Reasons and foundations for creating trusts date as far back as Ancient Rome. But even under modern U.S. legal structure, the trust is still one of the most important innovations in property law. So it is natural that we frequently use trusts in estate plans for our Massachusetts clients. To begin with, trusts are advance planning techniques, so that they are almost never “necessary.” Still, a properly tailored trust provides immediate and long term benefits for the right client. This article reviews some fundamental trust planning strategies for families on Cape Cod and Massachusetts.
What Happens When You Form a Trust in Massachusetts?
When a trust is created, there are a few titles that are recited in the document. The “Settlor” is the individual or entity who creates the trust. The “Grantor” (often used synonymously with “settlor”) is the individual or entity who funds, or places property into the trust. Afterwards we have the “Trustee” who manages the trust as a fiduciary on behalf of the “Beneficiaries.” It cannot be stressed enough that the Trustee as a fiduciary has an absolute obligation, even over his own interests, to administer the trust for the benefit of the beneficiaries.
At a very basic level, a Trust is an instrument that separates ownership of assets, generally into 1) Legal Title and 2) Equitable Title. This can be thought of as separating the legal authority to control assets for the trustee from the actual right to enjoy assets for the beneficiary. In the case of an asset as simple as a bank account, the Trustee has the authority to manage and distribute money, while the beneficiary has the right to receive the benefits of that management and distribution.
What are the Differences between Revocable and Irrevocable Trusts?
As the names describe, a revocable trust is one where the settlor/grantor can at any time terminate the trust and take assets back. A true irrevocable trust, by contrast, would not allow such flexibility. Wherever the distinction is important, the law determines the existence of one or the other of these trusts with questions of control:
Does the individual or entity that placed assets into the trust have the power to take them back? Does the individual or entity that created the trust have any authority to direct the trustee how to distribute? Many legal issues are based on these questions with respect to the language contained in a trust, and the answers can depend on type of legal issue concerned.
Does Placing my Home in a Revocable Trust Protect From Creditors?
Generally speaking, the answer to this question is a resounding no. In litigation for damages, personal injury or divorce, the counsel for a plaintiff or else the court itself will require that a party’s financial status be disclosed during the proceedings. Regardless of the circumstances, the party from whom such information is requested is required to list assets held in a revocable trust, since he or she still has complete control over those assets.
Even if the grantor transfers assets out of his or her control into an irrevocable trust, a court might still declare the transfer a “fraudulent conveyance” if it was made at a time when the litigation was being contemplated. In certain circumstances a properly and timely constructed irrevocable trust can provide protection, but we almost never consider a trust as a strategy for creditor protection.
What Is The Purpose of a Revocable Trust?
People and families form revocable trusts for several reasons. The most common reason that we’ve created a trust for our Cape Cod trust clients is avoiding probate. Creating and funding a trust in advance ensures that the courts (and public) will not need to be involved in the distribution of assets after someone passes away. In addition, the filing fees and legal costs for opening a probate matter almost always exceed the cost of creating and funding a trust. And furthermore, the distribution of assets in a trust can be instant whereas a probate matter will last at least a year before distributions are possible.
Another common purpose for a revocable trust relates to the capacity and competence of the beneficiaries. A trust that provides that a qualified trustee manages and distributes property, rather than the beneficiary alone, is an extremely effective tool to guarantee that the beneficiary uses the assets wisely and does not squander property that he or she might otherwise own outright. These trusts are frequently used for disabled individuals, minor children, and even older children.
While a revocable trust might provide some protection from the discovery of assets by creditors considering litigation, again, it is not an effective tool for protecting the assets themselves. As we mentioned above, the irrevocable trust is really the only way to avoid unforeseen risks in the future.
How Can an Irrevocable Trust Protect My Assets?
Whether from creditors, divorce, or even the MassHealth/Medicaid look back rules, a properly drafted irrevocable trust can at times guard against certain risks. It is worth mentioning again that timing is everything; We do not create and fund trusts in contemplation that litigation or other liability may be coming, but rather, looking farther down the road to ensure that certain assets will be guaranteed to certain beneficiaries regardless of what happens to our assets. It is therefore illustrative to consider that placing assets in a true irrevocable trust is much like giving them away altogether:
- The grantor loses legal title to the assets.
- The grantor no longer has complete equitable title over the assets (generally only income for his/her life).
- The grantor is unable to take the assets back into his name.
Although irrevocable trusts along with other gifting strategies can effectively overcome the so-called “five year MassHealth lookback rule,” they can just as often cause problems for families who have created them. If at any time within five years, property is placed into an irrevocable trust, that property may be considered a “disqualifying transfer” again just as though it were a gift. The effect of this is to disqualify the applicant for an equivalent period of care. It is then the responsibility of the MassHealth applicant to get that property back, but it is ultimately up to the Trustee whether or not the applicant will in fact have the property refunded.
For these reasons we usually only recommend an irrevocable trust for individuals or families who have significant assets. Most of the time anyway, people are naturally hesitant to give away control of any significant percentage of their estates. For while irrevocable trusts can remove the risk of creditors taking assets of the grantor, they introduce the risk of impoverishing the grantor to begin with. Discussing the particular use of these instruments deserves an in-person meeting with one of our estate planning attorneys, but for this article readers should be aware that irrevocable instruments are to be rarely used.
