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April 6, 2006
DO YOU NEED A TRUST?
I have had many clients come in and say, “I need a trust.” Usually, my first question is, why? One of the most common answers is that their neighbor or friend has one. Here are some considerations that you should consider before getting a trust.
TRUSTS AVOID PROBATE – It is a fact that property in a trust avoids probate. So, if probate avoidance is the reason that you are considering a trust, the first thing you need to figure out is which of your assets are subject to probate.
Probate assets are any assets that are in your name alone that do not have a named beneficiary. The typical probate asset would be a bank account or stock that has only your name on it. Annuities, life insurance, IRA’s and pension plans are common examples of assets that have named beneficiaries and are not considered probate assets.
OK, you’ve had a trust created. You’re not done yet! Now it’s time to fund the trust. You need to go to each bank and change the name on the account to the name of the trust. The same thing needs to be done with your stocks. If you are going to transfer real estate into the trust, a deed needs to be prepared transferring the property into the trust.
REVOCABLE OR IRREVOCABLE – One nice thing about revocable trusts is that you get to stay in control. It is permissible and generally the case that the person who sets up a revocable trust is the trustee. Revocable trusts are created primarily for probate avoidance and can be very handy when you have numerous stocks and bank accounts. By placing them in trust, upon your death, your trustee will have access to these assets without waiting for the probate process to be complete.
From a MassHealth (Medicaid) perspective, revocable trusts are basically ignored and treated as though the property is still in your own name. Revocable trusts do not offer any MassHealth protection and in some instances turn assets that would otherwise be non-countable into assets that will be counted in determining your eligibility. The most common example is the case of a husband and wife where one spouse needs nursing home care and their home is in a revocable trust. The home is not counted when one spouse goes into a nursing home as long as the other spouse owns the home and is living there. But, if the home is in a revocable trust it is a countable asset. Many times we have had to dissolve the trust and put the home back into the healthy spouse’s name to make it a non-countable asset.
Irrevocable trusts serve the same function, probate avoidance, but also may protect the assets in the event that you or your beneficiaries are sued, or need nursing home care. With an irrevocable trust you lose some of the control because you should not be the trustee of the trust if you wish to protect the assets in the trust from MassHealth. Who should be the trustee of your trust? I always recommend that people look at the word trustee and say, “Pick someone you trust”. For some families this is not as easy as it sounds.
TAX CONSIDERATIONS – The general rule is that revocable trusts do not have to file their own tax returns. All of the income is reported on the person’s income tax return that set up the trust. Usually, an irrevocable trust files it’s own income tax return. Many times we create irrevocable trusts that are defective for income tax purposes. Wow, defective, that kind of sounds like we made a mistake but that is far from the truth. By making the trust defective for income tax purposes, the person who transferred the property into the trust picks up the income on their own tax return. This comes in very handy when we have placed the person’s home in the trust and it is sold. Because the person is treated as the owner for tax purposes, even though the house is in a trust and the proceeds are paid to the trust, we are able to take advantage of the $250,000 gain exclusion ($500,000 for married couples) on the sale of the residence.
This article gives general information and not specific advice on individual matters. Persons wanting individualized advice on matters discussed should contact an advisor experienced in those matters. To the extent this article provides information on legal matters, it is based on law in effect in Massachusetts on the date of posting (laws in effect in other states are often quite different).
Ronald H. Surabian is a CPA and attorney who works at the Elder Law Center in Saugus, Massachusetts. He also holds Masters in accounting and a Masters in tax law. He currently serves on the board of directors of the Massachusetts Chapter of the National Academy of Elder Law Attorneys. If you have any questions please call me at the Elder Law Center, One Essex Street, Saugus, MA 01906 (781)233-4444. To view this or any prior article, please visit our web site at www.elderlawcenter.org