What is a Trust?

Many people—including many lawyers—think of a trust as a thing or an entity. But actually it’s a relationship.

More specifically it’s a relationship between a person (a trustor or settlor) who transfers property to another person (the trustee or legal owner) for the benefit of a beneficiary (the beneficial owner).

In essence, it’s a way for an individual to split up individual ownership of an asset into three different kinds of ownership.

But why, you might ask, would anyone want to do this?

The original reason was to devise a way for large landowners in medieval England to get around the strict laws of primogeniture, which prohibited all land transfers at death, except to the oldest son. Although we use trusts in different ways now (since the laws of primogeniture are no longer in effect), the structure of the trusts has remained the same for well over 700 years.

1.      Avoid the expense and delay of probate

Probate can be avoided in almost every situation by establishing a living trust and working with your attorney to choose the most appropriate ways to hold title to assets, to choose appropriate beneficiaries, and to appropriately use POD (payable on death) or TOD (transfer on death) designations. (In some unusual cases, such as wrongful death lawsuits, probate is necessary and sometimes even desirable.)

 2.      Make sure the right people receive your asset

Assume you’ve made a will leaving all your assets to your son, John.

After your death John is divorced or dies, and his wife, Allison winds up with much or all of your funds. Allison later remarries and starts a new family.

Allison’s children from her marriage to John — your grandchildren — could end up receiving little or none of the inheritance you left their father and which you assumed would be used for their benefit.

 To ensure that your grandchildren benefit from your estate, consider keeping the assets in a living trust rather than having them distributed at your death. You could name John your successor trustee, drawing income (and possibly a portion of the principal) during his lifetime. At his death (or when he reaches a designated age) the trust would end and the funds would be distributed to his children. Allison would never gain control of the inheritance unless that’s what you wanted. (Although we’ve been discussing grandchildren, you can also use this type of trust to protect other heirs.)

 3.      Protect the inheritance you leave

Assume you want to leave some money to your grandchildren. A guardian or custodian will typically retain control of the funds until the children reach the age of 21, at which time they must receive the inheritance. What if one of them decided to blow it all on a fancy sports car or goof off for a year or two? No one could intervene — the money would be the grandchild’s to spend however he/she wished.

 Or suppose you have an adult child who hasn’t yet learned (and may never learn) how to handle the money. How could you prevent that child from squandering the inheritance?

 A living trust can be designed to take care of these situations. For example, you could stipulate that your grandchildren not receive their inheritances until they reached age 25, 30, even 40 or older! You could direct your successor trustee to give them the income from the assets (or perhaps even a portion of the principal) in the meantime, but they would not receive the bulk of the estate until they were older and (hopefully) wiser. Even then, you could arrange to transfer the principal over a specific period of — five-year intervals, for example — so they wouldn’t have the chance to blow it all in one shot.

4.  Provide for a special needs loved one or a person with a special situation

 Suppose you are caring for a handicapped child or other family member or friend who is unable to work or otherwise handle his or her own affairs.

What will happen to that person when you die?

 Instead of having your assets transferred at your death, you could leave them in trust with instructions that the income, principal, or both be used for that individual’s benefit. A successor trustee also named in the trust document (perhaps a relative, friend, or trusted professional) would continue to manage the funds. After the handicapped person died, the assets would be distributed to your remaining beneficiaries.

 But what if the person is receiving public benefits (Supplemental Security Income, Medicaid, etc.) that could be cut off if trust assets were available? Assets in a Special Needs Trust are used to supplement, not replace, public benefits. With this type of trust you can continue to provide crucial support for your handicapped loved one while maximizing the amount that will remain available for other heirs.

This is also a way to provide for a spouse who is currently qualified for Medicaid. If the non-Medicaid spouse were to die before the Medicaid spouse, a Special Needs Trust would be set up to provide for the Medicaid spouse without them losing their benefits.

As we mentioned earlier, most people name themselves initial trustees of their living trusts in order to retain complete control of their assets until their death. After their death their successor trustee steps in to fulfill the trust’s requirements. But if you’re tired of keeping track of your affairs, you could appoint a trustee to manage the trust for you during your lifetime.

5.    Protect yourself and loved ones if you become incapacitated by illness or accident

What would happen to your finances if you were to become incapacitated and you don’t have a family member as a co-owner or signer on your financial accounts? A conventional will takes effect only when you die.

Let’s say you get into an accident and are hospitalized for an extended period of time. Who can legally step in and pay your bills, make sure your car and house payments are made?

No one, unless someone goes to court to establish guardianship over you, which can be expensive. If you have a trust, your successor trustee could step in to handle your finances and health care needs until you are back on your feet.

The simple definition of special (or supplemental) needs is anything other than basic support expenses such as food and shelter. In other words, paying for anything the beneficiary wants for personal use (other than food or shelter) is allowed. If, however, a special needs trust pays food and shelter expenses, those payments will be considered an available resource and may jeopardize government assistance.

It’s not always easy to know what is and what isn’t food and shelter, so here are some examples:

• Basic utilities such as gas, water and electricity are basic shelter expenses that cannot be paid by the trust. However, utilities such as telephone and cable service are not basic and can be paid by the trust.

• Food cannot be purchased by the trust, but food supplements can.

• Non-consumable items such as toiletries, cleaning supplies and personal care items can be provided by the trust.

• There is no limit on the value of household goods as long as they are reasonably necessary for the person to live in his or her residence.

• Computers, furniture, and appliances are allowable purchases.

• Buying and maintaining a motor vehicle, as well as paying the insurance, is also allowable

• Travel expenses, including lodging, meals, and a companion, can be paid by the trust.

The trustee must have sole and absolute discretion in all decisions regarding distributions to the beneficiary and the administration of the trust. The beneficiary can never have a right to compel distributions from the trust.

That does not mean that the trustee cannot ask the beneficiary what he or she wants (or vice versa). But the final decision is with the trustee.

All purchases by the trust should be paid directly out of the trust. The trustee should never turn over cash to the beneficiary to buy a desired item because cash is equivalent to support in terms of public benefit eligibility.

If the trustee is uncertain as to whether or not an expenditure constitutes a special or supplemental need, he or she should consult an attorney or other professional who is knowledgeable and specializes in special needs trusts.

Expenditures that are prohibited by federal or state regulations, or other mishandling of the trust, can result in the beneficiary being disqualified from pubic benefits.

Can I change my trust? If so, how?

English and American lawyers have created many different kinds of trusts during the last 800 years. One big distinction is whether the trusts can be terminated or revoked. The majority of trusts created for families can be revoked, thus, revocable. If a trust can be

Special Needs

A person who receives government assistance based on financial need will ordinarily lose that assistance if he or she receives assets or income over a certain limit. With a properly designed special needs trust, however, a family member or friend can provide certain kinds of benefits to someone without jeopardizing government assistance.

A special needs trust may be established either as a living trust (recommended) or as a testamentary trust. A testamentary trust is not the best solution because it will often have to be administered through the court system, but it is better than nothing.

The living trust is ideal for a parent who wants to create a trust for a child who has a disability but does not want the child to lose eligibility for public benefits. If there are other family members who want to leave something by will but do not want to create a special needs trust in their wills, they can merely make the gift to the existing trust. The parent, of course, can make either a lifetime gift to the trust or a gift to the trust by will.

The simple definition of special (or supplemental) needs is anything other than basic support expenses such as food and shelter. In other words, paying for anything the beneficiary wants for personal use (other than food or shelter) is allowed. If, however, a special needs trust pays food and shelter expenses, those payments will be considered an available resource and may jeopardize government assistance.

It’s not always easy to know what is and what isn’t food and shelter, so here are some examples:

• Basic utilities such as gas, water and electricity are basic shelter expenses that cannot be paid by the trust. However, utilities such as telephone and cable service are not basic and can be paid by the trust.

• Food cannot be purchased by the trust, but food supplements can.

• Non-consumable items such as toiletries, cleaning supplies and personal care items can be provided by the trust.

• There is no limit on the value of household goods as long as they are reasonably necessary for the person to live in his or her residence.

• Computers, furniture, and appliances are allowable purchases.

• Buying and maintaining a motor vehicle, as well as paying the insurance, is also allowable

• Travel expenses, including lodging, meals, and a companion, can be paid by the trust.

The trustee must have sole and absolute discretion in all decisions regarding distributions to the beneficiary and the administration of the trust. The beneficiary can never have a right to compel distributions from the trust.

That does not mean that the trustee cannot ask the beneficiary what he or she wants (or vice versa). But the final decision is with the trustee.

All purchases by the trust should be paid directly out of the trust. The trustee should never turn over cash to the beneficiary to buy a desired item because cash is equivalent to support in terms of public benefit eligibility.

If the trustee is uncertain as to whether or not an expenditure constitutes a special or supplemental need, he or she should consult an attorney or other professional who is knowledgeable and specializes in special needs trusts.

Expenditures that are prohibited by federal or state regulations, or other mishandling of the trust, can result in the beneficiary being disqualified from pubic benefits.

SSI Eligibility

What we need to know before we can answer that:

• What income sources are available to the child?

• What are the allocations for family member's living expenses

• When does the SSA use deeming? (And what is deeming?)

Income Sources

To determine whether a disabled child is eligible for SSI benefits, and how much the child is eligible to receive, the Social Security Administration (SSA) must consider any income sources available to the child. The SSA presumes that the disabled child shares in his or her parents' income. Attributing some of the parents' income to a child is called “deeming” income. The outcome of the deeming process is important because it can make some children ineligible for payments.

Social Security considers the following sources of income to determine a disabled child’s eligibility and SSI payment amounts:

• Parents' earned income, parent's unearned income, and parents' other resources (assets), and

• Step-parents' earned and unearned income and resources, if the child lives with the step-parent and the natural or adoptive parent.

Earned income is money that comes from a job. Unearned income is money that comes from sources such as investments or unemployment. The SSA considers both earned and unearned income when calculating the parent(s)’ total income.

The SSA does not consider all income and resources in the deeming process. For example, the SSA does not consider welfare or public income maintenance (PIM) payments such as Temporary Assistance to Needy Families (TANF) or the VA Pension for veterans, as long as the public income payment was originally calculated based on the family's income.

There are also other sources of money that the SSA will exclude from the deeming process. Here are some examples:

• Foster care payments

• Food stamps

• Disaster assistance

• Tax refunds on real property, and

• Home grown produce for personal consumption.

Before deeming the parents' income, the SSA makes adjustments to the parents’ income amounts to account for the living expenses of for both the parents and any other children that live in the house. These are called “allocations.” These allocations reduce the amount of a parent’s income that is deemed to the disabled child. These allocations are only applicable to disabled children whose parents are not on disability.

Allocation for other children 

The SSA makes an allocation for nondisabled children's living expenses—this amount will not considered part of the parent's income that can be deemed. In 2019, the amount allocated to each nondisabled child in the family is $386 (this is the difference between the SSI rate for an individual and the SSI rate for a couple). If the nondisabled child has his or her own income, or if the child receives public assistance, the allocation amount may be lowered.

Parental living allowance

The SSA also reduces the amount of income deemed to a child for a parental living allowance. The amount of the parental living allowance depends on how many parents are in the disabled child’s home (including step and adoptive parents). The parental living allowance for one parent is $771 (the federal SSI benefit rate); for two parents, the allowance is $1,157. (This allowance is not given to parents who receive public assistance.)

The SSA will subtract the nondisabled children's allocations from the parents' income, then deduct certain amounts from the parent's income, and then deduct the parents' living allowance to come up with the amount of income that is deemed to the disabled child.

The SSA uses the process of “deeming” parents' income if the disabled child:

• Is under the age of 18

• Is unmarried, and

• Lives at home with parent(s) who are not SSI recipients.

The SSA will stop deeming parents' income:

• When the child turns 18

• If the child marries, or

• If the child stops living with the parent(s).

Deeming can also stop for a number of other reasons:

• Changes in Living Circumstances

  If there is a change in status or family structure, deeming may be affected; therefore, you must keep the SSA updated if any of these changes occur in your family.

• Parent stops receiving SSI

  If a parent who was receiving SSI becomes ineligible for benefits, the parent’s income will be deemed to the child in the month he or she becomes ineligible for benefits.

• Parent becomes eligible for SSI

  Deeming from the parent’s income to the child stops when the parent becomes eligible for an SSI payment.

• Death of parent

  When a parent dies, deeming from the deceased parent’s income stops the month after the parent dies.

• Child moves into a treatment facility

  When a child moves into a medical treatment facility, deeming is stopped; additionally, the child may become ineligible for SSI.

• Child turns 18

  Deeming stops the month after the child turns 18. After that, the child’s own income is used to determine eligibility for SSI.

• Parent and child stop living together

  If the parent and child stop living in the same household, the parent’s income will no longer be deemed, beginning the month following their separation.

• Child starts living with step-parent only

  If the biological or adoptive parent leaves the child living with a step-parent, deeming stops. The SSA will consider only the child’s own income to determine eligibility for SSI.

If a separation between parent and child is temporary, then deeming is not affected. The SSA looks at several factors to decide if deeming of the parental income should stop.

• Intent

  The SSA looks at how long the parent and child intended to be separated and how long they were actually separated to determine if the separation is permanent.

• School

  If an eligible child is away from home for school, but occasionally comes home for weekend visits, holidays, or vacations, then deeming continues, regardless of how long the child was away from home. An exception to this is where the parent no longer has “parental control” over the child (for example, if parental control was taken away by court order).

• Private non-medical facility

  If a child lives in private non-medical facility that does not provide educational or vocational training to the child, the separation from the parent is generally considered permanent; this means that the parent’s income is not deemed to the child.

• Exception to Deeming for Institutionalized Children

  • Deeming does not apply if all of the following criteria are met:

  • The child lives in a medical facility

  • Receives reduced SSI payments

  • The child is eligible for Medicare under a state home care plan, and

  • Deeming would make the child ineligible for SSI

Credit Ratings

A revocable trust is a “see-through” entity for purposes of credit scores. That is, the credit rating agencies (like Experian or Trans Union) “see through” the trust to you as an individual. The reason that the trust is “seen-through” is that you retain full control of your assets–thus there is no barrier between you and your assets–so that for credit-worthiness, your trust is considered the same as you.