Trusts
A trust is a legal entity that lets you put conditions on how certain assets are distributed upon your death. Trusts also can help minimize gift and estate taxes.
There are two basic types of trusts: living trusts and testamentary trusts.
Living trusts can be either "revocable" or "irrevocable."
Revocable trusts allow you to retain control of all the assets in the trust, and you are free to revoke or change the terms of the trust at any time.
With irrevocable trusts, the assets in it are no longer yours, and typically you can't make changes without the beneficiary's consent. But the appreciated assets in the trust aren't subject to estate taxes.
Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
Other benefits of trusts include:
With a living trust, you can better protect your family’s financial future should you become incapacitated and when you pass away. A living trust allows you to distribute your assets to whom you want, the way you want, and when you want, without going through probate. By minimizing the costs in time and money to handle your estate, you maximize your beneficiaries’ inheritance.
With a living trust you can:
• Distribute your assets according to your wishes, so the court doesn’t makes these decisions for you.
• Specify how our children’s share of your property will be managed.
• Help you family avoid the hassle and cost of the probate process.
• Transfer management of your property to a successor trustee if you become incapacitated.
Protecting Your Major Assets
The following assets are commonly included in a living trust:
• Real estate
• Financial accounts (savings, brokerage, mutual funds, etc.)
• Stocks or bonds not held in a separate account
• Business interests (LLC membership interests, shares in privately held corporations, partnership interests, sole proprietorships, etc.)
• Intellectual property (patents, copyrights, trademarks)
• Jewelry, antiques, works of art and other personal items
Tax Implications During Your Life
With a Revocable Trust you are still treated as the owner of the property, and can be taxed on that property during your life. With an Irrevocable Trust, you give up ownership of the property and are no longer liable for it and cannot be taxed.
Reasons For Choosing A Revocable Trust vs. An Irrevocable Trust
It depends on the goals you’re trying to establish. For example, if the primary goal is to avoid excessive estate taxes, you will likely want to set up an Irrevocable Trust. If the primary goal is to maintain control of assets in the event of incompetence, you will likely want to set up a Revocable Trust. In addition, the rules of the particular Trust you’re establishing may dictate whether a Trust must be Revocable or Irrevocable. If you’re unsure about the type of Trust you want to establish, you can contact us.
There are many more complicated types of trusts, too, that apply to specific situations. Some include:
Credit shelter trusts/Bypass or AB Trust
With a credit-shelter trust (also called a bypass or family trust), you write a will bequeathing an amount to the trust up to but not exceeding the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. And there's an added bonus: Once money is placed in a bypass trust, it is forever free of estate tax, even if it grows. It helps couples avoid or reduce estate tax by keeping the deceased spouse’s property out of the surviving spouse’s estate. Bypass Trusts limit the amount of federal estate tax that would be payable on the death of the second spouse.
Generation-skipping trusts:
A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior - typically your grandchildren.
Qualified personal residence trusts:
A qualified personal residence trust can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.
Irrevocable life insurance trusts:
An irrevocable life insurance trust can remove your life insurance from your taxable estate, help pay estate costs, and provide your heirs with cash for a variety of purposes. To remove the policy from your estate, you surrender ownership rights, which means you may no longer borrow against it or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die and provide your beneficiaries with tax-free income.
Qualified terminable interest property trusts:
If you're part of a family in which there have been divorces, remarriages, and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property trust. Your surviving spouse will receive income from the trust, and the beneficiaries you specify (e.g., your children from a first marriage) will get the principal or remainder after your spouse dies.
Special Needs (or Supplemental Needs) Trust
A trust established to provide supplemental income for a disabled person who is receiving or may eligible to receive government benefits. Ordinarily an inheritance or receipt of a gift could reduce or eliminate a person's eligibility for government benefits. Special Needs Trusts work around this issue by expressly prohibiting distributions for food, shelter, or clothing.
Trusts in Massachusetts
Do I need a living trust in Massachusetts?
The main advantage of making a living trust is to spare your family the expense and delay of probate court proceedings after your death. But do you really need a trust? Massachusetts uses the Uniform Probate Code, a set of laws that simplifies the probate process, so making a living trust may be more trouble than it saves.
If I make a living trust, do I still need a will?
Yes, you always need a will. A will provides a backup plan for any property that doesn't make it into your trust. For example, if you acquire new property and neglect or forget to add it to your trust before you die, that property will not pass under the terms of the trust document. In your will, you can to name someone to inherit property that you haven't left to a particular person or entity in your trust.
In the absence of a will, any property that isn't transferred by your living trust or other method (such as joint tenancy) will go to your closest relatives as determined by Massachusetts law.
Can writing a living trust reduce estate tax in Massachusetts?
This depends on the kind of trust you create. A simple probate-avoidance living trust has no effect on federal or Massachusetts estate tax. A more complicated living trust, such as an AB trust, however, can reduce the federal estate tax bill for people who own a lot of valuable assets. Most people don't need to worry about federal estate tax because it affects only estates worth more than $5.45 million (that's the 2016 figure; it's indexed for inflation). You're more likely to be affected by the Massachusetts estate tax, which kicks in for taxable estates larger than $1 million. For more information on when you still might want to use an AB trust to reduce estate taxes, consult with us.
How do I make a living trust in Massachusetts?
In Massachusetts, to make a living trust you:
A trust is a legal entity that lets you put conditions on how certain assets are distributed upon your death. Trusts also can help minimize gift and estate taxes.
There are two basic types of trusts: living trusts and testamentary trusts.
- A living trust or an "inter-vivos" trust is set up during the person's lifetime.
- A Testamentary trust is set up in a will and established only after the person's death when the will goes into effect.
Living trusts can be either "revocable" or "irrevocable."
Revocable trusts allow you to retain control of all the assets in the trust, and you are free to revoke or change the terms of the trust at any time.
With irrevocable trusts, the assets in it are no longer yours, and typically you can't make changes without the beneficiary's consent. But the appreciated assets in the trust aren't subject to estate taxes.
Since trusts usually avoid probate, your beneficiaries may gain access to these assets more quickly than they might to assets that are transferred using a will. Additionally, if it is an irrevocable trust, it may not be considered part of the taxable estate, so fewer taxes may be due upon your death.
Assets in a trust may also be able to pass outside of probate, saving time, court fees, and potentially reducing estate taxes as well.
Other benefits of trusts include:
- Control of your wealth. You can specify the terms of a trust precisely, controlling when and to whom distributions may be made. You may also, for example, set up a revocable trust so that the trust assets remain accessible to you during your lifetime while designating to whom the remaining assets will pass thereafter, even when there are complex situations such as children from more than one marriage.
- Protection of your legacy. A properly constructed trust can help protect your estate from your heirs’ creditors or from beneficiaries who may not be adept at money management.
- Privacy and probate savings. Probate is a matter of public record; a trust may allow assets to pass outside of probate and remain private, in addition to possibly reducing the amount lost to court fees and taxes in the process.
With a living trust, you can better protect your family’s financial future should you become incapacitated and when you pass away. A living trust allows you to distribute your assets to whom you want, the way you want, and when you want, without going through probate. By minimizing the costs in time and money to handle your estate, you maximize your beneficiaries’ inheritance.
With a living trust you can:
• Distribute your assets according to your wishes, so the court doesn’t makes these decisions for you.
• Specify how our children’s share of your property will be managed.
• Help you family avoid the hassle and cost of the probate process.
• Transfer management of your property to a successor trustee if you become incapacitated.
Protecting Your Major Assets
The following assets are commonly included in a living trust:
• Real estate
• Financial accounts (savings, brokerage, mutual funds, etc.)
• Stocks or bonds not held in a separate account
• Business interests (LLC membership interests, shares in privately held corporations, partnership interests, sole proprietorships, etc.)
• Intellectual property (patents, copyrights, trademarks)
• Jewelry, antiques, works of art and other personal items
Tax Implications During Your Life
With a Revocable Trust you are still treated as the owner of the property, and can be taxed on that property during your life. With an Irrevocable Trust, you give up ownership of the property and are no longer liable for it and cannot be taxed.
Reasons For Choosing A Revocable Trust vs. An Irrevocable Trust
It depends on the goals you’re trying to establish. For example, if the primary goal is to avoid excessive estate taxes, you will likely want to set up an Irrevocable Trust. If the primary goal is to maintain control of assets in the event of incompetence, you will likely want to set up a Revocable Trust. In addition, the rules of the particular Trust you’re establishing may dictate whether a Trust must be Revocable or Irrevocable. If you’re unsure about the type of Trust you want to establish, you can contact us.
There are many more complicated types of trusts, too, that apply to specific situations. Some include:
Credit shelter trusts/Bypass or AB Trust
With a credit-shelter trust (also called a bypass or family trust), you write a will bequeathing an amount to the trust up to but not exceeding the estate-tax exemption. Then you pass the rest of your estate to your spouse tax-free. And there's an added bonus: Once money is placed in a bypass trust, it is forever free of estate tax, even if it grows. It helps couples avoid or reduce estate tax by keeping the deceased spouse’s property out of the surviving spouse’s estate. Bypass Trusts limit the amount of federal estate tax that would be payable on the death of the second spouse.
Generation-skipping trusts:
A generation-skipping trust (also called a dynasty trust) allows you to transfer a substantial amount of money tax-free to beneficiaries who are at least two generations your junior - typically your grandchildren.
Qualified personal residence trusts:
A qualified personal residence trust can remove the value of your home or vacation dwelling from your estate and is particularly useful if your home is likely to appreciate in value.
Irrevocable life insurance trusts:
An irrevocable life insurance trust can remove your life insurance from your taxable estate, help pay estate costs, and provide your heirs with cash for a variety of purposes. To remove the policy from your estate, you surrender ownership rights, which means you may no longer borrow against it or change beneficiaries. In return, the proceeds from the policy may be used to pay any estate costs after you die and provide your beneficiaries with tax-free income.
Qualified terminable interest property trusts:
If you're part of a family in which there have been divorces, remarriages, and stepchildren, you may want to direct your assets to particular relatives through a qualified terminable interest property trust. Your surviving spouse will receive income from the trust, and the beneficiaries you specify (e.g., your children from a first marriage) will get the principal or remainder after your spouse dies.
Special Needs (or Supplemental Needs) Trust
A trust established to provide supplemental income for a disabled person who is receiving or may eligible to receive government benefits. Ordinarily an inheritance or receipt of a gift could reduce or eliminate a person's eligibility for government benefits. Special Needs Trusts work around this issue by expressly prohibiting distributions for food, shelter, or clothing.
Trusts in Massachusetts
Do I need a living trust in Massachusetts?
The main advantage of making a living trust is to spare your family the expense and delay of probate court proceedings after your death. But do you really need a trust? Massachusetts uses the Uniform Probate Code, a set of laws that simplifies the probate process, so making a living trust may be more trouble than it saves.
If I make a living trust, do I still need a will?
Yes, you always need a will. A will provides a backup plan for any property that doesn't make it into your trust. For example, if you acquire new property and neglect or forget to add it to your trust before you die, that property will not pass under the terms of the trust document. In your will, you can to name someone to inherit property that you haven't left to a particular person or entity in your trust.
In the absence of a will, any property that isn't transferred by your living trust or other method (such as joint tenancy) will go to your closest relatives as determined by Massachusetts law.
Can writing a living trust reduce estate tax in Massachusetts?
This depends on the kind of trust you create. A simple probate-avoidance living trust has no effect on federal or Massachusetts estate tax. A more complicated living trust, such as an AB trust, however, can reduce the federal estate tax bill for people who own a lot of valuable assets. Most people don't need to worry about federal estate tax because it affects only estates worth more than $5.45 million (that's the 2016 figure; it's indexed for inflation). You're more likely to be affected by the Massachusetts estate tax, which kicks in for taxable estates larger than $1 million. For more information on when you still might want to use an AB trust to reduce estate taxes, consult with us.
How do I make a living trust in Massachusetts?
In Massachusetts, to make a living trust you:
- Create the trust document, which says who will inherit trust property and names you as trustee -- the person in charge.
- Sign the document in front of a notary public.
- Transfer your property, such as your house and car, to your name as trustee of the trust.