An Attorney's Guide To Trusts

I’ve always found estate planning interesting because the work you’re doing isn’t really for yourself. It’s for the people you love and care about most. In many ways, estate planning is one of the most selfless acts in financial planning. The question of “Should I have a trust?” has come up quite a bit in client conversations lately, so I thought it would be a good topic to explore.

I’m not an estate planning attorney. Because of that, I want to introduce an estate attorney (and friend) Matthew Dorsey, Esq., to walk through what a trust is and the many forms they can take.

Take it away, Matt!


How a Trust Can Be Part of Your Plan?

What is a Revocable Trust?

A Revocable Trust holds assets for you during your lifetime. You can revoke the Trust and take back ownership of the assets at any time that you choose. Revocable Trusts are generally also amendable, which means you can modify their terms however you see fit over time. Revocable Trusts are sometimes used in the place of Wills in order to avoid the probate process. In those cases, attorneys generally suggest you still do a “Pour Over Will”, which directs anything in your probate estate to be distributed to your Revocable Trust. This is done so that if you die with probate assets, despite your efforts to avoid doing so, those assets are distributed pursuant to the terms of your Revocable Trust. Probate assets are assets owned solely by you and not held jointly with someone else, payable to a named beneficiary, or held in trust.

What is an Irrevocable Trust?

An Irrevocable Trust cannot be revoked by the creator and is often used in asset preservation planning to assist the creator in later qualifying for Medicaid to pay for nursing home care. Anything transferred into a properly drafted Irrevocable Trust more than five years before a Medicaid application is filed will not be counted as an asset of the Medicaid applicant. Irrevocable Trusts are also generally not amendable, however certain changes may be possible after their creation. For example, Irrevocable Trusts used for Medicaid planning often include a limited power of appointment, which will allow the Trust creator to change the beneficiaries of the Trust.

What is a Third Party Supplemental  Needs Trust?

A Third Party Supplemental Needs Trust can be set up for the benefit of a disabled person by a third party. For example, a father may set one up for his disabled child in his Will, so that money will be available for the child's care after the father's death. This type of Trust does not affect the eligibility of the disabled child for governmental benefits, such as SSI or Medicaid. One of the advantages of a Third Party  Supplemental Needs Trust is that the remaining principal of the Trust can be left to other family members after the death of the disabled person. 

What is an Irrevocable Life  Insurance Trust?

An Irrevocable Life Insurance Trust (ILIT) is often used to assist with the payment of potential estate taxes. When the ILIT is  established, the creator gifts money to the Trust to purchase a life insurance  policy on his or her life. Over the course of the creator's life, he or she gifts additional money to the ILIT to pay annual premiums, keeping the annual  gifts below the annual exclusion amount for federal gift tax purposes. This allows the value of the insurance policy to grow outside of the taxable estate  of the creator. Upon the creator's death, the death benefit paid under the life insurance policy is not part of the creator's taxable estate and is therefore available to help pay any estate taxes that are levied on the creator's estate.

Can I have a Trust and a Will?
Yes. In fact, it is quite common to have Trusts set up within a Will. These Trusts are known as Testamentary Trusts. When the person doing the Will has younger children, a Trust is often set up in the Will to manage the assets for the children until they are older. In addition, Revocable or Irrevocable Trusts can work in conjunction with a Will, based on the individual needs of the client.

Whether a Trust should be part of your estate plan is a discussion you should have with your attorney. As you can see, Trusts come in a great variety of types and serve many purposes. An experienced professional can help you make the right decisions based on your personal circumstances.

Matthew J Dorsey, Esq. is a Shareholder with O'Connell and Aronowitz, 1 Court Street, Saratoga Springs, NY. In practice since 1997, he has focused in the areas of elder law, estate planning, and estate administration. Mr. Dorsey can be reached at (518)584-5205, mdorsey@oalaw.com and www.oalaw.com.

As Matt outlined above, trusts can serve many different purposes depending on the situation. For some families they are essential planning tools. For others, a well-structured will, proper titling, and updated beneficiary designations may accomplish the same goal.

The bigger point is this. Estate planning isn’t something to leave to chance. If you’ve spent a lifetime building your nest egg, it’s worth taking the time to make sure it passes to the people you care about in the way you intend.

That’s really what this comes back to: Preparation.

If you’d like to talk through whether a trust makes sense as part of your plan, we’d be happy to have that conversation with you. And if it turns out your estate plan needs some work, we can connect you directly with Matt and his team to make sure the legal side of things is done properly.

What I've Been Reading Lately…

The Basics of Estate Planning

Kiplinger does a nice job outlining the core documents that make up a solid estate plan. In addition to a will or trust, a complete plan typically includes a financial power of attorney, a healthcare proxy or directive, and updated beneficiary designations on retirement accounts and insurance policies.

 How Much Did People in Their 60s Actually Spend Living in Retirement Last Year?

As I work to build better retirement income strategies, I keep coming back to one thing. How retirees actually spend their money. Nearly half of retirees fear running out. That’s a number I’m on a mission to change through better planning.

$100K Social Security Cap?

Proposals like this surface all the time, so I keep a close eye on them. This one is coming out of a Washington think tank, so nothing is set in stone. That said, expect to see more headlines like this in the coming months. If anything materially changes, I’ll cut through the noise and keep you informed.

That wraps up the April edition of the Financial Planning Corner. I hope you found it helpful!

One quick ask, I’d love your feedback. If there’s a topic you’d like me to cover, or a question you’ve been turning over in your own planning, shoot me a note and let me know.

And if any of the strategies above connect to your personal situation and you want to go deeper, I’m always happy to talk it through.