A trust is a multifunctional instrument used for several purposes. To use a metaphor, it is like an intelligent cardboard box; you tell it what to do and it does it for everything you put inside. It is different from a will because a will provides a direction for the planned distribution of assets upon death. Upon death, those assets must get re-titled to whomever you directed them to. A trust is different because it can provide a direction for the planned distribution of assets and provides for the re-titling of those assets into the trust immediately. Thus, because the assets are already in the trust, the trust can transfer the assets upon the triggering of some event. Because the person creating the trust has already proved that was his intention (to put the assets in the trust) he does not have to prove the contents of the trust (like a will). Thus, there is no probate. In addition, a trust can be created for other uses such as a special needs trust or income only trust.
The trust can be either a revocable or irrevocable trust. A revocable trust means that the person who created the trust (grantor) holds a discretionary interest in the trust after it is created. A discretionary interest means the grantor can direct how he would like the assets in the trust be invested/gifted/spent until the triggering event (which is usually death). An irrevocable trust means the grantor is giving up control and has no discretionary interest until the triggering event occurs. You’re probably asking yourself ‘why in the world would I want an irrevocable trust?’ Well, in the world of estate planning and Medicaid Planning, there are plenty of reasons that make common sense.
Of ten there are different types of trusts created for different purposes. To boil the reason of why you would have a revocable trust versus an irrevocable trust into one sentence is almost impossible. However, most people will have an irrevocable trust created when they are trying to keep the benefits those assets give them without disqualifying themselves from receiving benefits those same assets will prevent them from having. Huh? To illustrate, there two kinds of trusts I will explain in more detail under Special Needs Trust and Income Only Trust.
Trusts can have other valuable uses as well. Often, revocable trusts are created as part of an estate plan that minimizes the impact of inheritance and/or estate taxes levied by the Federal Government. Revocable trusts can also be created to prevent the probate of property owned in various states. Probating assets is generally undesirable because it is a public process that can be result in litigation. Instead, the property will be owned within the trust and the transfer of the property can take place by proof (death certificate and certificate of authority) of the triggering event (usually death) as specified in the trust.
Special Needs Trusts
In essence, a Special Needs Trust is an instrument created to protect the assets of someone who is disabled and is/will be receiving public assistance. By placing the assets in this trust, the disabled person can still receive the benefits of those assets and still maintain eligibility for public assistance.
The special needs trust is usually created by one of two persons. In the first instance, the parents of a disabled child (usually called third party special needs trust) might incorporate a special needs trust into their estate plan that automatically places the inheritance their disabled child would receive into the special needs trust. In the second instance, the disabled person might create the special needs trust themselves upon receiving a gift, inheritance, or personal injury award that might other otherwise disqualify them from receiving public assistance.
The special needs trust is an irrevocable trust, so the creator has no control over it and the disabled person has no discretionary control. Instead, a trustee has discretionary control over the assets and must use sound fiduciary duty to utilize assets in the trust when they are necessary. Because the benefactor of the trust is disabled, they are usually on some type of public assistance that they would normally be disqualified from receiving if they had control over assets. By placing the assets in an irrevocable trust, the child or disabled person retains the benefits of the trust without disqualifying themselves from public assistance.
A special needs trust works great for Medicaid Planning purposes because the beneficiary is not considered to own the assets in the trust. Thus, it is usually not a disqualifying event for Medicaid eligibility purposes.
