A Trust is a legal arrangement that governs how your assets are managed and distributed. You, the Grantor, transfer title to certain property to another party, known as the Trustee, who holds the property for your benefit or the benefit of others, known as Beneficiaries. You can create a trust during your lifetime, known as a Living Trust, or in your Will, known as a Testamentary Trust.
Trusts can be used to meet a variety of needs, from tax planning, to disability planning, to asset management, to asset protection, to providing for persons who have special needs.
The terms and conditions under which the property is to be held by the Trustee are specified in the written document known as a Trust Agreement or as stated in your Will. Thus, Trusts are creatures of “contract.” The Trustee may be an individual or an institution such as a bank or Trust Company. Most commonly, if you create a Living Trust, you will serve as your own Grantor, Trustee, and Beneficiary of your own Trust.
WHY CREATE A TRUST?
A Trust can privately accomplish your personal and financial objectives, including: Asset Consolidation and continuity in the management of financial affairs; control; Probate Avoidance; and Tax Planning. However, not all trusts will accomplish all of these goals, and sometimes, use of a trust will frustrate certain goals you may have such as short-range Medicaid Planning goals. Once you determine what your goals are, you should talk to a lawyer about how to achieve them.
REVOCABLE VERSUS IRREVOCABLE TRUSTS
Trusts can be written so that they are either permanent (irrevocable) or changeable (revocable). Often, your needs and your goals will dictate which direction you go in establishing your trust.
Irrevocable – If the purpose of the Trust is to protect assets or to secure present or future tax benefits, then the Trust will likely be irrevocable. When you create an irrevocable Trust, you are essentially giving away all rights to the property you place in the Trust, at least to the extent of the Trust Agreement. Asset protection generally requires that you give away your interest in the portion of your property you want protected. While this may (or may not) trigger a gift tax, putting your assets into a trust will help you avoid inheritance taxes and creditor claims. If you plan early enough, it may also shelter assets from Medicaid claims. Trusts used as part of a Medicaid plan are complex and must be carefully drafted.
Revocable (most Living Trusts) – If the purpose of creating a Trust is simply to avoid probate and provide for the possible loss of capacity, then the Trust should be revocable or changeable. Under a revocable Trust, the Grantor retains the right to change the terms of the Trust or terminate it at any time prior death. Although a revocable trust may streamline the probate process, you should still execute a “Pour-over Will” to move any left over assets into the trust at your death. In Tennessee and Georgia, probate is generally easy and inexpensive so you should anticipate that your Pour-over Will will be probated.
TRUST ARE USED TO:
Among other uses, Irrevocable Trusts, e.g. Insurance Trusts, can be used to minimize or eliminate Estate taxes. Trusts can be used to protect assets until minors are old enough to use them wisely. Spendthrift and Asset Protection Trusts can shield assets from creditors. Special Needs Trusts can shield assets and assist Elders and disabled individuals in qualifying for Medicaid and Supplemental Security Income. SNTs may be self-settled (meaning that the potential Medicaid/SSI applicant’s own money funds the trust) or they may be funded by a third party (e.g., a parent or grandparent). SNTs let you supplement Medicaid during the life of the beneficiary. Trusts can limit or control how assets are used after the grantor’s death (e.g., charitable trusts, spendthrift trusts).