When discussing legal issues with clients I often get the question, "What about a trust?" Some of these clients want to avoid probate, some want to qualify for Medicaid, some want to protect assets, some want to provide for disabled relatives, and some want to save taxes. Everybody has heard about trusts, but a lot of folks are not quite sure what they are. Let's talk about the basics.
Most people know about contracts. A contract is a legal transaction between two people. If I want to rent a car, I put up some money, the car rental company puts up a car, and we agree to trade the money for the use of the car. The contract could last for a day or for many years.
A trust is a legal transaction among three people. The first person is the person who creates the trust. This person, called the trustor or trustmaker, makes the terms of the trust and provides the money necessary to carry out the purposes of the trust. The second person is the trustee. This person takes the money provided by the trustor and agrees to manage and spend it according to the terms and conditions that the trustor wrote down so that the purpose of the trust is accomplished. The third person is the beneficiary. This is the person who receives benefit from the trust. Normally, the trustee has to administer and spend the trust funds for the benefit of the beneficiary.
The basic trust fund baby is created this way. Uncle Scrooge creates a trust for his young nephews, Huey, Dewey and Louie to help them with their education. Scrooge puts a million dollars in the Duckville Savings and Loan and asks the bank's trust department to be the Trustee. Thereafter, Duckville Savings, invests the money and spends the income and principal, according to the directions and guidelines contained in the trust, to educate Huey, Dewey and Louie.
Seems simple. Like contracts, the devil is in the details. A full chapter of the Oregon Revised Statutes deals with how to create, administer and terminate trusts. I keep a paper copy of those laws on my desk at all times.
So can trusts do all the things that people think they can? No. Trusts can do some of those things. Trusts can be used to avoid probate, but whether that is a good thing depends on the situation. Trusts can be used to protect assets, but you need to have whole lot of assets that need protection before asset protection trusts become worth the cost and legal risks entailed in creating them. If you have too much income to qualify for Medicaid, an Income Cap Trust will allow you to qualify, but trusts will not permit elders to give away their money and have the government pay for their long term care. Trusts are good ways to provide for disabled relatives and can be used in certain circumstances to give money to a disabled person without disqualifying the person from receiving public benefits. Trusts can save you taxes if you pay a lot in taxes and are willing to give away big chunks of your money to avoid paying taxes on it.
If future posts I hope to address specific kinds of trusts. The important thing to recognize when talking about trusts is that they come in a wide variety of shapes and sizes. You can do a lot of good things with trusts, but like with other things in life, if what you hear about trusts sounds too good to be true, it probably is.