The Danger with Trusts

A trust can be a very useful financial device, when used properly. Some trusts have uses that the average person (Or even the average attorney) would not realize. Nevertheless, if you’re thinking about establishing a trust, be careful. Trusts, like wills, are the sorts of things that some people will inevitably try to draft and form themselves, in an effort to save money. The problem is, the danger isn’t just in setting it up. Trusts, just like any financial tool, can be the basis for scams and theft.

Actually, setting up a trust is fairly easy, unlike a will. As we already discussed, in our article about wills, “intent,” when it comes to whether or not a will is valid, is irrelevant. Specifically, if you draft a will that is very clear about your intent as to how your estate is to be distributed, upon your death, but the will is found to be invalid, because it was not drafted and executed according to Massachusetts probate law, the will – along with your intent – is still thrown aside. Notice that this is the case, even when your intent is very, very clear; however, when it comes to the question of whether or not a trust was formed, Massachusetts law does take “intent” into consideration. In fact, it is one of the few things Massachusetts’ law does consider, in terms of determining whether or not a valid trust has been formed.

Where “intent” can get you into trouble, as far as trusts are concerned, is that once a trust is set up, you might not be able to turn around and say – I want my assets back! This can lead to some really sticky and unfortunate situations. We’ve seen situations where a person sets up a trust, and – in an effort to protect his or her assets from creditors – the person sets up an irrevocable trust, with a family member as the trustee, usually a family member the person thinks he or she can “trust” (no pun intended) or control, only to find out later that he or she cannot control the person. We’ve also seen situations where a person sets up a trust, again, with a family member as trustee, and the trustee empties out all of the assets, usually a bank account. Of course the person runs off to the bank and says, hey this family member took all of my money, to which the bank says, “yes, but he/she was the trustee …we can’t help you …this is a civil matter.”

The examples just given are only a few. We could fill up pages and pages, with examples of what can happen when a person starts setting up trusts, without really understanding how each trust fits into their overall estate plan. If you’re thinking about setting up a trust, or making any adjustments to your estate plan, we can help you. In addition to drafting and forming the trust for you, we can help you understand how it fits in to your overall estate plan, and also inform you of other options available to you that you might not even be aware exist.

Call us today! Your initial consultation is absolutely free and – as always – is one-hundred percent confidential!

 

What is a Trust?

A trust is a financial tool used for primarily two purposes – making gifts and managing assets. A trust is made up of various parts and positions. The basic “parts” of a trust are equitable title, legal title, and the corpus. The basic “positions” are the settlor, the trustee, and the beneficiary. First, the settlor (or grantor) delivers the corpus (trust property) to the trustee. Once this happens, the trustee holds legal title to the trust assets (the corpus), but the trustee also has the burdens of ownership. The beneficiary holds equitable title (rather than legal title) to the trust assets, but the beneficiary also enjoys the benefits of ownership.

Confused yet? Well, simplifying it, think of it this way. A person has some property. That person declares a trust and delivers that property to the trustee, while naming a beneficiary. A trust is born, and it is the trustee’s obligation to hold that property for the benefit of the beneficiary. If you are unfamiliar with the basic attributes of a trust, an example might help clarify things a bit.

Imagine that a person, we’ll call Tex, has a million dollars. Tex is elderly, and is dying. Tex is not married and wants to make sure that his daughter, Anna, is cared for, for the rest of her life. Tex could just leave Anna the million, but he is afraid that she will simply spend it all in a year or two and have nothing left. Instead, Tex establishes a trust, and names a bank, we’ll call Big Bank, trustee. Tex gives the million dollars to Big Bank, as trustee, and big bank invests the money. When Anna turns 18, Big Bank takes all of the profits earned on its investments of the million dollars and gives it to Anna. Each year, for her entire life, Anna gets this money paid to her. Upon her death, Tex specified that the corpus be paid to her issue (her heirs).

At the outset of this article we said that a trust is a tool primarily used to make gifts and to manage assets. In the example we just provided, you can see how Tex’s trust was used for both of these purposes. First, it was used to make gifts to Anna, Tex’s daughter. Second, it was used to manage Tex’s assets, by controlling them and their dispensation, even after he no longer owned those assets.

In reality, trusts can be far more complex than the example just given. For example, a corporation can be named as a trustee of a trust. Trusts can also be established for charitable purposes. Some trusts can include what is called a spendthrift clause, which prevents the beneficiary’s creditors from ever taking the trust assets to pay the beneficiary’s creditors. In other cases, the trustee and beneficiary can be one in the same, provided there is either another trustee or beneficiary. There are even trusts in Massachusetts, called nominee trusts, that are not controlled by the trustees, but by the beneficiaries!

The point is, the definition provided above is meant only to provide you with a very basic idea of what a trust actually is. At the same time, the definition and example provided above are also meant to illustrate just how useful trusts can be. If you think your estate plan would benefit from the implementation of one or more trusts, we can assit you. We would be happy to discuss all of your options with you, and even provide you with some options you may not have considered.

If you have any questions, call us today. We are always happy to answer your questions, and your initial consultation is absolutely free and – as always is one-hundred percent confidential! In the meantime, if you wish to learn more about trusts, we invite you to continue reading the next article below.

 

What are the Different Types of Trusts available in Massachusetts?

If you know anything about trusts, even just a little, you’ve probably heard of many different types of trusts. For example, living trusts, testamentary trusts, inter-vivos trusts, spendthrift trusts, revocable trusts, realty trusts, irrevocable trusts, and nominee trusts are some of the various trust nomenclature you’ve probably heard thrown around. What are all of these trusts? More importantly, what are the different types of trusts available to those of us living in the state of Massachusetts?

We’re going to help you understand each and every one of these different types of trusts, and we’re going to do this by breaking it all down for you. it isn’t as complicated as you might think. First of all, realize that some of the trust names mentioned above are simply duplicate names for the same type of trust. For example, a living trust and an inter-vivos trust are exactly the same thing. Inter vivos means “between the living” or “between living people.” Thus, an inter-vivos trust is another way of saying a living trust. A living trust means a trust created while you are still alive. It is meant to differentiate between a testamentary trust, or a trust established by your will, after your death.

There are two types of trusts, in Massachusetts, revocable trusts and Irrevocable trusts. Whether a trust is testamentary or inter vivos is secondary to the question of whether the trust is revocable or not. When you think of trusts this way, in terms of whether or not they are revocable, it provides a much more useful starting point. Having said this, you should understand that there are different ways of classifying trusts. For example, trusts can be classified based on whether or not the settlor was alive when the trust was formed, in which case a trust is either testamentary or inter vivos. The problem with this classification is that inter vivos trusts is the term used interchangeably with a revocable trust. Trusts can also be classified according to the “intent” of the settlor. For example, we can refer to express trusts (where the settlor explicitly creates a trust), resulting trusts (where the settlor did not expressly create a trust, but examination of his/her intent indicates this was his/her desire), and constructive trusts (where the court delcares a trust exists to prevent injustice).

Do not allow these different ways of classifying trusts confuse you. As we stated above, we believe the most useful way and – perhaps – the most proper way to classify the different trusts allowed in Massachusetts, is according to their revocability. Again, under this classification method there are only two types of trusts: revocable and irrevocable trusts. Both revocable and irrevocable trusts can also be additionally classified with some of the other “classification” methods above. For example, a trust can be an irrevocable testamentary trust or a revocable express trust, etc …

So, what is a revocable trust? A revocable trust is sometimes called a living trust, which – we’ve already learned – is itself sometimes called an inter vivos trust. Thus, a “revocable trust” is the same thing as an “inter vivos trust” and a “living trust.” Just like that, we have combined what most people might think are three different trusts into a single one. Whatever you call it, it is simply a type of trust that can be changed at any time. If you have second thoughts about a provision in the trust or change your mind about who should be a beneficiary or trustee of the trust, then you can modify the terms of the trust through what is called a trust amendment. You might even decide that you don’t like anything about the trust at all, and – if this were to happen – you can revoke the entire trust agreement.

Of course, in order to amend or revoke the trust, you must be alive. This is why these trusts are called living trusts or inter vivos trusts, because they all refer to a trust where the settlor or grantor (the person putting the property or corpus into the trust) is still alive. If you think about it, it is all about control. Trusts are useful tools, but they typically involve delivering your assets to the trust – over which a trustee has control. Obviously, it became desirable to be able to create a trust, but still retain a certain amount of control over the assets the person placed therein. One way to do this would be for the settlor to name himself/herself trustee of the trust. Of course, this raised issues as to wether such a trust was really a trust at all. These issues eventually led to the creation of the revocable trust (in fact, with revocable trusts, it is now very common for the settlor to be a named trustee).

What is an irrevocable trust? An irrevocable trust is a trust that cannot be revoked, obviously, but there is more. It cannot simply be amended at will either. Unlike a revocable trust, which – as we just learned – can be changed pretty much as you like at will, an irrevocable trust cannot be so amended. Irrevocable trusts offer benefits not available through the use of a revocable trust. This fact goes hand in hand with the next question.

Why would anyone want to establish an irrevocable trust, if alive, when he or she could have established a revocable trust and – thus – could have retained control over the trust, with the power to amend or revoke the trust at will? Perhaps we answered this question, when we said that irrevocable trusts offer benefits not available through the use of a revocable trust. Irrevocable trusts can offer signficiant tax savings and protection from creditors not available through the use of a revocable trust. In the end, it is a matter of give and take. If the settlor retains control over the trust assets, by using a revocable trust, then settlor cannot simultaneously claim that the assets are not his or hers. In other words, you cannot have your cake and eat it too.

You cannot escape your creditors, by simply putting your assets into a trust, if you continue to either retain control over those assets or retain an interest in those assets. Another way of putting this is that a settlor cannot gain protection from his or her creditors, if the settlor puts his or her assets into a revocable trust. However, if a settlor puts his or her assets into an irrevocable trust, the settlor’s creditors will not be able to access those assets, because the settlor no longer owns them. Of course, it is possible (even probable) for a settlor to establish an irrevocable trust over which he or she retains a certain interest. In this case, the settlor’s creditors will only have access to that portion over which the settlor retains an interest.

But what if the settlor does not act as trustee and the settlor’s only interest in trust income? What about the beneficiary’s interest? Can the beneficiary’s creditors access the trust income or principal to pay for the beneficiary’s debts? What if the trust contains a spendthrift clause, what then?

We realize that we may be leaving you with many questions. If this is the case, that is a good thing. It means that you are truly beginning to see just how potentially useful a trust can be. Unfortunately, when it comes to trust law, as with any complex law, the answering of one question often raises two or three more.

If this article has left you with any questions about trust law, or estate planning, in general, call us today. We are always happy to answer your questions, inform you of all of your options, and even enlighten you as to some options you may have never considered.

Your initial consultation is absolutely free, and – as always – is one-hundred percent confidential! Call us today!