Learning Cafe Recap: Irrevocable Trusts

Certified Elder Law Attorney and partner Barbara McGinnis recaps the Learning Cafe on Irrevocable Trusts.

A trust is a legal way of holding, managing, and distributing property. Irrevocable trusts are an important tool in the elder law and estate planning toolbox, especially when it comes to qualifying an older adult for Medicaid or Veterans pension benefits.

Setting up and administering a trust is a five-step process:

  1. Trust creation
  2. Tax recognition of the trust
  3. Funding of the trust
  4. Administration of the trust
  5. Distributions from the trust

Creating a trust involves identifying the person who establishes and funds the trust. This person is usually called the “Grantor.” It also involves identifying an appropriate trustee. A Trustee is the person who holds, invests, manages, and distributes the money for the “Beneficiary” of the trust, which is the person or persons for whom the trust is established.

Once the trust has been created, a federal employee identification number (a tax ID or “EIN”) is obtained from the Internal Revenue Service’s web site. Trust funds are invested under a tax ID number, not a Social Security number. Getting a tax ID number doesn’t automatically mean the trust must pay income taxes. In practice, however, any income the trust earns is usually taxed to the beneficiary, who would pay the taxes on that income. The trust may have to file a federal income tax return but usually would not have to pay any income taxes. It’s always good idea to seek professional help for guidance on trust accounting and trust taxation.

After the trust has been created, the trust is funded. Typically, there are two sub-steps to the funding process. First, the Grantor transfers his or her assets to the Trustee; and second, the Trustee accepts title to the assets. In most instances all this means is that the trustee goes to the bank or brokerage company with a copy of the trust agreement, the federal tax ID number, and a check made out by the Grantor to the Trustee to open up a trustee account. Instead of a social security number, the tax ID number is used.

The next step in the five-step trust process is Trust Administration, which involves the establishment, monitoring, and daily management of a trust fund. People involved in trust administration, such as the trustee, the trust administrator, and the investment adviser, all serve in a fiduciary role. This means that they are legally bound to act solely for the benefit of trust beneficiaries.

For large trusts, most trustees work with a record keeper, service provider, or consultant to ensure that administrative duties are properly handled. It is also the fiduciary’s responsibility to select the service provider and to monitor the service provider’s performance to ensure that the trust is being administered correctly. For small “family” trusts, the trustee may do most or all of this work. Trustees must have a thorough understanding of their own fiduciary responsibility—and potential liability. It is not a privilege or an honor to be a trustee, it is a job.

The final step in the five-step trust process is Distribution. The way this is done varies based on whether you have an income-only trust or an asset protection/third-party trust. If distributions are done incorrectly, it could jeopardize an older adult’s eligibility for Medicaid or VA benefits.

As always, it is important to seek advice from qualified professionals when establishing, funding, and administering trusts. If you have questions about trusts, Takacs McGinnis may be able to help. Just give us a call.


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