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Demystifying Trusts

There are three types of Trusts: 1) Revocable, which means the Trust can be amended; 2) Irrevocable, which means the Trust cannot be amended; and, 3) Special Needs Trusts, which are Trusts holding assets for the benefit of a person who has special needs, cannot manage money, and/or is disabled.


Revocable Trusts are primarily used to reduce Massachusetts estate taxes for estates valued at two million dollars ($2 million) at the time of death; pay out Trust funds over time to young beneficiaries; and/or, avoid probate.


The most common Irrevocable Trusts I prepare are Trusts designed to “Save the house from the nursing home bill” as people say. This type of Trust has very technical requirements according to MassHealth regulations. There are many other types of Irrevocable Trusts designed to save taxes.


There are two types of Special Needs Trusts, depending on whether the assets are owned by the person who has special needs or owned by someone else; and, Pooled Trusts, which are professionally managed on behalf of those with special needs.


A Trust has three components: (1) A Grantor, who is the owner of the assets; (2) Beneficiaries, the people or charities who will be given the Trust funds at the time stated in the Trust; and, (3) a Trustee, the person who follows the Grantor’s instructions as to how to manage and promptly pay the Trust funds to the designated beneficiaries.


The Trustee can be a family member, friend, or professional. I recommend that the Grantor choose a Trustee who will not mismanage the Trust funds, will follow the Grantor’s instructions, and, will get the job done in timely manner.


I call a Trust a “Piggy Bank.” The Grantor signs the Trust and then funds the Trust by transferring ownership of the assets, such as real estate, bank accounts, and non-retirement investment funds from the Grantor to the Trustee. To me, it feels like dropping the coins into the Piggy Bank. Any assets transferred to a Trust before the Grantor passes away avoids probate. Sometimes the Trust is not funded until the death of the Grantor. To fund a Trust after death, we use a “Pour-over Will.” In this plan, the Will must be probated in order to legally transfer the asset(s) to the Trust after the passing of the Grantor.

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