A primer on trusts, part 1

Posted 9/13/15

When I first meet clients and discuss trusts, I often hear remarks such as, “I don’t really know what a trust is.” I thought it might be helpful in this column to discuss very basically what a trust is and why trusts are used in estate …

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A primer on trusts, part 1

Posted

When I first meet clients and discuss trusts, I often hear remarks such as, “I don’t really know what a trust is.” I thought it might be helpful in this column to discuss very basically what a trust is and why trusts are used in estate planning. In my next column, I will discuss different types of trusts and the different purposes they serve.

A trust is a legal arrangement through which one person (or an institution, such as a bank), called a "trustee," holds legal title to property for another person, called a "beneficiary." The rules or instructions under which the trustee operates are set out in a trust agreement. Said differently, a trust is a contract that describes how a trustee, the legal owner of property, must invest, manage and distribute the trust property to and for the benefit of the future recipients of the property, i.e. the beneficiaries. Trusts have an initial set of beneficiaries who will benefit from the trust during their lives and another set—often the children of the initial beneficiaries—who will benefit from the trust assets only after the initial beneficiaries have died. The first group are often called "life beneficiaries" or the “current beneficiaries” and the second the "remaindermen."

There can be several advantages to establishing a trust, depending on your situation. Best-known is the advantage of avoiding probate, the court process by which a deceased person's property is passed to his or her heirs. If a trust is written to terminate at a person’s death, the property in the trust passes immediately to the beneficiaries by the terms of the trust without estate taxes and without probate. This can save time and money for the beneficiaries.  Because the law places significant legal duties on trustees, the law omits the need for judicial oversight of the distribution of trust assets.

Certain trusts can also result in tax advantages both for the trust creator and, sometimes, the beneficiary. For example, life insurance owned by a decedent is subject to federal and Rhode Island estate tax at the decedent’s death. If the ownership of the life insurance policy is placed into the name of an irrevocable life insurance trust, all of the estate tax on the life insurance can be avoided, if proper procedures are followed. Other trusts may be used to protect property from creditors or to help the donor qualify for Medicaid.  Today, many individuals are interested in creating irrevocable trusts to hold assets to avoid having the assets paid a nursing home. When assets are transferred into a trust, a gift typically occurs and the 5 year lookback for Medicaid qualification occurs. A good estate planning attorney will take the time to explain the pros and cons of such planning, including the fact that gifts into irrevocable trusts result in a relinquishment of control over the asset transferred into the trust.

Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust need know about the trust assets and distribution provisions.

Attorney Macrina G. Hjerpe is a partner in the Providence law firm Chace Ruttenberg & Freedman. She practices in the areas of Estate Planning, Probate, Estate Administration, Trust Administration, Trust Litigation, Guardianship, Business Succession Planning, Asset Protection Planning, Elder Law and Estate Litigation.

Macrina G. Hjerpe

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