Attorney At Law: Not all trusts are created equal
By Nancy Burner, Esq.
While there are very good reasons for creating a trust, the TYPE of trust is of great consequence and depends upon many facts and circumstances. No one should create and fund a trust unless they understand the reason — the problem (or problems) they are trying to solve. This article is intended as a simplified “primer” on the most common trusts used in estate planning. It is not exhaustive by any means but certainly provides a framework for designing an estate plan.
First, what is a living trust? A living trust is a document executed by you as the grantor or creator during your lifetime, as opposed to a testamentary trust that is created at your death. It is a free-standing document that sets forth how your trust assets should be managed during your lifetime and distributed at your death.
One of the most common living trusts is the Revocable Trust. This document is meant to obviate the need for probate by titling all assets in the name of the trust. If properly drafted and funded, this trust will alleviate delays, make the administration of your assets seamless and significantly reduce the legal fees costs incurred on the settling of your estate after you die.
Typically, you would be the Grantor and Trustee of your own revocable trust. In the trust document you would name successor Trustees to act in the event of your incapacity or death. The revocable trust uses your Social Security number and is not a separate taxable entity.
Another common trust is the irrevocable Medicaid qualifying trust. This trust will also avoid probate and has the added benefit of protecting assets should you require long term care in a nursing home or care at home through the Medicaid program. This trust is often funded with your home, as well as other assets. You would not be the Trustee of this trust, but you would name one or more of your beneficiaries or any other trusted individual to act on behalf of the trust. Even if your home is transferred to this trust, you will still pay all the expenses of maintaining the home and have exclusive use and occupancy.
You would also enjoy all the tax benefits like star exemptions, capital gains exemption upon the sale of your primary residence and your heirs would still obtain a step up in basis at your death. All income earned by the trust can be paid to you or accumulated in the trust, but will still be taxable to you at your individual rate.
Often clients do not realize that life insurance proceeds are taxable in their estates. With the federal exemption likely to be cut in half by January 1, 2026, keeping the value of life insurance proceeds out of your taxable estate is a number one priority for many. A well drafted irrevocable life insurance trust (ILIT) will avoid such taxation. If the life insurance trust purchases the policy, then the life insurance will be completely outside your taxable estate. If you already own the policy and then transfer it to your insurance trust, you must survive the transfer by three years.
With the prospect of the federal estate tax exemption being drastically reduced, many clients are opting to create spousal limited access trusts (SLAT). The SLAT could be used to transfer a significant amount of wealth out of your estate while the exemption is high. A SLAT is an irrevocable trust created by one spouse for the benefit of the other during his or her lifetime. The SLAT can provide income and principal distributions for the benefit of the non-grantor spouse and descendants, with the spouse being primary. The spouse can serve as a Trustee.
Furthermore, assets in the SLAT are protected from the spouse’s creditors and not included in the spouse’s taxable estate.
When planning for your estate, consider your goals. Do you have taxable estate or are you worried about the cost of nursing home care? The solution should address those issues.
Nancy Burner, Esq. is a Partner at Burner Prudenti Law, P.C. focusing her practice areas on Estate Planning and Trusts and Estates. Burner Prudenti Law, P.C. serves clients from New York City to the east end of Long Island with offices located in East Setauket, Westhampton Beach, Manhattan and East Hampton.
