Trusts

A trust is a relationship recognized in the law whereby an individual sets aside something of value for another and designates someone to oversee or administer the asset for the benefit of another. For estate planning purposes, a trust is typically a written document wherein a “grantor” (the person setting up a trust), sets forth the terms under which an asset (that is typically transferred to the trust by the grantor) is administered by a trustee (the person who oversees the trust) for the benefit of the beneficiary (the person who benefits from the trust).

The following outlines many of the critical aspects of trusts and is designed to help answer your questions:

Primary Persons Involved with Trust

There are three primary roles with a Trust. The Grantor is the person who establishes the Trust. The Trustee is the person who oversees the trust, which means that the Trustee follows the written Trust document for direction in handling the assets of the trust, and typical responsibilities include investing the assets and distributing the assets in accordance with the Trust’s terms. The Beneficiary is the person who benefits from the trust, its assets and its administration. The Trustee has a fiduciary obligation, or a duty of trust and loyalty to the Beneficiary.

Revocable Trust

A Revocable Trust is a trust that is established during a person’s lifetime which the grantor can modify or cancel at any time. It can be used to hold title to assets that a person does not wish to hold in his own name. A Revocable Trust can be used for privacy reasons. For instance, a Will is admitted to the public record, while a trust is not. A Revocable Trust can also be used to allow a family member to serve as trustee and manage assets on behalf of the grantor.

A Revocable Trust Will not avoid any tax liability. For tax purposes, assets in a Revocable Trust are still considered to be the property of the person who created the trust.

Setting up Revocable Trusts to Avoid Probate 

Probate refers to the administration of the estate of a person who dies with a Will. In many states, probate requires extensive court oversight and as a result is very cumbersome and expensive. Therefore, revocable trusts are often used to avoid the probate process. In Pennsylvania and New Jersey, the probate process is efficient compared to other states. Usually one visit to the Register of Wills (or Surrogate in NJ) will be all that is needed.

Importantly, a Revocable Trust Will not avoid taxes and will not avoid most steps in the administration process (settling debts, notifying beneficiaries, accounting, etc.). Therefore, a Revocable Trust is usually needed if the only purpose is to avoid probate. There are circumstances where a revocable trust does make sense in Pennsylvania and New Jersey, such as where privacy is needed, where there are asset management concerns, where there is out-of-state real property or where an individual’s competency is in question.

Irrevocable Trust

An Irrevocable Trust is a trust in which the grantor gives up the right to modify or cancel the trust. Irrevocable Trusts are used primarily for tax planning purposes. If an irrevocable trust is drafted properly, it may “remove” assets from a person’s estate for tax purposes, and the assets in the trust may escape any gift tax. A common technique is to place a life insurance policy into an irrevocable life insurance trust, and pay the premiums using the annual gift tax exclusion. If properly planned and administered, this can result in a large payment free from estate tax upon the death of the grantor.

Qualified Personal Residence Trust

A Qualified Personal Residence Trust, or QPRT, is a trust that allows the grantor to make a gift of a home to his beneficiaries and minimizes the gift tax paid on the transfer. Essentially, the trust will hold the home for the benefit of the grantor for a certain period of time before the home is released to the beneficiaries. This arrangement diminishes the value of the home for gift tax purposes and minimizes the tax paid. After the transfer the grantor will have to move out or pay rent to his beneficiaries in order to ensure that the transaction is respected.

Special Needs Trust

In order to be eligible for some public benefits, such as Medicaid and Supplemental Security Income (SSI), a person cannot own more than a minimal amount of assets.

For a person eligible for benefits, receipt of a gift, an inheritance, or the proceeds of a lawsuit can disqualify that person. One way to avoid disqualification is to direct the money into a Special Needs Trust (also called a Supplemental Needs Trust).

A Special Needs Trust is drafted so that the funds can only be spent on things that the government will not cover, such as supplemental needs. This will allow the beneficiary to keep his or her benefits while also receiving the benefit of the additional funds.

Consideration of these issues is essential for families with disabled spouses, children or other beneficiaries who may be eligible for government benefits.