There are dozens of different kinds of trusts that can be made to protect and preserve your assets for future generations, but with so many types of trusts it can be difficult to figure out which kind is the best fit for you. Join us to learn about common types of trusts and the benefits and disadvantages they offer. We will be joined by our guest speaker Attorney Hyman Darling from Bacon & Wilson PC of Springfield. In this webinar we will be covering:
– What are some of the benefits that common trusts offer?
– What are some of the disadvantages that common trusts can offer?
The opinions expressed in this webinar are the opinions of Attorney Brian Barreira and Attorney Hyman Darling on the law as written as of the date of the webinar recording, November 18, 2021. The information presented in the webinar is for informational purposes only, and is not a substitute for individualized legal advice.
Brian: Hello, hi I’m Brian Barreira, estate planning and elder attorney and based in Plymouth Massachusetts and with me is Hyman Darling from Bacon & Wilson in Springfield and we’re going to be talking about the pros and cons of common types of trusts and we’re going to try to do 30 trusts in 30 minutes. Which means this is going to have to, we’re going to have to roll we’re not going to have a lot of time to deal with a lot of different details of trusts; but let’s get started. Hyman why don’t you introduce yourself and tell people what your practice is.
Hyman: Well just like you Brian, I’m a lawyer in Springfield Massachusetts, do estate planning, probate, elder law, tax law, I’ve been doing it for a long time and am happy to join you today.
Brian: Okay, well let’s get started with- I think what we’ll probably do in the future is we’ll do a program together that’s about a narrower topic not a broad topic like 30 trusts. But for now, we’re just going to get through- now the reason for this program is my practice gets so many calls from people with self-diagnosis. ‘I want a trust’, and there’s not, there’s no such thing as one type of trust. And sometimes people go online and try to figure out what other things they should do and it’s, you know, it’s confusing out there when you’re looking at a lot of the materials online which are marketing, they’re sales oriented rather than educationally oriented. So let’s get started, the first kind of trust I want to talk about is actually not a trust, it’s called the nominee trust. It’s a trust that you put real estate into, and the reason it’s called a nominee trust is it nominates a trustee, a person to be in charge, but the trust does not say who’s the beneficiary. This is a way of putting something into trust and not letting other people know what you’re really doing. So commonly, the unrecorded page says who the beneficiary is and commonly that’s another trust, or it could be an LLC, it could be anything.
It’s really not a trust, courts have ruled in Massachusetts it’s not a trust.
It’s not worth doing in many cases the negative is there’s an unrecorded page and I’d say in about a quarter of the cases of people who come in to see me after having done those they don’t even know that there was an unreported page and they have a hard time finding it, some people can’t find it. So, that’s one, it’s a realty trust. So with one down, 29 trusts to go, you want to add something?
Hyman: I just want to add, I do a similar type document for clients who wish to claim a lottery ticket and they want to keep it anonymous as to who the winner is. So for instance, I could be the trustee and the world doesn’t know who the beneficiary is but the beneficiary of that trust is also the revocable trust that deals who gets the money if they should pass away.
Brian: The negative of a nominee trust is that the world thinks you’re the owner and they have to rely on what you say. So it would be a good way to steal, it would be, not that you would ever do that but-
Hyman: You should always trust the trustee, that’s why they call it a trustee.
Brian: Right, right, and I believe that it’s not a good thing to do in many cases I mean because we used to fund other trusts by deeding to a nominee trust the beneficiary of which was the other trust and now we can just do a trustee certificate so there’s no need to do that.
Hyman: makes it easier.
Brian: Okay, so on to the most common kind of trust being sold at seminars and webinars, the revocable living trust or revocable living trust. It’s simply, you know in a way it’s sort of like a will and a durable power of attorney put together. It says what happens while you’re alive and you typically are the one in charge and if you cannot do it then someone else steps in during lifetime or death and it’s got the inheritance provisions right on it, right in it. There are no tax benefits, it doesn’t protect you from creditors, it doesn’t protect you from anybody it just simply is a way of avoiding probate.
Hyman: A lot of people call these family trusts, marital trusts, a revocable trust, living trust, loving trust, there’s all kinds of names people use for them and they use them interchangeably and they really shouldn’t but it’s just as Brian said, a revocable living trust. It’s created while you’re alive and you fund it while you’re alive and you avoid probate.
Brian: And it’s a good thing to do if you have real estate in other states because if you have real estate in three states there’s a probate after you’re gone in three states. So if you fund the trust, funding it means deeding the property to the trust, that avoids probate. So married people do and do a joint revocable trust that’s, go ahead Hyman, that’s yours.
Hyman: Yeah lots of people do a joint revocable trust, sometimes they put the assets in there, if they don’t have a lot of assets they might change the beneficiary of their life insurance that the first beneficiary will be the spouse, second beneficiary will be the trust, so that life insurance pours into the trust and it doesn’t go through probate. They might have provisions in the trust that have the money doled out to the kids, incoming principle at the discretion of the trustee after they’re gone, maybe the principal goes out at a third of 25 a third or 30 or 35 or maybe they’ve got kids with problems like substance abuse or just not good with money, they might have it held in trust for their lifetimes. But they can change it, it’s revocable anytime they want.
Brian: One of the questions that I sometimes have when I look at one of these is ‘does the survivor have the ability to amend the trust’, it’s got to say that, if it doesn’t say that then there’s a question about whether the survivor’s stuck with whatever’s in there.
Hyman: Another good reason people shouldn’t write them on their own.
Brian: Yeah, right or by downloads you know because there’s probably things you don’t know about. The next kind of trust is called the totten trust. Now this is typically what you do when you go to a bank and you set up an account that says me trustee for you, so that when I die you show up with a death certificate and then you can claim the money. So it’s still my money while I’m alive and then it becomes yours at death. I’ve told people to go to banks and talk about totten trusts and a lot of the people at banks don’t seem to use that term.
Hyman: Well as as a former banker, we used to set up a lot of these but we knew what we were doing at the bank. We used to call them a poor man’s trust. Okay, you put the money in this account in your name, like Brian puts it in trust for me, it’s still Brian’s money he gets taxed on it, nothing’s changed, it’s not protected from creditors, but maybe he doesn’t trust me to hold that money so he doesn’t want to make a joint, but after he’s gone he doesn’t mind if I get it. So we call them totten trusts, there’s also a thing very similar called a payable on death, POD, it really has the same effect.
Brian: Okay, so the next type of trust, testamentary trust in a will for a minor, it’s a common thing a parent does. I think that’s yours no that’s mine okay
Hyman: that’s yours
Brian: I took yours so
Hyman: yes you did.
Brian: I’m sorry we have color-coded lists here. A trust in a will for a minor is simply you have a will and you say I want everything to go to my kids but I don’t want them to get it too young in age. In Massachusetts you’re considered to be a not a minor anymore once you’re 18. And what would you have done with money if you’d inherited at 18 or 21 for that matter? So a testamentary trust, you need a trustee you need someone to manage it and that’s a common thing for parents of young children to do if they don’t have large retirement plans.
Hyman: I use those a lot for my clients who come in that may be a single parent and not much in assets but they do have retirement plans, life insurance and they’ve got minors so we’ll set up a trust under the will. It used to be something I never liked to do because you had to account to the court it was a pain the neck, with the Uniform Probate Code now in Massachusetts it makes it much easier.
Brian: Okay, so on to government trusts that have to do with government benefits, public benefits. The three types we’re going to talk about are special needs trust, an irrevocable income only trust, and a testamentary trust for your spouse in a will; and it looks like I’m going to roll through all three myself so you just sit back Hyman, we’re behind schedule so I’m going to go fast. Special needs trust is a trust, it’s a discretionary trust for someone who’s usually on government benefits like SSI. SSI has a rule that if you have more than two grand you’re off, so the assets are left in trust for the person, there’s a trustee who has discretion to make distributions. Now if you’re on SSI, if the trustee gives you money you lose your SSI, so the trustee has to buy things for you, so it’s the kind of trust where you’re gonna have a trustee who’s paying attention to what’s going on. The other thing is they cannot make payments for food or shelter, so there has to be restrictions right in the trust. If we’re talking about SSI there are other government benefits like section 8 housing and they look more toward patterns of distribution, so you’ve got to be careful if you’re the trustee of that kind of trust. There are pool trusts out there and this is not even on our list, so I think we’re giving them more than 30 here, there’s a pool trust which is essentially a special needs trust where everybody has an account with one big trust and it’s run the same way. Want to add anything to that?
Hyman: No, we could talk about that all day we’ve got to keep moving I think.
Brian: Yeah, sometimes these are known as supplemental needs trusts, supplemental care trusts, so there are other terms that are used. An irrevocable trust an income only trust is often done for MassHealth planning to try to protect your assets from a nursing home and the trust says you only have the right to the income you don’t have the right to the principal. It was a problematic trust up until recently and the top court in Massachusetts has struck down almost all of the flimsy arguments that MassHealth lawyers were making against trusts. So now, it works now the problem I have with that kind of trust is if you have your home in it and you sell it, all you got afterwards, the equity has to stay in the trust, and all you get is income. So I have a variety of this kind of trust that I refer to as an exploding trust and if another home is not purchased for you within 30 days all the money goes out to the beneficiaries, the people are going to inherit early. It takes five years before this kind of trust is safe when you fund it so it’s not something you can do at the last minute. Finally, testamentary trusts for spouses, now this is a loophole in the federal Medicaid trust law that you can drive a truck through and it’s been there since 1985 so it’s not the new cutting edge game. Assets that you leave that you have in your own name if you’re married, your own name no beneficiary, no payable on death, no totten trust nothing like that, if those assets drop through probate in through your will into a trust for your spouse all the assets can be used for your spouse, but they don’t belong to your spouse if your spouse needs MassHealth later. That’s a real contrast to the irrevocable trust that you do while you’re alive which has to tie up the assets so they cannot be used for your spouse. So this is a good way if you’re married to try to plan to save assets, it doesn’t have to be a home it could be money, and the sick part of this is it works best if you know who’s going to die first. I never get volunteers on that, but if you know who’s going to die first the morbid thing is down the stretch you got to be moving assets into the name of the one who’s going to die first and I often use this also as an estate tax planning vehicle because the assets that are in the name of the one who dies first will not end up being taxed in the estate of the surviving spouse. Okay that’s enough for that one.
Hyman: Looks like you’re still on.
Brian: Yeah, okay so I’m gonna have to accelerate. So there are a variety of trusts known as bypass, QTIP, family trust, AB trusts,
Hyman: Credit trust,
Brian: Credit shelter, yeah so these trusts- there’s a certain dollar amount that’s exempt from estate tax, under federal law and under state law. The amount if you’re married, these are trusts are for married people, if you leave some assets in trust for your spouse, and this ties into what I said with the testamentary trust for your spouse, release from some assets that are there for your spouse but with certain standards that have to be inserted, they will not belong to the survivor for estate tax reasons, so that you can exempt more money from the estate tax. If you leave everything to the survivor, the survivor is going to pay the the maximum estate tax. So that’s how these trusts work, there’s usually a formula within the trust that says what to allocate to one or versus the other. One kind of trust for a spouse is known as a QTIP trust where the spouse has to receive income and that allows you to leave it for your spouse but not get taxed on it now, and leave it so that it’ll be subject to estate tax when you’re both gone. That’s a good kind of trust to leave if you’re in a second marriage and you have kids from a first marriage and you want to protect their inheritance. Now, you can do a lifetime QTIP trust and this tends to be called the spousal lifetime access trust, a SLAT, where you put assets in trust for your spouse now, make it irrevocable in use so that in case you’re – if you’re the wealthy one and your spouse dies first you wouldn’t have had a chance to use your spouse’s exempt amount from estate taxes.
Hyman: A further benefit of the SLAT if you fund it during lifetime which is really when you should do it, is that all the appreciation escapes being taxed, if it’s done properly. So you still kind of have use of the money but it won’t be taxed in your estate, so if you’re willing to give up control and ownership of some of the money, it makes good economic sense to save taxes by doing that.
Brian: Okay you’re up with QDOTs and ILITs.
Hyman: Well QDOT is a document that you would use as a type of trust only if you have a non-citizen spouse because they are not taxed the same. As Brian said earlier, there is no tax between spouses, but there is a tax between non-citizen spouses; so if the citizen spouse dies first leaving everything to the non-citizen spouse they don’t qualify for that thing called the unlimited marital deduction, so there will be a tax on the first death. Contrary, if the non-citizen spouse dies first and leaves it to the citizen spouse, that’s fine but we would do that if we have a non-citizen situation. I usually try to get my clients to become citizens, you know they get all the deductions and then they’re allowed to vote, without that they can’t vote. So, they have even some time after that someone dies to become a citizen but in times of COVID people didn’t qualify within the time frame so you got to be careful, you can’t bet on that. The irrevocable life insurance trust is one that I really do like because any life insurance a person has when they die, if they own the policy, it’s includable in their estate and it will be taxed. So by transferring the life insurance to a separate irrevocable trust they’re giving up control and ownership of the policy and as long as they live three years from the time they transfer it the proceeds will not be includable in their estate and likewise will not be included in the spouse’s estate; so the kids will get all this money free and clear of estate tax and income tax but you can still have the surviving spouse be a beneficiary of that trust and get income in principle as you decide what you want to set up. So it’s private, it basically can protect the assets from creditors, possibly from a divorce situation, possibly from a second or third marriage situation, it’s a wonderful opportunity especially for term life insurance that has no value. People who buy large term life insurance policies should never have those policies held by them when they’re going to have a taxable estate.
Brian: Right, because they could if they want to get rid of the insurance or get rid of the trust, they can just stop paying the insurance.
Brian: and then the second to die, irrevocable trust for second to die policies, which is a cheaper kind of life insurance because it doesn’t pay out until two people have gone. Okay so moving on quickly, generation skipping trust, this is a trust that leaves things hanging for the next generation so that the assets don’t land in the next generation. They can be used for the next generation, but they don’t land there for estate tax purposes, and that allows there to be more there for the grandchildren ultimately. There’s a lot to this but this is a summary program not a detailed program. I use this also, I do generation skipping trusts more for MassHealth planning purposes because a lot of my clients are in their 90s and their children in their late 60s and early 70s, so why leave assets to the generation that is then going to start looking at getting rid of them? Why not leave them in a trust for the benefit of the next generation.
Hyman: That’s great multi-generational planning too, saves on estate tax and saves on long-term care so it’s a home run for everybody.
Brian: Okay you got three kind, four kinds of trusts, let’s fly through these, these are not common for-
Hyman: I’m going to talk about all these somewhat together because all of these are going to be irrevocable trusts and when you create these trusts you’re giving away something irrevocably. The qualified personal residence trust is a house, the 2503c trust is money or stocks that you might put in trust for a minor child usually a grandchild or if you have a client who’s fairly healthy but wealthy he might want to give away some money, the GRAT is also an irrevocable trust to get money out and the intentionally defective grantor trust is also an irrevocable trust. So for all of these, you’re using the the government’s rules that they provide for you, I’m not as smart as Brian in this type of area but maybe but you know we’re not so creative that we created these trusts, the government says what you can do we just take the law and say, well here’s what you can do you can set up these trusts give these assets away and they’re out of your estate. The benefit in most of these is that all the appreciation also escapes being taxed in your estate. So you give away a house worth three hundred thousand, in twenty years by the time you die it doubles, all that appreciation is also out of your estate for estate tax purposes. Now the credit’s pretty high now but it’s going to come down on the federal side so who knows what might happen, so what we’re saying to people now, take advantage of these credits that you have now, this year it’s 11.7 million dollars next year it’s going to be over 12 million dollars, take advantage of this credit while it’s still available before it goes away.
Brian: And one thing to say about irrevocable trusts that get assets out of your estate is that the people inheriting get a carry-over basis in the assets. So typically when someone dies owning assets and when something isn’t on their estate tax return all the built-in capital gains up till that date go away. When you do these kinds of trusts where you’re getting rid of assets it’s it’s not a complete positive because the people inheriting have your basis, which means they will pay a large capital gains tax upon a sale.
Hyman: But only if they sell it.
Hyman: If they keep that family compound at Cape forever, never sell it, then never pay the capital gains tax.
Brian: Right, but the other thing is if you get a step up in basis you get to depreciate. So if you’re talking about something that’s rental then sometimes it’s better for the Mass estate tax I think Hyman and I wrote down this analysis that it’s better for a lot of people not to avoid the Mass estate tax because the rate is lower than the capital gains tax rate and it’s better to get a step up in basis.
Hyman: Especially when there’s no federal taxes, you’re not paying any federal estate tax and then you end up paying no federal income tax on the gain. That’s a home run.
Brian: Yeah so we’re way behind schedule, I’ve got crummy trust listed here crummy trust, it’s just a way of making a gift; let’s say you’re funding life insurance, you’ve got a life insurance trust, you give the beneficiaries the the right for 30 or 45 days to pull the money out that you just put in to pay the premium; it’s treated as a gift to them because they had that right, the right lapses and then the premium is paid. Hyman you’ve got a few more trusts.
Hyman: Well total return annuity trust honestly I don’t do very many of these, I might do it if it’s an irrevocable trust for charitable purposes, but you know we might set up a trust for a beneficiary who’s not very good with money and we don’t want to have discretion because they’ll be knocking on the trustee’s door all the time to get money, so you just put it in there make it annuity. It’s a fixed amount for a fixed period of time and that’s how the trust gets paid out.
Brian: And the one good thing about a total return provision in a trust is there’s a natural tension if you’re the income beneficiary that you want investments for income and the people inheriting after you’re gone they want growth. So a total return trust just puts a number out there, a percentage that you get every year and the trustee doesn’t have to worry about whether it’s income or capital gain.
Hyman: Right, incentive trusts, they sound real good but I really don’t like them too much because it’s kind of harsh, but if you have a child or a grandchild that you want to set up a trust for and you know they’re never going to be good at making money, you might tie the amount of money that they’re going to get based on how much money they’re making. So you might tie it to their W-2 form, or how much money they get on their income tax return, so it kind of stimulates them. But you know, if you have a grandchild or somebody who who just wants to be a social worker and they’re very happy being a teacher or a laborer, you hate to penalize them because they didn’t go to medical school to become a brain surgeon. So it sounds good but I don’t like doing it too often but once in a while there’s a need for it.
Brian: Okay so there’s another kind of trust that can be done if you’re concerned about your children’s spouses in a divorce. So there’s a case that I can’t even pronounce the name of, I think it’s Pfannenstiehl.
Hyman: Well you know what it means.
Brian: Yeah so, you leave it in trust, if you leave assets in trust for your child a probate court judge can look at that and go well it’s the child’s money and we can account that against the child; but if you leave it in trust for the child and the child’s children then the judge cannot look at that and determine that that belongs to the to the child and a lot of times a judge has to exclude that from the calculations in the divorce.
Hyman: That could backfire based on who’s getting divorced
Brian: Okay you got three, you got some, oh you got a lot of them, go ahead fly
Hyman: I’m going to group offshore asset protection and domestic asset protection in the same category. These are for people who have a lot of money and they’re worried about being sued and it really requires that they go out of the states in many cases to have these trusts. You have to have usually a trustee in another jurisdiction whether it’s Nevada or South Dakota or Florida or somewhere that they have these trusts that can go on for years and offer this creditor protection against the assets so it might not help for tax purposes but it does protect for somebody suing the the trust assets or the person individually. They’ve got to be set up before you’re being sued, once you’re sued you can’t do this, otherwise it’s a fraudulent conveyance, but it’s usually pretty expensive because you’re probably putting a lot of money in this type of trust and you’ve got to pay someone else to be the trustee to manage it and those trustees know how to charge. So you can do that, but you got to be very- you’re going to be pretty wealthy to do this. Anything you want to add to that?
Brian: No, we’re almost out of time we got four types of charitable trusts.
Hyman: Okay, charitable trusts are wonderful, I love having money go to charity because usually that means money is not going to go to the government for estate taxes or income taxes, so people should always, always think about a charitable trust as a way of saving money if they have retirement plans and they want to leave money to the kids and money to a charity, sometimes even if they’re not charitably inclined, it’s still better to leave the money into a charitable trust and have the money doled out to the kids over a period of time and let the charity get it at the end; or do it as a reverse of that, a lead trust, where the children get nothing initially, because they’re getting plenty of other money from their parents, the charity gets money for a period of time and when that period ends the children get whatever is left in that trust. So they might pass it down the line or leave it to the grandchildren as a generation skipping trust. I love having charitable trusts.
Brian: So for the charitable remainder, you either choose a percentage as of the opening date of the trust or you recalculate the percentage the kids get annually. So those two types of charity, the annuity trust is the one that is established right up front and the uni recalculates annually. Finally, unless you’ve got something else to add Hyman,
Brian: We got unwritten trusts, constructive trusts, purchase money resulting trusts, these are more trusts that come about as a result of litigation, where somebody was given the money to do something or somebody was supposed to do something for you and they didn’t and the court can impose a trust on what happened. That’s it, we covered at least 30 trusts in 30 minutes. Thanks Hyman.
Hyman: My pleasure thank you.
Brian: We’ll do this again
Brian: Thank you everybody for joining us, Bye.
Hyman: Bye, thank you.