that they all are not alike. Some trusts are created and funded while you are alive (inter vivos) and some after death (testamentary). Some are irrevocable, where they cannot be changed and the assets put in them cannot be retrieved, and some are revocable so you can change them and still have access to the assets. Some are for the protection of assets and others for reducing income or estate taxes. Some are to protect a beneficiary from poor management decisions or creditors. There are trusts that can last for generations for very wealthy people and to take full advantage of the $11,000,000.00 exemption from federal taxes but they are used by a very small part of society.
The assets in revocable trusts are treated as if you own them because you have unlimited access to the funds. They are taxed as your assets and accessible to your creditors. Irrevocable trusts are separate legal entities. In most cases the goal is to have the assets out of your control so the money is protected for your loved ones and not available to pay for your long-term care or available to your creditors (or to reduce taxes).
There are a variety of irrevocable trusts, including:
- Credit Shelter or Bypass Trust – Used by married couples to reduce estate taxes when the second spouse dies. In this arrangement, the property of the spouse who dies first is transferred into the trust for the benefit of the surviving spouse. Because he or she does not own it, the property does not become part of this spouse’s estate when he or she dies. This is less used today because a single person can protect $11,000,000.00 from federal estate tax and a couple can protect $22,000,000.00.
Charitable Trust – Used to reduce income and estate taxes by using the tax-exempt status of the charitable organization to allow either reduction in taxes and charitable intent to be carried out or to reduce capital gains tax on highly appreciated assets by having the trust liquidate the asset and then paying an income for the benefit of the trust or another party.
- Spendthrift Trust – Used to protect a beneficiary who may have creditors.
- Special or Supplemental Needs Trust – Used to protect the public benefits that many special needs individuals receive as some individuals who are disabled will lose eligibility for their public benefits like Medicaid for SSI. Since an inheritance could disqualify a beneficiary from Medicaid, for example, this estate planning tool provides money for additional day to day expenses while preserving the government benefits. A Special Needs Trust uses the funds of the special needs beneficiary and has a payback provision and a Supplemental Needs Trust contains someone else’s funds and no payback provision is required.
Looking for an elder law attorney in Chester County, PA? Slutsky Elder Law can explain what trust options exist for you and how a trust may or may not benefit you in your estate plan. To set up an estate planning consultation please call us at (610) 940-0650