Funding Trusts

There are certain types of trusts that generally must be funded in your lifetime. If those types of trust are not generally funded in your lifetime, then you will have spent unnecessary attorney’s fees on a trust. There are many types of trusts, but this article will focus on the three types of trusts: irrevocable trusts, revocable trusts (also referred to as a living trust) and supplemental/special needs trusts.

An irrevocable trust generally is not revocable. In other words, once the trust is established and funded, it is not revocable. That means you are unable to amend it or revoke it. Irrevocable trusts are most often used when you want to remove an asset from your estate. Doing so is so that your estate is not subject to estate tax for that asset or so that your estate does not have to count it as an asset for purposes of Medical Assistance/Medicaid. When you transfer an asset to an irrevocable trust, you no longer own it. Instead, your irrevocable trust owns it. Therefore, deciding to move an asset out of your estate must be made carefully. There are numerous rules that apply to irrevocable trusts. If the rules are not followed any asset owned by the irrevocable trust will be counted as part of your estate for estate tax purposes and/or Medical Assistance/Medicaid purposes.

A revocable trust is a trust that holds certain assets during your lifetime, and upon your death those assets are distributed according to your wishes as stated in your trust documents. There are many reasons why revocable trusts are used. However, revocable trusts are most often used to lawfully shelter assets that will result in your estate avoiding having to pay estate taxes or minimizing the amount of estate taxes. Revocable trusts are analogous to a rebate offered by a retail store. They are available to anyone, but you have to take steps in order to benefit from the revocable trusts. But, in order for your estate to benefit from the estate tax savings, you must have funded the trust during your lifetime.

A special needs trust (established by the individual who is receiving needs- based government benefits) or supplemental needs trust (established by a third party so that an inheritance or gifts to an individual receiving needs- based government benefits) are trusts that preserves the eligibility of a beneficiary who is receiving needs-based government benefits, such as Medical Assistance. Similar to an irrevocable trusts, there are numerous rules that must be followed in order for the funds in the trusts not be counted as an available asset for Medical Assistance/Medicaid purposes. If those rules are not followed exactly, then the funds in the trust will knock the beneficiary off of the needs-based government benefits until there has been a spenddown of those funds. On the other hand, if the special needs trust or supplemental needs trust has no assets in it, then those trusts will have no benefit to the beneficiary.

Now is the time to double-check and make certain that your trusts are properly funded, and that you are exactly following the rules of each type of trust.

Spangler and de Stefano, PLLP assists business owners and individuals with their estate planning.

The material contained herein is for informational purposes only, and is not intended to create or constitute an attorney-client relationship between Spangler and de Stefano, PLLP and the reader. The information contained herein is not offered as legal advice and should not be construed as legal advice.