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WHAT EXACTLY IS A TRUST?
A Trust, similar to a corporation, is its own stand-alone legal entity that can have its own bank account and a distinct federal tax identification number. Every Trust has 3 actors: 1) the maker or settlor – the person who establishes the Trust; 2) the Trustee – the fiduciary who is responsible for administering and carrying out the goals of the Trust; and 3) the beneficiary – the person or persons who will benefit from the Trust. Often in the case of a family trust, the settlor, trustee, and beneficiary can be the same person. The Trust can survive after the settlor passes away, and the Trust assets can either continue to be administered or can pass on to beneficiaries, depending on the express terms and intent of the Trust.
SHOULD MOST MIDDLE-CLASS AMERICANS HAVE A TRUST? – WHAT ARE THE ADVANTAGES AND DISADVANTAGEOUS OF A TRUST?
Of course, each family's financial circumstances are different, and it is not a good idea to adopt a general blanket rule for all. There are some advantages to a Trust, particularly for a family with multiple millions of dollars of assets and complex real estate and investment holdings. The management and distribution of these assets can be streamlined. There is also a higher level of privacy. However, most middle-class families are well served by having a Will. The Estate Administration process and amount of inheritance taxes are the same, regardless if an inheritance comes via a Will or a Trust. Sometimes a Trust is created but no one acts to fund the Trust. A funded trust must file a separate annual tax return for every year it is in existence. Accordingly, sometimes a Trust is a smart estate planning tool, in many other cases, it is an added expense that does not achieve any greater benefit compared to a normal Will.
WHAT IS A TESTAMENTARY TRUST?
A testamentary trust is a trust created under a Will. There are different types of trusts for different purposes (i.e. Child's Trust, Spendthrift Trust, Special Needs Trust, etc.). Often, it is not necessary to create, fund, and manage the Trust right away. Instead, the Trust is created under the Will, and shall only be initiated if the correct circumstances are in place. For example, if younger children or grandchildren have grown to adulthood at the time a decedent has passed away, it may no longer be necessary to create a special child Trust. However, if there is still a young child who will inherit funds, it will then be necessary to establish a new trust that will be authorized under the Will.
I DON'T WANT TO DEAL WITH LAWYERS, PAY EXPENSIVE ATTORNEY FEES OR TAXES, WILL A TRUST AVOID ALL OF THAT?
Generally, no. For a long time, there are late-night TV commercials and we have clients that have paid anywhere from $3,000 to $25,000 to set up a revocable living trust, with no real guidance or tangible benefits. Consumers should note with caution that the Pennsylvania Attorney General's Office publishes guides to prevent elder scams and abuse, and include unnecessary family trust plans among potential scams. As discussed above, there are some advantages to Trusts, particularly for families with multi-million dollar Estates and complex holdings. However, the same inheritance taxes must be paid, the same tax return must be filed, the same Estate Administrative steps must be taken, and the same fees for attorneys, accountants, advisors, and trustees fees must be paid. In light of all of this, a Trust does not produce any better outcome or reduction of fees compared to a normal Will. Again, it is emphasized that each family situation is different.
WHAT IS THE DIFFERENCE BETWEEN A REVOCABLE AND IRREVOCABLE TRUST?
As the name implies, the settlor of the Trust can terminate and end a revocable Trust, but cannot do so for an irrevocable Trust. There are also some important tax and estate administration differences – funds transferred into an irrevocable trust have been removed from someone's personal assets during their lifetime, which triggers different tax treatment. The rules are complex and each situation should be evaluated by an experienced law firm and tax professional.
WHAT IS A SPECIAL NEEDS TRUST AND HOW IS THIS DIFFERENT THAN AN A.B.L.E. ACCOUNT?
Family members and beneficiaries may be receiving Medicaid or disability income which may only be eligible based on economic status. In other words, if the federal and state government is providing economic assistance, it does not make sense to gift that person substantial funds, which may then be recouped by a governmental lien. At the same time, those family members suffering from a disability or medical condition often have extra expenses that are not met. A Special Needs Trust is a Trust that considers federal and state rules and can provide supplemental funds for a disabled person, without removing eligibility for government assistance. The Trust could be funded now, or it could be funded as a Testamentary Trust via the future Probate of a Will. Recently, the federal A.B.L.E. Act allows bank and investment accounts to be established which operate in a similar manner to a Special Needs Trust. Pennsylvania, in turn, has adopted its own A.B.L.E. act. This program is administered by the Pennsylvania Treasurers' office, and excellent resources and web links are available at the PA Treasurer's Office, as well as the National ABLE Center.