By Attorney Maria Baler (November 2010)

Although Trusts are commonly used in estate planning, these documents are confusing to many. To shed some light on this subject, the next three articles in this series will focus on Trusts. In this article we will discuss the basics and importance of a Revocable Living Trust. Next month, we will discuss the use of Irrevocable Trusts. Finally, since family members are often named to serve as trustees, we will conclude with an article discussing the responsibilities of the trustee.

A Trust is a legal document created to accomplish certain family, tax, or other financial objectives. It is helpful to think of a Trust as a private agreement between the person who creates the Trust (called the “Donor” or “Grantor”) and the person the Donor designates to manage the Trust assets (called the “trustee”) for the benefit of the Trust’s “beneficiaries.” A living trust, sometimes called an inter vivos trust, is a Trust that exists and can own assets during the Donor’s lifetime. A testamentary trust is one created by the Donor’s Will and takes effect only after the Donor’s death. A revocable trust can be changed or terminated by the Donor after it is created. Revocable Living Trusts are used frequently, but that does not mean everyone needs one. A Revocable Living Trust could be a good estate planning tool for you if it helps you achieve your goals.

Here are five reasons to use a Revocable Living Trust as a part of your estate plan.

1. You have young children. In most families, parents wish to leave their assets to their children after the death of both parents. However, if both parents die while a child is still young, the child will have full control over and access to his inheritance at age 18. Most children do not have the experience to wisely manage large sums of money or real estate at age 18. For this reason, many parents with young children create a Revocable Living Trust as a part of their estate plan. Such a Trust typically provides that after both parents’ deaths, the child’s inheritance will be held in trust for the child’s benefit and managed by a more experienced trustee. The Trust document will specify the age or ages at which the child would be entitled to receive distributions from the Trust. While a child’s inheritance is held in Trust, the Trust will permit the trustee to use the Trust funds for the child’s benefit, including paying for the child’s education, helping the child to buy a house or start a business, or for any other reason the Donor/parent may specify. Holding assets in trust for a young child will protect the child from making unwise decisions and may also offer protection from a child’s creditors.

2. You want to minimize the time and expense involved in settling your estate and preserve your privacy. A probate court proceeding, often called “probate,” is required to transfer assets that are owned by a deceased person at death to his or her heirs. In Massachusetts, the probate process can take a year or more to complete and has been slowed in recent years by budget cuts which have reduced the number of court personnel. Probate can be expensive due to the court filing fees and attorneys’ fees involved in probating an estate. Probate is also a public process, as the probate court file, including a list of the assets in the estate and their value, the expenses, debts and taxes that are paid by the estate, and to whom and in what amounts the estate assets are distributed, are all public record. Assets owned by a living Trust at the death of the Donor will avoid probate and the related delay and expense of a probate proceeding. Living Trusts are also private documents, which are not filed with the Court or made a part of the public record, maintaining the privacy of the Donor and the beneficiaries.

3. You want to reduce estate taxes. Estate taxes may be payable at death if the value of the assets (including life insurance, retirement accounts, real estate, investments, cash, etc.) owned by the deceased person exceeds $1 million. A certain type of revocable living Trust, called a “credit shelter trust,” can be used by married couples to reduce the estate tax payable after both spouses’ deaths. This type of revocable living Trust can maximize the value of the assets passing to children or other heirs provided the Trust is properly created and funded prior to death.

4. You have a child with special needs. Families who have a child with special needs must have a plan in place to ensure the child’s needs will be met in the future. It may be important to ensure assets will be managed for the child’s benefit for her entire lifetime as the child may never be capable of managing assets. Further, many people with special needs are eligible for public benefits that provide medical care or income for food and shelter expenses. Qualification for those benefits can be adversely affected if the special needs child receives an inheritance from a parent. It is not necessary to disinherit a special needs child to protect her eligibility for public benefits. Trusts can be used very effectively to maintain a special needs child’s eligibility for benefits after the parents’ deaths. Such a “Special” or “Supplemental Needs” Trust can also provide long-term management of the child’s inheritance and additional resources to meet the child’s needs that are not addressed by the public benefits she may be eligible to receive. These types of Trusts provide an important safety net for a child with special needs that does not depend on the goodwill or good fortune of siblings or other family members.

5. You want to ensure that your assets are properly managed for your benefit if you become incapacitated. An effective estate plan includes planning for how you will be cared for and how decisions will be made in the event you become incapacitated. By creating and funding a Revocable Living Trust of which you are the beneficiary during your lifetime, you provide a mechanism for your assets to be managed and used for your benefit during any period of incapacity that occurs during your lifetime by a Trustee that you choose. This type of planning may avoid the need for a guardianship or conservatorship proceeding in the Probate Court while maintaining your privacy.

Attorney Maria Baler is an estate planning attorney and a partner with the Dedham firm Samuel, Sayward & Baler LLC. She is also a director of the Massachusetts Chapter of the National Academy of Elder Law Attorneys (MassNAELA). For more information, visit www.ssbllc.com.