CT Probate Guide: The Testamentary and Living Trust
Why Trusts may be of Value
Trusts have generally been used to help people who fall into two basic categories: people who need financial assistance and people who are unable to manage their own money properly. Trusts have been used to benefit children, those over the age of eighteen who are unable to manage large sums of money, those with disabilities who aren't able to manage their own affairs and those with substantial creditors. In addition, trusts are commonly employed as devices to shield a person's assets from unnecessary taxation or court supervision. The trustee is normally directed to pay income to one or more beneficiaries and is given discretion to distribute principal, usually subject to certain stated standards. The payment of income may also be discretionary. The trust, therefore, allows the settlor (even after his or her death) to distribute assets to favored parties and to control those assets “from the grave” through the trustee whom he or she has appointed. For example, an individual who has children from a prior marriage might establish a trust for his or her spouse to ensure that the individual's children receive the trust property after the spouse's death. If properly created, a “spendthrift trust” (see definition in “Glossary of Terms”) may be crafted to shelter assets from the reach of the beneficiaries' creditors, including the government.
One of the greatest advantages of the trust is its ability to shelter certain assets from estate taxes at the time of the settlor's death. The Internal Revenue Service taxes both lifetime gifts and property passing after death, if certain exemptions are exceeded. The subject is a complicated one, but the reader should be aware of the fact that gifts or bequests between spouses are normally exempt. As long as both spouses are still living and competent, the proper utilization of a trust may shelter additional assets from taxation if the trust is drafted properly. It does not matter whether the trust is a testamentary or living trust – the potential tax benefits are identical. The use of an irrevocable life insurance trust or a charitable remainder trust may also offer potentially attractive tax benefits.
Comparison of Testamentary and Living Trusts
Both testamentary and living trusts can play a viable role in professional estate planning. Each device should be analyzed to determine the best course for an individual. What follows is a summary of the most common benefits and detriments mentioned by objective practitioners in the field.
May a testamentary or living trust be modified or revoked?
A testamentary trust is always revocable and modifiable as long as the testator is living and competent. Naturally, it becomes irrevocable when the testator dies. A living trust, as the term is commonly used, is ordinarily revocable, although certain types of trusts established during the settlor's life may be irrevocable, usually for tax reasons. For example, a typical life insurance trust (and often a charitable remainder trust) is irrevocable upon formation.
Can a testamentary or living trust protect trust assets from creditors?
While some may argue that the assets in a living trust can be insulated from the claims of the settlor's creditors, there are important exceptions. The creditors of a settlor who has created a revocable, funded living trust (the most common of all) and named himself or herself as trustee can and do reach the settlor's assets. That applies also to a settlor or his or her spouse who needs long term care (whether at home or in a nursing home) and submits an application for Title 19 Medicaid assistance. Under current federal and state law, the revocable trust assets will be deemed available to the settlor or his or her spouse and could result in denial of Title 19 benefits. On the other hand, properly drafted spendthrift trusts, whether testamentary or inter vivos, can shield trust assets from the creditors of beneficiaries. In addition, the beneficiary of a properly drafted special needs trust would be eligible for Title 19 assistance, since the assets within such a trust would not be deemed available to the beneficiary. This area of the law is extremely technical and fraught with potential pitfalls. An attorney with expertise in Title 19 law should always be consulted beforehand.
If you have any questions or would like to speak to a probate law attorney about a will, trust, or estate matter, please contact the experienced attorneys at Maya Murphy, P.C. at (203) 221-3100 or at JMaya@Mayalaw.com.
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Source: Probate Court User Guide: Understanding Trusts, (2015), http://www.ctprobate.gov/Documents/User%20Guide%20-%20Understanding%20Trusts.pdf
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