Estate Planning


A trust is a legal arrangement through which a trustee (one or more individuals and/or institutions, such as a bank or trust company) acts as fiduciary and holds legal title to property for the benefit of another person, called a “beneficiary.”  The rules or instructions under which the trustee operates are set out in the trust instrument.  Trusts often have two (or more) sets of beneficiaries; one or more persons who currently benefit and another group – often children – who begin to benefit only after the first group has died.  The first are often called “life beneficiaries” and the second “remaindermen.”

There are several commonly cited advantages of a trust.  Best-known is the advantage of avoiding probate.  Property held in a trust created and funded during the life of the grantor passes by the terms of the trust.  This can save time and money for the beneficiaries.

Another advantage of trusts is their continuing effectiveness if the grantor becomes incapacitated, so that it is not necessary to establish a court-supervised conservatorship.  Certain trusts can also result in estate tax advantages both for the grantor and the beneficiary.  These are often referred to as “credit shelter” trusts.  Trusts also may be used to protect property from creditors or to help the grantor qualify for Medicaid.  Unlike wills, trusts are private documents and only those individuals with a direct interest in the trust need know of trust assets and distribution.

Revocable Trusts
Revocable trusts are often referred to as “living” trusts.  The grantor of a revocable trust maintains complete control over the trust and may amend, revoke, or terminate the trust during his lifetime.  This means that the grantor can take assets from, or put assets into, the trust or change the trust’s terms.  Thus, the grantor is able to reap the benefits of the trust arrangement while maintaining control.

Revocable trusts are generally used for the following purposes:

  • Probate avoidance.  At the death of the person who created the trust, the “grantor” or “settlor,” the trust’s property passes to whoever is named in the trust.  It does not come under the jurisdiction of the probate court and its distribution does not depend on the probate process.
  • Tax planning.  Although the assets of a revocable trust will be included in the grantor’s gross estate for estate tax purposes, the trust can be drafted so that the assets will not be included in the estates of the beneficiaries, thus avoiding transfer taxes when the beneficiaries die.
  • Asset management.  The trust permits the named trustee to administer, manage, and invest the trust property for the benefit of the beneficiaries.

Irrevocable Trusts
An irrevocable trust cannot be changed or amended by the grantor.  A typical aim of irrevocable trust planning is estate tax reduction.  Depending on the specific type of irrevocable trust, one might use such planning to do any of the following:

  • take advantage of the gift tax annual exclusion,
  • leverage the value of the unified credit against the estate and gift tax,
  • freeze or otherwise limit the estate tax value of an asset,
  • transfer future asset appreciation to later generations, or
  • create a non-taxed source of liquidity using life insurance products.

Testamentary Trusts
A testamentary trust is a trust created by a will.  Such a trust is not effective until the will of the decedent is probated, the trustee is qualified by the court, and assets are transferred to the trustee from the estate.  Although a testamentary trust will not avoid the need for probate and is a public document since it is a part of the will, it can be useful in accomplishing other estate planning goals.  For instance, the testamentary trust can be used to reduce estate taxes or provide for the care of a disabled child.

Supplemental Needs Trusts
A supplemental needs trust enables the grantor to provide for the continuing care of a disabled spouse, child, relative, or friend.  The beneficiary of a well-drafted supplemental needs trust will have access to the trust assets for purposes other than those provided by public benefits programs.  In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid and low-income housing.  A supplemental needs trust can be created by the grantor during life or be part of a will.