What is a trust? There are so many different
kinds of trust arrangements that it is impossible for me to provide a simple
answer to this question. But the trust is such an important estate planning device
for many seniors that I will try to provide the reader with a basic
understanding of trusts and how they are used. This article will focus not on
trusts used by the wealthy, but on their use by Average American individuals
and families.
A trust is an arrangement involving three
parties:
1)
the Settlor (or Trustor) – the person setting up the trust and
transferring assets to it;
2)
the Trustee – a person or firm that holds and administers the
assets for the benefit of others; and
3)
the beneficiary – the person for whose benefit the assets are being
held and administered.
A trust can have multiple settlors, trustees,
and beneficiaries.
With an estate planning -trust you (the
“settlor”) transfer legal title to assets you specify to a “trustee” to be held
and managed by the trustee and distributed to the beneficiaries in accordance
with your directions. With some trusts you can name yourself as Trustee. Often
people will name a family member or a professional trust company as trustee or
co-trustee. You can also name yourself as primary beneficiary and designate
other “contingent” beneficiaries in the event of your death.
Here are some examples of trusts that are
commonly used as part of the estate plans of individuals and families.
Illustration 1 – Financial
Management Trust. Mary, a widow
with two children, has approximately $225,000 in various savings and retirement
accounts. With the help of her elder law
attorney Mary creates a trust agreement that names a carefully chosen Bank
trust department as the trustee. The trustee assigns a trust officer to Mary
who helps get the trust set up and funded from Mary’s savings.
In accordance with Mary’s instructions, the
trustee will then begin paying Mary’s bills each month. It will pay Mary’s real
estate and estimated income tax payments as they come due. The trustee will deposit money in Mary’s checking
account each month as needed for her personal use. Mary can increase or
decrease the mount of her monthly draw by phoning her trust officer. If Mary wants more money for any reason, she
calls her trust officer and money is transferred to her checking account. The
trustee invests Mary’s money in a manner approved by Mary in advance so that it
is consistent with her risk tolerance. Mary gets a full accounting statement in
the mail every three months. She can check her account anytime online.
Upon Mary’s death the Trustee will pay her
final expenses from the trust funds and distribute the remainder to her
children. Mary can change this distribution at any time. Mary can also cancel
the trust at any time and all of the money will be returned to her.
In the above illustration Mary is the Settlor,
the Bank is the Trustee, and Mary is the Primary Beneficiary of the Trust.
Mary’s children are called contingent beneficiaries. Lawyers call this kind of a trust a revocable
“inter vivos trust” or “living trust.” It is revocable because Mary (the Settlor) can
undo it at any time during her life. (“Inter vivos” means between living
people and here the Settlor is alive. On the other hand, a “testamentary trust”
is one that is created in the Settlor’s Will and which takes effect after the
death of the Settlor.)
A revocable inter vivos trust can be an excellent way to set up a
financial care management arrangement for an older adult. For more information on this arrangement see
my article Who
to Choose as your Financial Pinch-Hitter – a Family Member or a Trust Company
Illustration 2 – Special-Needs Trust. Miriam is a widow
with two children: Ron, age 33, works with computers at Penn State’s main
campus. Allen, age 31, has a developmental disability. Allen resides with
Miriam and works part time on the maintenance staff of a local hospital. He currently receives SSI and Medicaid
benefits. Ron and Allen have always been
very close.
Miriam wants to leave an inheritance to Allen
but is worried that an inheritance would cause Allen to lose his SSI and
Medicaid benefits.
Miriam’s elder law attorney drafts a will that
includes a special-needs trust (SNT) for Allen. Upon Miriam’s death ½ of her
estate will pass to this trust. When properly drafted and administered this
trust will provide for Allen’s needs while preserving his right to receive
means-tested public benefits like SSI and Medicaid. The lawyer and Miriam
discuss the kinds of expenses that can be paid from the trust, and Miriam
decides to name her other son, Ron, as Trustee with a Professional Trust
Department as back-up. Upon Allen’s death any funds remaining in the trust will
be distributed to Miriam’s grandchildren.
The elder law attorney also suggests that both
Miriam and Allen have powers
of attorney drafted, and that Allen should consider whether he should set
up an ABLE
account.
Illustration 3 - Home Protection Trust. Ken and Virginia are
both in their early 70s. They married when Ken got back from Vietnam in 1969.
They have a daughter, Betty Lou, with whom they are very close. Betty Lou has
had a hard life so far, and her parents want to ensure that they are able to
leave her an inheritance when they are gone. They also have a son Sam. Sam
lives in Pittsburgh with his wife and a child and has a good job as a
pharmacist.
Like many couples, Ken and Virginia’s home is
their most valuable asset. A house down the street recently sold for $280,000. In addition to the home, the couple has about
$200,000 in savings.
Last year Virginia’s mother died at age 94. Her
mother had received long-term care services at home for almost two years before
moving to a nursing home where she spent the last 28 months of her life. Her
mother had worked for over 40 years as a bookkeeper and had saved as much as
she could for retirement. But all these savings were wiped out to pay for her
care needs. And, after her death, the state forced Virginia to sell her
mother’s home and pay the proceeds to the government to reimburse it for money
Medicaid had paid toward the cost of her mother’s care. Virginia learned this
is called Medicaid
Estate Recovery. Virginia doesn’t want the same thing to happen to her home
when she and her husband are gone. She wants to ensure that the home will go to
Betty Lou.
Ken and Virginia meet with an elder law
attorney and discuss how to best protect their home for themselves during their
lives and for Betty Lou after they are gone. They discuss the consequences and dangers
of giving the home to Betty Lou
outright.
After discussing their options, Kenn and Virginia
decide to place their house in a home protection trust. In order for the home
to be protected from nursing home and other care costs, the trust needs to be
irrevocable, which means that Ken and Virginia cannot cancel it. But they can
live in the home for the rest of their lives, and if they ever want to move,
the trust can sell the home and buy another residence for them.
The lawyer explains that because of Medicaid’s
5-year look-back rule, it is best to transfer the settlors home to the
trust while the settlors are relatively healthy.
When held by the trust, their home (and any other
assets they decide to transfer) can be protected from Medicaid estate recovery in
the event one or both of them ever have a long expensive stay in a nursing
home. And since the trust, rather than a child, hold legal title to the
property it is protected from divorce or other bad things that may happen in their
child’s life as well.
The elder law attorney suggests that a Family
meeting might be a good idea to bring Betty Lou and Sam into their parents’
trust planning. See: A
Family Meeting as Part of Effective Estate Planning. The meeting is held
when Sam is in town visiting his sister and parents. He is totally on-board
with the idea of Betty Lou getting the house someday.; And Sam and Bett Lou
agree to serve as co-Trustees of the trust.
These are just a few examples of common ways
that trusts are used to help seniors with their lifetime and estate planning. There
are dozens of different types and uses of trust. Trusts are not just for the
wealthy.
This article is intended to be just a starting
point. Talk with your elder law attorney about whether and how a trust might
help you achieve your planning goals. If you live in Pennsylvania, you can call
Marshall, Parker and Weber
for expert help in putting together a plan that best meets your unique situation
and goals.
