Trusts Can Protect

Most Floridians are familiar with revocable trusts. They are effectively a legal fiction under which a grantor transfers ownership to the grantor as trustee of the trust. Terms of most revocable trusts allow the grantor to do whatever the grantor wants with the assets in the trust and provide that if the grantor becomes incapacitated, the successor trustee is to use the trust assets to take care of the grantor.

A revocable trust does not insulate assets from the claims of creditors. That would be too simple. The grantor retains the right to amend the trust, revoke the trust and generally use the assets or direct use of the assets. The grantor’s creditors can still reach the assets because the grantor effectively owns them and controls them.

The IRS understands that a revocable trust is not a real trust during the grantor’s life. A real trust separates legal ownership from beneficial interest. The IRS does not require a separate tax return for such trusts during the grantor’s life and they are known as grantor trusts. The grantor continues to file income tax returns using the grantor’s social security number but when the grantor dies the assets in the trust are considered owned by the trust and avoid probate. That is the big benefit of a revocable trust.

A trust can do a lot more than protect beneficiaries from the burden of probate. A trust can also protect a beneficiary from other risks. A great example is the special needs trust.

A special needs trust provides benefits to a beneficiary suffering from a disability and receiving government assistance. If funds were given direct to the beneficiary or to a trustee to assist the beneficiary without restriction, the beneficiary would lose government assistance and trust assets would have to be exhausted before the beneficiary could requalify.

Special needs trusts are not intended to provide support and pay bills that would generally be paid from a trust for a beneficiary. For a special needs beneficiary, basic needs are met in whole or in part by the government through SSI, Medicaid, Florida Food Assistance Program and other government programs.

A special needs trust can fill the gaps not paid for by the government. These gaps can include medication and medical equipment, house cleaning, work or education expenses and miscellaneous household expenses. A special needs trust can even pay for entertainment and recreation, vacations and travel. The trust can pay a wide variety of expenses other than the basic necessities of life. The quality of life of the beneficiary can be significantly improved beyond funds available from the government alone.

There are a lot of disabilities that do not rise to a level that the government will provide assistance. Trusts can be used to provide benefit and protection in a far broader field than maintaining eligibility for government payment.

Age is a good example. Many believe giving a young person lots of money is a bad idea. Lacking maturity, the person may spend the money quickly and reap little benefit. That may also be true of the elderly. Both the young and old may be subject to scammers. 

Others suffer from addiction. Gambling, drugs and alcohol strain an addict’s finances. Giving an addict money can simply lead to the purchase of drugs, losing bets and other good and poor quick actions.

Rather than giving someone a direct gift, a trust can be established for the person’s benefit. This can be done through a will or revocable trust and only be effective at death of the person creating the trust. The person creating the trust can specify how the funds are to be used, who is to be the trustee and what happens to the funds when the beneficiary dies. A trust can be established for education, living expenses, saving at a rainy-day fund or virtually any other purpose the grantor wants to fund through a trust. If established as part of a will or a revocable trust, terms can be changed any time during the grantor’s life.

In some cases, a grantor will establish irrevocable trust during the grantor’s life to benefit children or other beneficiaries. Why would that be done? It is often done to move assets out of a person’s estate so that they will grow in the trust and not be part of that person’s taxable estate when the person dies. The hope is that the assets will avoid estate tax. 

Another purpose may be that the assets will avoid creditors of the person creating the trust. If properly drafted, the trust can even be created so that the grantor is charged with all of the income, pays the income tax from separate funds and funds in the trust grow outside of the grantor’s estate. That not only provides protection for the beneficiaries but also a tax benefit.

Trusts can have multiple purposes. In second marriages, a person may want to provide for a spouse during the spouse’s lifetime but make sure that anything left over goes to children from a prior marriage. That is not as easily or surely done by gifting to a surviving spouse. Leaving assets in trust from which the surviving spouse’s needs are met until the surviving spouse dies and remaining assets go to the children is a frequent choice in second marriages.

Choice of the trustee to serve after death of the grantor is often difficult. Family members generally lack expertise in trust management and will be subject to pressure and friction as the beneficiary asks his or her relative for distribution from the trust. Professional trustees generally do a good job of management and reporting but will not usually serve as trustee in smaller trusts since their fees are based on a percentage of trust assets. When an individual is selected as trustee, a line of succession is a good idea but sometimes the grantor feels only one person is qualified. These issues are resolvable but can require considerable thought.

Trusts can be used to provide protection for beneficiaries and should not be overlooked as part of the estate planning process.