Trusts

A trust is a legal arrangement where one person sets money aside for the benefit of another. For instance, suppose Sarah wants to make sure her grandchildren get a share of her estate after she dies. She could leave it to them in a will, but that could pose problems. First, if the grandchildren are minors when she passes they will not be able to take possession of the inheritance; the court will appoint a custodian who will manage the money for the grandchildren’s benefit until they reach the age of majority. Additionally, suppose Sarah possesses a large fortune and wants to make sure that the grandchildren spend the money worthwhile things—like a college education or a home—and not simply blow it on frivolities. She also wants it to last as long as possible. If she simply leaves it to them in a will it will be theirs to spend however they like, either immediately or when they reach the age of majority.

To ensure that the money is spent appropriately, Sarah could set up a trust. Sarah (the Settlor) could give the money to her accountant, David (the Trustee) to manage for the benefit of her grandchildren (the Beneficiaries). David would manage the money and distribute it in accordance with the terms of the trust. These terms would cover things like how the money is to be invested, how often distributions are to be made, what the money can be spent on, etc. There may also be a provision that states that at a certain time (say, when all the beneficiaries have reached their thirtieth birthdays) all the money will be distributed and the trust will terminate.

Do I need a trust?

Maybe. A number of celebrity financial gurus have suggested that a trust is an essential part of estate planning and that everyone needs one. They are referring to so-called “living trusts” or “family trusts” where the same person (or people) acts as settlor, trustee, and beneficiary throughout their lifetime; at their death, the trust assets are distributed to the successor beneficiaries and the trust terminates. The main advantage cited for such a setup is that it avoids probate. This is true—any assets owned by the trust (and not the individual) pass by the terms of the trust and do not go through the individual’s estate. In some states, this may be advantageous, but in Pennsylvania, it's a dubious benefit.

Compared with some other states, the probate process in Pennsylvania is relatively simple and straightforward. Your beneficiaries will probably not receive their inheritances much earlier (if at all earlier) than if they had gone through probate, and the trust distribution process can hit the same kinds of snags and delays that probate can. There is also no tax benefit, as trust proceeds are still subject to Pennsylvania inheritance tax, and the trust will not shield your assets from creditors. Trusts are also expensive to set up, and additional expenses may be incurred in transferring assets into the trust’s name, such as attorney’s fees for real estate transfers and deed recording fees. Finally, trusts do not obviate the need for a will. You would still need to provide direction for any assets in your possession at your time of passing that you have not transferred to the trust. Trusts have their place, but unlike wills, they are not essential estate planning tools that everyone needs. Beware of attorneys or financial advisors who claim otherwise.

When is a trust recommended?

There are a number of situations where trusts can be useful. In blended families, wills alone can create situations where the children of one spouse are unintentionally disinherited. For example, suppose Joe and Martha are married and each have adult children from prior marriages. Each spouse executes a will that devises their entire estate to the other spouse, with each spouse's children named as contingent beneficiaries. If Joe dies first, his entire estate would go to Martha, and her entire estate would be divided among her children; Joe's children would get nothing. One possible solution to this problem is for each spouse to include the other's children as contingent beneficiaries, but this but this does not offer certainty, since the surviving spouse can change their will at any time. A trust would enable the couple to provide that the assets be available to the surviving spouse during their lifetime, and be distributed among the children of both once they have both passed.

Trusts have other uses as well. Maybe you would like to provide for a disabled family member but do not wish to jeopardize their eligibility for public assistance. Maybe you own property in another state and want to avoid ancillary administration. Maybe you want to leave money to minor children and ensure it is used for college. Maybe you want to provide for a certain family member but simply don't trust that they'll use the money responsibly. Maybe you have significant wealth and are trying to minimize Federal Inheritance Tax. Any time there is a potentially sticky situation or you want to control how money is used after you've passed, it's worth discussing a trust. The different kinds of trusts available are too numerous to list here, but there is likely an option that will suit your specific needs. It is important, however, that the trust exists to serve a specific purpose, as they are not a one-size-fits-all solution to estate planning issues.

What is a Medicaid Trust?

Medicaid Compliant Trusts are an increasingly popular option for those wishing to qualify for Medicaid assistance for nursing home care while protecting their assets from a mandatory spend-down. Generally speaking, if you need long-term nursing care you do not qualify for Medicaid until you liquidate most assets, and others may be subject to recovery from your estate after you die. A Medicaid Trust can protect these assets, but there are several caveats. The trust limits your ability to control these assets and they will not be available should you need them for other purposes. There is also a five year look back period, so they are not ideal if you anticipate needing long-term care relatively soon. It is because of these and other reasons that Medicaid Trusts are not a miracle cure that will allow you to keep your assets and still be eligible for Medicaid, but a tool that has its advantages and disadvantages. Only a detailed analysis of your goals and financial situation will determine whether a Medicaid Trust is an appropriate solution for you.

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