When you hear that someone has a trust, or a trust fund, it can mean many different things. There are different types trusts that provide different protections and functions. The most common trust we draft for our clients is a revocable trust.
How does a revocable trust work? A trust is like a treasure chest with certain rules that restrict withdrawals from it. You place assets into the treasure chest, preferably during your lifetime if you want to avoid probate. The trustee then manages the assets placed into the trust. During your lifetime, you are the trustee and beneficiary of the trust, so you retain complete control over your assets. No separate trust tax return is required.
Once you pass away, the trust becomes irrevocable, meaning that the terms of the trust cannot be changed, with some minor exceptions. Your named successor trustee then manages the assets in the trust for your beneficiaries. The trustee can make distributions to your beneficiaries for health, education, maintenance, and support. If your beneficiaries are young, susceptible to creditors, or struggling with drug or gambling addiction, the trustee can hold the money in trust until the beneficiary is capable of managing it on their own. Once the beneficiary has reached the maturity level required for an outright distribution, they can request the remainder of their share in a lump sum. After all the money has been distributed, the trust terminates.
Another benefit of executing a trust is privacy. If you leave all your assets through your Will, the probate process is a public proceeding, meaning everyone can see what assets were left to each beneficiary, or if anyone was specifically disinherited. However, a trust is a private document. Who gets what and when stays between you, the trustee, and the beneficiaries.
What does this type of revocable trust NOT do? This trust will not eliminate estate taxes. The current Massachusetts estate tax exemption amount is one million dollars. This means that your estate will be taxed if at death your assets are more than one million, regardless of whether they are titled in your name individually, or in the name of your revocable trust.
Additionally, this trust will not protect from MassHealth long term care costs. The rule of thumb is that if you can reach it, MassHealth can reach it. Since the trust is revocable during your lifetime, you can reach all assets in the trust, and so can MassHealth. So, if you would like to protect, for example, your home from MassHealth, there are other types of trusts that may better serve this goal.
A revocable trust is a great estate planning tool for certain clients. If you would like to avoid probate and make sure your assets are managed properly for your young children, this may be the right option for you.