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Concerns of the Elderly and the Disabled: Will a Trust Help You?
What is a Trust?A trust is a legal relationship set up by a donor under which one or more persons (the trustee) holds property (often under a written instrument) for the benefit of one or more others (the beneficiary).People are motivated to create trusts for various reasons:
- to provide for management of assets both before and after death as part of a comprehensive estate plan;
- to protect the beneficiary by giving control of the trust fund to the trustee and by limiting the beneficiary's rights to receive income or principal;
- to reduce income or estate taxes by transferring to another both the benefit and tax liability of certain property;
- to assure stand-by protection in the event of illness or disability; and
- to help reduce administration and probate costs and delays at death.
If you are thinking a creating a trust for the benefit of yourself or another, you should ask: What do I hope to accomplish? Will a trust help? How much will it cost to establish and administer such a trust? Whom shall I select as trustee?
When You Should Create a Trust
You should create a trust only when there is a need and when the economic benefit justifies it. You may want to create a trust to meet specific lifetime purposes:
- to relieve yourself of the burdens of asset management;
- to formulate a flexible estate plan;
- to finance a child's education;
- to support an elderly parent;
- to shift income and the tax liability for a limited or extended period of time;
- to make a charitable gift; and
- to avoid disclosure of assets in probate.
You may create a trust that will take effect only after your death to receive your estate, life insurance and other death benefits and to provide for your surviving spouse and inactive trust during your lifetime, funding it with only a nominal amount, and then directing by your will or otherwise that assets be "poured over" into that trust after death. This type of trust is sometimes referred to as a living or inter vivos trust. It may also be accomplished by writing the trust into your will; this is called a testamentary trust and becomes effective after death and after the will is probated.
Educational Trust
The Tax Reform Act of 1986 eliminated a great deal of the tax benefits associated with educational trusts. Prior to the act, a parent could shift income producing assets to the children in trust. Income from those assets would be taxed at the child's lower rate, thus saving the parents considerable tax dollars.
Congress, in the 1986 act has done away with the chief incentive for shifting income to the children. Now, unearned income of a minor child under the age of 14 is taxed at the parent's rates. There is still some advantage to an educational trust, especially if the parent can gift assets that do not create income until the asset is sold or matures. If the sale or maturity of the asset occurs after the child reaches the age of 14, then the proceeds will be taxed in the child's lower tax bracket.
Minor's Trust
One way to help finance a child's education and to obtain some tax benefits is to create a Minor's Trust. Although Massachusetts and most other states have reduced the age of majority to eighteen, the Internal Revenue Code permits a Minor's Trust to continue until the child reaches the age of twenty-one. If such a trust meets the requirements of the Internal Revenue Code, it will afford certain tax advantages:
- $10,000 may be given to such a trust each year with not gift tax liability ($20,000 if one's spouse consents);
- the income from the trust fund will be taxed either to the trust (if it is accumulated) or to the child (if it is distributed and the child is 14 years of age); and
- in most cases, the trust fund will not be included in the estate of the donor for estate tax purposes.
How does this trust help you to accomplish your goals?
It can protect the donor by providing a fund for the payment of tuition and other expenses; the trustee may pay these directly. The income from the fund will be taxed, it at all, at the trust's rates or the child's rates (if over age 14), which presumably will be significantly lower than your rate. The trustee should not pay expenses or obligations which are your legal debts (for example, certain medical expenses of the child, or education expenses which you have contracted to pay), as this will require you to report trust income used for those purposes on your income tax return.
Trusts as Part of Estate Plan
Two trusts that are frequently used as part of a comprehensive estate plan of a family after death are the marital and the residuary (or family) trust. These trusts are usually established under the same estate planning instrument.
Marital Trust
The marital trust is created (either during lifetime or by will) for the exclusive benefit of one's surviving spouse; it qualifies for both the Federal and Massachusetts marital deductions and thus is exempt from estate taxes. The income must be distributed to the surviving spouse for life, and the trustee is often given a discretionary power to use principal for the additional benefit of the surviving spouse. The surviving spouse may also be given rights to receive principal. The surviving spouse may have either two types of interest over the trust principal: a general power or a limited power. A general power of appointment provides the spouse unrestricted power to dispose of the marital trust property during his or her lifetime or by will. A limited power of appointment would limit the class of individuals to whom the surviving spouse could direct distribution at his or her death. Finally, the trust instrument may not provide the surviving spouse the ability to direct distribution of principal, instead directing for specific dispositions of the trust property after the death of the surviving spouse.
Although 100% of the amount in the marital trust will qualify for the Federal marital deduction, for decedents dying prior to July 1, 1994, only one-half of the amount in this trust will qualify for the Massachusetts marital deduction. A recent change in the Massachusetts estate tax law provides that for decedents dying after July 1, 1994, the entire trust will qualify for both Federal and Massachusetts marital deduction. Any property in the marital trust for which a marital deduction is taken will be subject to estate taxes in the surviving spouse's estate when he or she dies.
Family Trust
That property which does not qualify for a marital deduction is often placed in a trust called a family trust. This trust may be administered for the benefit of the entire family, not just the surviving spouse. The trustee may have discretion to distribute income or principal or both to one or more members of the family, and this may be used both as protection for all concerned and as a device to minimize income taxes. On the death of the surviving spouse, the property usually is distributed to the children in equal shares, sometimes when they attain a specific age. If the surviving spouse's powers over use or distribution of the trust principal are appropriately restricted, there will be no estate taxes on the property on the surviving spouse's death.
Who Should Be the Trustee?
One of the most difficult tasks in the creation of a trust is choosing the right trustee or trustees. You may choose as your trustee or trustees an individual and/or a bank authorized to exercise trust powers (a corporate trustee). You should name a successor trustee in case a trustee should cease to serve. What are the factors that you should consider in your choice:
- does the trustee understand what you are trying to accomplish?
- does the trustee have experience:
- as a trustee?
- in making investments?
- in making trust decisions?
- in your kind of situation?
- will the trustee be understanding of the beneficiary's needs?
- is it likely that the trustee will be able to serve and be available for the full term of the trust?
- will the fees be reasonable and affordable to you?
A Trustee's Duties and Fees
The trust itself will prescribe many of the duties of a trustee, and the law provides the rest. The trustee must manage the trust assets, invest them, keep records, prepare tax returns, make regular distributions of income (if required) and account to the beneficiaries. the trustee has a duty of loyalty and good faith. The trustee should be available to the beneficiaries to discuss the management and administration of the trust assets as well as the needs and objectives of the beneficiaries.
In Massachusetts, the reasonableness of the trustee's compensation is ultimately determined by the court. Many corporate trustees (such as banks and trust companies) base their fees on a percentage of the income and a percentage of the principal each year. Banks publish fee schedules which are available to the public on request.
Instructions to Trustee
Remember that you are the author of your trust. You define its terms. You provide the guidelines under which your duties will be performed by the trustee. Your instructions may be simple or complex, but they should be clear. Provision for the distribution or accumulation of income and/or principal, the terms upon which your trust may be amended, who will be your successor trustee and a host of other issues will be essential components of your trust. Each of these decisions can have far-reaching consequences for yourself and your beneficiaries. These decisions should be made only after consultation with your lawyer and should be stated in a will or trust instrument prepared by him or her.
Tax Advantages
There are various types of trusts for you to consider in your individual, family and business planning. There can by significant tax advantages to you, your estate or your beneficiaries with a trust designed specifically for your needs. While not every type of trust is intended to produce a tax benefit, your lawyer can show you how skillful trust planning may help you to save or at least defer the high cost of income, estate or gift taxes. If you already have a trust plan that was drawn some years ago, you should have your lawyer review it, because there have been sweeping changes in the tax laws brought about by the Tax Reform Act of 1976, the Revenue Act of 1978, the Economic Recovery Tax Act of 1981, and the Tax Reform Act of 1986, the Taxpayer Relief Act of 1997, as well as the changes to the Massachusetts Estate Tax Law adopted in 1992. When you create a trust, you should keep in mind that tax treatment is only one factor which should be considered together with your non-tax planning needs.
The Lawyer's Role
Since a trust is part of a comprehensive estate plan, it should be established only after the most careful consideration has been given to its advantages and disadvantages.
A lawyer can help you in several ways. First of all, he or she can help you decide whether a trust will meet your particular estate planning objectives. If it will, he or she can prepare the trust instrument and explain to you how it will operate and what the tax consequences of this trust will be as well as the best way to rearrange your property so that it reaches the trust with a minimum of delay and expense. Your lawyer can help you in your selection of the appropriate trustee, and he or she can review with you the trustee's performance, to insure that the trustee's duties are being properly carried out.
How to Get Help
If you need a lawyer and don't know how to find one, you may contact the Massachusetts Bar Association's Lawyer Referral Service. The number in Boston is (617) 654-0400 or TDD (617) 338-0585. Outside Boston you may call toll-free 1-800-392-6164. There is no charge to call the Lawyer Referral Service, and your first half-hour consultation with an LRS attorney is only $25.
The Massachusetts Bar Association also offers free help through its Dial-a-Lawyer call-in program. On the first Wednesday of each month, from 5:30 to 7:30 p.m., volunteer lawyers are available to answer your basic legal questions by phone. Dial-a-Lawyer may be reached at (617) 338-0610.
Masslawhelp is a public service of the Massachusetts Bar Association.Posted on Apr 27, 2000 |
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