What Are Trusts?

May 22, 2018 | by the National Care Planning Council

A trust is a legal document that "entrusts" property to a trustee (a bank, attorney, individual or trust company) to manage assets on behalf of a person or persons (beneficiaries of the trust) whom the maker of the trust wants to benefit.

In most cases, the maker of a trust is creating a benefit for a loved one that will be distributed after the death of the creator or maker of the trust. Trusts usually involve very specific and detailed instructions on how a trustee is to carry out the duty of managing or distributing the property on behalf of a beneficiary.

A trustee will select investments, keep records, manage assets and prepare court accountings, paying bills and (depending on the nature of the trust) medical expenses, taxes due, charitable gifts, inheritances or other distributions of income and principal.

A trust relationship is also created in a will when the maker of the will specifies an entity to be an executor or personal representative of the estate. This person or company then becomes a trustee for the deceased individual who made the will. The responsibilities of an executor in settling the estate of a deceased person include collecting debts, settling claims for debt and taxes, accounting for assets to the court and distributing wealth to beneficiaries.

There are countless types of trusts created for myriads of different situations but the most common trust, useful to most of us, is the "living" or "inter vivo" trust. The purpose of this trust is to avoid the cost, public disclosure and the possible 6-month to 12-month process of probate.

Probate transfers title from the deceased to the living, but by definition a trust never dies, thus it is not subject to probate. Most trust arrangements make the trust the owner of the property with the original owner(s) as trustee(s) (caretakers as it were) and beneficiaries(s). As beneficiaries, the property reverts to the estate of the original owners after their deaths.

In many states the probate process has been greatly simplified and the cost is minimal. In these states, the cost and bother of setting up a trust to avoid probate may be more than simply going through the simplified probate process after death.

For Medicaid qualification, living trusts are subject to inclusion of assets and the property must therefore be listed as resource. For Medicaid planning purposes and for obtaining VA aid and attendance, a living trust may not be useful at all. However, a living trust can be established prior to applying for Medicaid in order to disqualify the personal residence as exempt. Thus the personal residence will count as a resource for dividing up the resources between spouses.

This strategy will result in the community spouse retaining his or her maximum share of the resources. After a "snapshot" of resources has been made by Medicaid, the property is removed from the trust and placed in the community spouse's name or the trust is converted into an irrevocable trust for purposes of starting the five-year look back or applying for the VA aid and attendance benefit.

Irrevocable Trusts and Estate Planning

An irrevocable trust is a permanent trust. Once it is created and in operation, it cannot be revoked, amended, or changed in any way. However, in some cases, it may be possible to change the trust. Irrevocable trusts offer tax advantages that revocable trusts don't. For example, the trust allows a person to give property and assets away even before death. Effectively, since the asset and property are no longer the trustmaker's, the tax liability and responsibility are also no longer the trustmaker's.

Changing an Irrevocable Trust

Can an Irrevocable Trust Be Changed?
Things to Consider if You're Stuck With an Irrevocable Trust
By Julie Garber, About.com Guide

By its design an irrevocable trust is just that, irrevocable, and so as a basic rule an irrevocable trust can't be amended, modified, changed, or revoked. But with that said, here are some things to consider if you think that you're stuck with the terms of an irrevocable trust.

Trustee or Beneficiary Modification or Judicial Modification.
Some Irrevocable Trusts are written with instructions to the Trustees or beneficiaries to allow for the terms of the trust to be modified under specific limited circumstances. For example, Charitable Trusts usually contain provisions to allow modification of the trust agreement to comply with changes in federal law. This can be done by a document signed the Trustee and beneficiaries or by a court proceeding seeking judicial modification of the trust. In addition, if circumstances have changed that make the administration of an Irrevocable Trust expensive or out of date, then the Trustee and/or trust beneficiaries can request that the terms of the trust be modified or that the trust be completely terminated through a judicial modification.

Trust Protector Modification.
Modern estate plans make use of a "Trust Protector," who is an independent third party appointed by the Trustee or the trust beneficiaries. If the Irrevocable Trust contains provisions allowing for the appointment of a Trust Protector, then one can be hired to examine the facts and circumstances surrounding the desired change to the Irrevocable Trust agreement and then make a determination as to whether or not the change should be made. If the Trust Protector recommends that a change be made to the Irrevocable Trust, then the Trust Protector will either be able to sign the applicable documents making the change, or seek court approval of the change.

Exercise of a Power of Appointment.
If the Trustees or beneficiaries of the Irrevocable Trust have been given a lifetime or testamentary "Power of Appointment," then the terms of the trust can be changed for the benefit of the current or future beneficiaries upon exercise of the power.

Disposition of Trust Property.
While it won't change the terms of an Irrevocable Trust, the sale or other disposition of all of the property owned by an Irrevocable Trust can cause the trust to be terminated. For example, if an Irrevocable Trust owns a life insurance policy and the insured stops paying the premiums, then the insurance policy will either immediately or eventually lapse and the Irrevocable Trust will be empty.

VA Eligibility

Assets can be gifted directly to individuals without using an irrevocable trust in order to qualify for aid and attendance. There are situations, however, where using a trust is more desirable. Here are a few of them.

Setting up a trust ensures that control is maintained over the gifted assets so that they are not spent prior to the possibility of needing Medicaid. This is necessary as a penalty has been created by gifting assets and if the five-year look back as not been met, money must be available to pay for the penalty.

An irrevocable grantor trust is a better choice for capital assets -- those assets that are subject to capital gains tax. Gifting those assets outright loses the special capital gains exclusion on the home and the step up in basis at death.

The trust protects the assets from creditors of the beneficiaries and the grantor. Thus, if one of the beneficiaries ends up being sued, getting into debt or taking out bankruptcy, the trust cannot be tapped into on behalf of this beneficiary.