Trusts Demystified

Many clients come into our office asking to have their property placed into a trust but have no idea what a trust is or the purpose of establishing one. Indeed using a trust has become a commonplace occurrence in the last few years but most people really don't understand the function of a trust. This article serves to explain the uses of trusts in general and in particular with regard to real property.

A trust is always comprised of three elements: the corpus or res in Latin (but simply meaning the trust content), the trustee(s) and beneficiary(ies). There cannot be a valid trust if one of these elements is missing. (Interestingly, the creator of the trust (referred to as the settlor or grantor) can also be the trustee and beneficiary depending on the type of trust created and its purpose.)

The content of the trust can be virtually anything- a bank or brokerage account, tangible personal property, cash, or-and as is currently very common, real property.

The trustee(s) will manage the trust according to the terms of the trust as drafted by your attorney. Trustees are in essence the trust creators' agents carrying out the trust mission; they are usually given the discretion to invest the property, sell it, rent it, renovate it, convert it, etc. Whatever the powers granted the Trustee at the time of Trust drafting, one rule remains constant: the Trustee must legally act only in the interest of the beneficiaries and not engage in self dealing. The Trustee must act prudently when deciding how to invest, or whether or not to invest trust assets (if such power is granted in the trust). Because the Trustees are often granted much discretion in how they handle trust assets, they should be chosen wisely and be those closest to you. In some cases, individuals choose "professional Trustees" (such as lawyers, accountants or financial advisors). Professional Trustees can be useful where the trust assets are complex and difficult to manage, or where an independent Trustee is needed to keep watch over another that is not fully responsible or trustworthy, and of course in instances where the trust creator does not have anyone they can trust.

Trust beneficiaries are the persons benefitting from the trust contents. Beneficiaries may be permitted to enjoy the trust property throughout the trust term (the period of time the trust is in effect) or they may only have access to the property and its use after termination of the trust (which is often triggered by the the passing of the trust creator)-this will depend on the type and purpose of the trust. Beneficiaries are most commonly the trust creator's children, spouses or other relatives but can be any person(s) designated by the trust creator.

This brings us to some of the commons uses and benefits of trusts: avoiding estate taxes (or "death taxes" as they are commonly referred to), planning for Medicaid, protecting the property from creditors (including divorced spouses), avoiding probate (the cumbersome and costly court process of dealing with a Will after death), and managing the distribution of assets. The type of trust and the trust terms will depend on one of these uses and should be assessed by a qualified attorney with experience in trust drafting.

Real property (or a coop apartment) such as your residential home, vacation property and rental property is often placed in a trust for the reasons mentioned above- and in particular to help qualify for Medicaid and ensure that all property passes to the beneficiaries without creditors like Medicaid recovering against the properties after your demise.

Once real property is transferred to a trust, the legal owner is the trust itself. Therefore, a new deed must be issued and recorded (or a new stock certificate issued in the case of a coop transfer). The Trustee(s) will then manage the property in accordance with the trust terms- they will usually be granted the power to sell the home and purchase a new one for the benefit of the trust creator during their lifetime or invest the sale proceeds.

The terms of the trust vary greatly depending on the purpose of the trust but in a typical Medicaid trust where real property is part of the trust corpus, the creator of the trust can continue to enjoy any rental income from the property and be entitled to any tax breaks (such as the senior citizens STAR real property tax exemption).

If you think you may benefit from a trust, call our office today for a free telephone consultation: 347-699-5529 (5LAW).