TO TRUST OR NOT TO TRUST.
DO YOU NEED A TRUST?

This is a common question clients often ask when they are doing estate planning.  Estate Planning involves making a will, providing for representation in the event of incapacity (via powers of attorney), making final medical care decisions and possibly creating a trust.

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A Trust is a form of legal ownership where a Trustee owns property for the benefit of others.  The trustee is the person who has title to the stuff in the trust (called the corpus).  Why on earth would anyone put his or her property into an entity that is owned by someone else?

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Bottom line.  Most of us would not nor do we need to.  Some people, though,  very much need a trust.  But most importantly, do you?  

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One reason to have a trust is to get property out of your name.  This can help avoid state specific estate taxes where they have them (like Massachusetts).  Texas has no state estate tax. Yet.

A trust can also help avoid federal estate taxes by, again, effectively reducing the size of person's estate.  In 2021 the federal estate tax exemption is 11.7 million for an individual (double that for a couple.)  However, this changes yearly, sometimes drastically,  and as political climates change, that extremely generous estate tax exemption could fairly easily be reduced or eliminated.  

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If you own a business and have some property you wish to insulate from the claims of possible future business creditors, a trust can effectively do that.  And, as long as the trust is created prior to any claim, that trust property should not be available to judgment creditors either.  Trusts can be an effective tool to keep business and personal property separate. 

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A trust can help avoid probate.  If you have a reason to maintain privacy after your passing, a trust is a good way to do that.  Trust assets, those that have been properly titled in the name of the trust, are NOT subject to probate.  They do not come under the inspection of a court nor is it required they be included in any inventory that has to be filed.  Remember, they are not in the name of the decedent so are not counted as part of his or her estate.  AND, the trustee can manage and/or distribute the property under full legal authority without any court involvement or state mandated wait times or notice requirements.  To some people, that is  reason enough.  

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A parent can make a trust for the protection of an incapacitated child  or family member which can survive beyond their own life.  A parent can also help protect the inheritance of a loved one who, they believe, would blow through their inheritance and become impoverished.  This is called a spendthrift trust. 

Charitable giving is another  reason some make a trust.  Probate, even where there is a will, hampers, delays and can even redistribute funds in ways that defeat a will gift.  You see, even when there is a will, debts must be paid first.  A lot of people don't realize that.  A trust takes property out of one's estate and dedicates it for a purpose.  It is about as sure as one can get to making sure after life charitable gifts are completed. 

A trust can also be used to provide for your own long term care.  As long as a the trust is irrevocable and is established 5 years (60 months) prior to applying for Medicaid, the property in the trust is not counted for purposes of qualification for Medicaid.  This 5 year period is called the "look back" period.  The rules are difficult and vary from state to state but the idea is that if you make transfers of property for less than market value, such as sell a car that you titled in the name of the trust, to a grandson for half the value, you could be disqualified to the tune of the other half of the value of that car.  So when you are applying for Medicaid nursing home assistance, the value of the other half of the car may be counted in the calculations of your eligibility.    Of course, all assets that are not in the trust will be counted as assets for purposes of qualifying (or not qualifying) for Medicaid long term care assistance.  That is why it is important to title assets in the name of the trust.  If you don't, they simply are not in the trust and are not protected.  And you should not apply for Medicaid assistance early.  Doing so messes up the system for them AND the look back period will go back further (to an earlier time.)  These convoluted rules were created because, way back, people, even rich ones, would give all their stuff away right before applying and report to Medicaid that they were impoverished and needed assistance.  Thus they avoided spending all their own money and could pass it all on to their heirs.   The Look-Back period stops that.   To plug any legal loophole created by trusts, Medicaid applies it to trusts assets too.  

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It is important to know whether you need a irrevocable trust or if a revocable one could accomplish your goals. For example, for Medicaid qualification, the trust would have to be irrevocable.  Any property that you could easily take back  out of a trust (or "revoke") would be counted against Medicaid eligibility so this type of trust is non-revokable, you cannot take back property from the trust. 

If you are looking to ensure that a gift to a loved one or a charity is completed after your life however, a revocable trust could give you control and benefit of the property, and allow you to take property out of the trust if you wish (revoke the property and or the trust), as well as provide for orderly and non-court related succession to a successor Trustee to carry out your after life wishes. 

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As you can see, Trusts are valuable tools created to protect property for a loved one, yourself, or for any legal beneficiary, such as a charity.  And, as they are essentially a contract between the trustor (you) and the trustee to carry out your wishes, they can be used in many ways and with almost any type of property to that end.  

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