DO YOU NEED A TRUST?

By Alex Kim, CFP®, MBA, CPA

When it comes to securing your financial future and protecting what matters most, trusts can be like a tailor-made plan for your legacy. Whether you’re safeguarding your family finances, ensuring a loved one’s care, or streamlining the transition of assets, there might be a trust designed to fit your goals. From revocable trusts to irrevocable ones, the world of trusts offers a wide array of options.
And contrary to common myth, trusts are not just for the rich: they can be a great estate planning tool even for people with middle-class wealth or modest means. You don’t have to be “high-net-worth” to benefit from a trust, and its use extends beyond just tax avoidance.

Trusts can be very effective for anyone with complex estate planning needs or anyone looking to personalize his or her estate plan beyond what’s provided by standard beneficiary designations, title registration, or a will. A trust allows you to customize how, when, and to whom your assets are to be distributed, with specifically defined conditions.

Let’s begin our dive into the world of trusts by exploring the distinction between two general categories that are essential to understand: revocable and irrevocable.

In a revocable trust (aka “living trust”), the grantor (the person creating the trust) retains the right to alter or terminate the trust during his or her lifetime, providing greater flexibility and control. The most common purpose for a revocable trust is to proactively plan for incapacity, bypass the lengthy and costly probate court process, and maintain privacy (unlike a will). 

Also, a revocable trust can be especially effective if you own property in multiple states. Without a revocable trust owning those properties, your properties might become subject to probate in each state when you pass away. In many cases, the grantor pays the income taxes created by assets in the trust. In addition, because the grantor still maintains control, a revocable trust does not provide creditor protection or estate tax reduction.

In contrast, with an irrevocable trust, the grantor cannot alter or revoke the trust. Generally, an irrevocable trust offers greater asset protection, eligibility for government programs, and an estate tax shelter for the grantor, but the cost is less flexibility and control. Keep in mind, a revocable trust becomes irrevocable upon the grantor’s death.

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Honing in on a handful of trusts

The trust universe is vast, but let’s focus on the types that might be more relevant to the average person with middle class wealth or modest means. Five varieties fit the bill.

#1: Special Needs Trust. If you are concerned about providing for a disabled family member, a special needs trust is highly worth considering. Why? If you were to leave an inheritance outright to a special needs beneficiary, they could fail to qualify for governmental benefits (such as Supplemental Security Income, Medicaid, and housing benefits). People with disabilities who would otherwise qualify for public benefits might no longer be eligible if they inherit assets outside of a trust, or if they directly receive a settlement related to their disability.

To circumvent this pitfall, a special needs trust provides financial support to the disabled individual while still allowing them to qualify for needs-based public benefits. For example, parents of a child with autism might create and fund this trust to pay for their child’s various expenses — medical equipment, education, home furnishings, etc.

A special needs trust might be revocable or irrevocable.

#2: Minor’s Trust. Trusts come in handy when minor children are involved, since anyone under 18 cannot legally own property. So, when you leave property to a minor, that property must be managed by an adult at least until the child turns 18. To address this, a trust can be set up to specify your intentions and conditions for the child to access the funds. An example is the Section 2503(c) irrevocable trust, which can extend the grantor’s control over the assets until the child reaches 21. If the grantor’s goal is to control the trust assets beyond 21, a Crummey irrevocable trust would be the alternative. 

#3: Spendthrift Trust. A grantor would use this trust to address fears of a spendthrift heir who is not financially responsible and might squander the inherited money. The grantor can design the trust with guardrails, so that the beneficiary receives a monthly stipend or gets access to funds at a certain age or upon the attainment of certain benchmarks, such as college graduation.

Assets in this trust are not subject to the beneficiary’s creditor claims or divorce proceedings.

Spendthrift trusts can be revocable or irrevocable.

#4: Medicaid Asset Protection Trust (MAPT). Someone who doesn’t have long-term care insurance might use a trust to protect assets meant for their heirs and ensure they aren’t taken by a nursing home or Medicaid. Such a trust is irrevocable and designed to protect assets from being counted for Medicaid eligibility. As long as the trust is created and assets transferred five years before the grantor applies for Medicaid long-term care benefits, the trust assets are excluded for Medicaid eligibility purposes. So, after the five-year look-back period, as long as the trust owns the assets, Medicaid cannot count and seize those assets to reimburse long-term care costs. The downside is that, because these are irrevocable trusts, the grantor loses control of the assets.

#5: Qualified Terminable Interest Property (QTIP) Trust. Among many who can benefit, this trust can be especially useful for a blended family. For example, it allows the grantor to provide income to the surviving spouse from his or her current marriage yet maintain control of how the trust’s assets are eventually distributed once the surviving spouse dies. In this case, the trust income is provided to the surviving spouse, but upon the surviving spouse’s death, the principal passes to the grantor’s specified beneficiaries. For instance, Peter and Jane get married, each with children from previous marriages. Peter establishes a trust where Jane is the income beneficiary, allowing her to access income during her lifetime. After her death, however, the remaining assets would then be distributed to Peter’s children from his previous marriage.

As you just saw, this trust comes in handy in second marriages or if you expect your spouse to remarry after you die. The grantor maintains post-mortem control over eventual disposition of the principal after the death of the surviving spouse. For instance, the grantor might wish to provide income for the surviving spouse from trust assets, but upon the surviving spouse’s death, intend for the remaining principal to pass to his or her own kids. If an asset is left outright to the surviving spouse, that surviving spouse gains full control and can designate anyone as beneficiary of the inherited asset, potentially bypassing the grantor’s wishes. Note: QTIP trusts are irrevocable. 

  

Trusts are more than just legal tools — they can be powerful bridges connecting your present plans to your future goals. Whatever your reasons for considering a trust, the right one can make all the difference. Understanding if trusts are right for you and their unique benefits is key to building a solid foundation for your legacy. Seek guidance from your financial planner, tax advisor, and most importantly your estate planning attorney who can serve as the point person in crafting the best strategy. After all, securing your future isn’t just about planning — it’s about peace of mind.


Alex Kim, CFP®,MBA, CPA is an MMBB Financial Planning Specialist with more than 17 years of direct experience in the financial-planning field, and more than 20 years in the financial services industry. He holds the CERTIFIED FINANCIAL PLANNER® certification, along with a CPA. He earned his B.A. in Accounting from Pace University and his MBA from Columbia University.

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