Family Law: The Ins and Outs of Trusts

Trust. We base decisions of whom we’ll do business with, whom our kids can play with, and who can watch our children based on whether or not we trust someone. But when it comes to the legal issues of Trusts, we can’t just go with our gut instinct.
            Webster’s dictionary defines “trust” as “a fiduciary relationship in which one person (the trustee) holds the title to property (the trust estate or trust property) for the benefit of another (the beneficiary). James Lange, CPA and Attorney at James Lange Law Offices in Pittsburgh and author of Retire Secure! Pay Taxes Later, The Key to Making Your Money Last as Long as You Do, said, “Practically all parents and virtually all parents with minor children should establish a trust known as a testamentary trust—a trust that is part of a will or revocable trust. That trust is…to protect the child’s inheritance.” Lange said that if parents die and children are minors, “the money will typically be controlled by the Uniform Gift to Minors Act. The bad thing is there isn’t enough direction for the administrator.”
            Matt Schwartz, an associate at James Lange Law Offices, further clarified that families who need trusts should establish them for financial reasons. “If parents have bought life insurance policies or have life insurance through their work, they should have a will prepared that establishes a trust for their children so that their children do not have outright access to the proceeds once they turn 18.” Having a trust establishes who oversees the money for the children and the distribution terms. The trustee can be an individual, a not-for-profit administrator or a corporation, such as a bank. A trust is especially important if you have a child with dependency issues, if you have adult married children and concerns about inheritance or if you have a special needs child.
            Kemp C. Scales, who has law offices in Erie, Titusville and Pittsburgh and who specializes in Special Needs Trusts, said that if a parent leaves money to a child who has a disability “that could cause the child to lose Medicaid and/or SSI, and the child would not be eligible again until the funds had been spent down to nearly nothing.” All United States citizens are guaranteed Medicare and Social Security at some point in their lives. But Medicaid and Supplemental Security Income, or SSI, are needs-based programs for people who are disabled or impoverished.
            “As little as $2,000 in assets can disqualify children from many governmental programs that can be critical to their care and well-being,” said Brien Wall, CFBS, CLTC, Special Care Planner with Financial Designs Inc., of Pittsburgh. “However assets in a Supplement Special Needs Trust do not count against this $2,000 limit, making [the trust] an effective vehicle for enhancing the lifestyle of the person with special needs.” The money in the trust can then be used for living and quality of life expenses, instead of being exhausted on health care costs.
            One reason parents should set up a trust is that it can save federal estate taxes in certain situations. (Check with your lawyer to see if this is an ideal situation for your estate.) Furthermore, according to Schwartz, allowing the parents to state how the money should be distributed to their children, protecting the children from inheriting money or an estate at too young an age, providing an income tax advantage for a minor beneficiary, and appointing a guardian angel over your children’s assets until they are mature enough to make decisions on their own.
            Occasionally people are averse to setting up trusts because they do not want to pay the annual maintenance fees (which include filing an annual tax return). “These fees can be high with a corporate trustee,” said Schwartz. Other parents may not want the trustee to have that much responsibility, or they are afraid to create a future conflict between their child and the trustee.
            On a special needs trust, “the main drawback is probably the lack of control over the funds in the trust. By definition, the beneficiary of the special needs trust cannot control how the trust funds are spent. The trust is not an ATM machine for the beneficiary to withdraw money whenever it is needed. Instead, the trustee must have full discretion as to when and how the trust funds are spent,” Scales said.
            Setting up a trust is easy, usually involving a visit to your bank or lawyer and filling out the necessary paperwork. Some trusts can be set up with no to very little money up front (especially if the trust is not the corporate administered kind). “Pennsylvania doesn’t require trusts to be funded,” Scales said. Your home, retirement funds and life insurance can be put into the trust and held for your children and you can determine who manages your trust. One particular option, ACHIEVA, in Pittsburgh, “is committed to excellence in lifelong services for people with disabilities and their families”, according to their Web site. This not-for-profit corporation acts as a trustee of special needs trusts. But almost any bank or lawyer can act as trustee.
            And once the trust is set up, you can tell other family members or friends who may wish to provide for your children, because they, too, can make gifts of cash, annuities, etc. directly to the trustee through the trust.