A trust is a legal instrument dating from medieval times, originally based on just that—trusting another person to hold assets and to distribute them. Every type of trust has these elements in common:

  • The party forming a trust (the grantor or settlor)
  • The assets of the trust (sometimes called the subject matter)
  • At least one trustee holding the assets
  • At least one beneficiary for whom the trust is held
  • A declaration of trust—the legal formalities necessary for the trust’s creation

In the simplest example, a grantor creates a declaration of trust and gives assets, typically money or real estate, to the trustee. The trustee keeps them in trust for the beneficiary, and they distribute the assets according to the terms of the declaration. This often means disbursing funds according to a schedule or according to the judgment of the trustee, but a trust declaration can impose many different kinds of requirements. In the meantime, the trustee has a fiduciary duty to the beneficiary. They have to care for the trust assets, investing prudently if appropriate and maintaining any real estate or tangible property.

There are four basic categories of trust, and every trust belongs to two of them:

  • Inter vivos trust, also called a living trust—created during the grantor’s lifetime
  • Testamentary trust—created after the grantor’s death
  • Revocable trust—the terms of the trust allow the grantor to change or dissolve it
  • Irrevocable trust—the grantor cannot change or dissolve it

From these, attorneys have developed dozens of types of trust instruments that can be customized to fit your needs or those of your family. Broadly speaking, they serve to protect assets from two kinds of risks: legal and personal.

Protecting Assets from Legal Exposure

Placing assets in an irrevocable trust is often an excellent way to prevent triggering financial penalties under law. Although this seems sneaky, it is not only lawful but sometimes an essential element in protecting an estate. It is often crucial to show that you—or your intended beneficiaries—do not own certain assets; instead, a trust owns them, and a trustee governs them.

For example, in order to qualify for SSI and Medicaid, a disabled person can only have assets or income below a certain threshold. If they were to receive or inherit money directly, they would no longer be eligible for the programs that fund their medical treatment. A special needs trust, or supplemental needs trust (SNT), can safeguard resources for that person’s use. Although SNTs must be carefully drafted and trustees must work to avoid conflicting with the law, these trusts can provide essential resources for a beneficiary’s life. An SNT can pay for household goods, personal care, utility bills, and other needs that SSI income and Medicaid do not cover—so long as the beneficiary never touches the money.

If you yourself contemplate needing Medicaid—as many of us will—you will need to speak to a Medicaid planning attorney about distributing your assets to qualify under the income threshold. One way to protect them is by creating an irrevocable living trust called a Medicaid asset protection trust or MAPT. If you create this trust at least five years before applying for Medicaid, it can preserve assets for your use and safeguard them for your heirs.

Living trusts are often good ways to avoid the delays and costs of probate after a grantor’s death. After death, assets in an estate have to pass through probate court before the heirs can take legal title. A properly settled trust is not part of the estate and will not have to go through the probate process. Depending on the applicable law, they may also avoid estate taxes. Typical living trusts that estate planners use include:

  • The irrevocable life insurance trust (ILIT)—the trust holds a life insurance policy for the grantor’s beneficiaries
  • The charitable trust—a way to contribute to causes with a minimum of difficulty to the beneficiaries

Protecting Assets from Personal Circumstances

Sometimes you need to protect assets as much from other people as from the law. If you die leaving minor children or grandchildren, who would handle their inheritance for them? How well would they keep it safe from other people in the children’s life? You may have to ask yourself the same question about your grown children or any of your potential heirs. How do you plan your will if one of your loved ones needs help handling money or is involved with untrustworthy people?

Testamentary trusts, as well as living trusts, are useful in these cases. After your death, a trust can protect resources for your minor heirs, retaining them for a specific purpose (such as education) or until they reach a certain age. For older beneficiaries, the “spendthrift trust” is a rather judgmental name for a similar instrument. The trustee of a spendthrift trust has the power to pay only certain necessary expenses for the beneficiary, and the beneficiary cannot sell their own interest in the trust for ready cash. Arrangements like these protect the beneficiaries not only from themselves but from others.

Getting Started with Trusts

Trusts can be very flexible, drafted to serve the particular needs of you and your family. Although some websites offer boilerplate forms for trust creation, these may not work for your situation, leading to legal nullities and costly mistakes. Trust and estate laws differ by state and by circumstance, and for appropriate representation, you should choose an attorney who practices in your state. As New York trust attorneys, we will be glad to talk to you about your planning needs. Call us today at 646-362-8600 to schedule an appointment.