Frequently asked questions about Trusts

What Is a Trust?

A trust is a legal arrangement under which property is held and administered by a trustee according to the terms of the trust for the benefit of one or more beneficiaries.

Trusts can be created for many different purposes. Some are designed primarily to manage and distribute property during a person's lifetime and after death. Others may address long-term-care planning, beneficiaries with disabilities, tax planning, asset management, charitable objectives, or particular family circumstances.

The word “trust” therefore describes a broad category of legal arrangements rather than a single estate-planning product. Understanding what a particular trust accomplishes requires looking at its terms, the property transferred to it, and the objective it was created to achieve.

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Who Are the Grantor, Trustee, and Beneficiary of a Trust?

Three roles are central to understanding most trusts.

The person who creates and transfers property to a trust is commonly referred to as the grantor, settlor, or creator.

The trustee holds and administers trust property according to the terms of the trust and applicable law.

The beneficiary is the person or entity for whose benefit trust property is held or distributed.

Depending on the type of trust, one individual can sometimes occupy more than one of these roles. For example, the creator of a revocable living trust may also serve as trustee and beneficiary during life while naming successor trustees and beneficiaries to act or receive property later.

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What Is the Difference Between a Revocable and Irrevocable Trust?

The distinction generally concerns the creator's ability to revoke or change the trust.

A revocable trust expressly gives the creator the ability to revoke it and may provide powers to amend its terms. Revocable trusts are often used for property management, incapacity planning, privacy, and transferring properly funded trust assets without probate.

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An irrevocable trust generally involves greater restrictions on the creator's ability to revoke or alter the arrangement. Depending on its design and purpose, an irrevocable trust may be used for long-term-care planning, tax planning, asset-protection objectives, or planning for particular beneficiaries.

Importantly, irrevocable does not by itself tell you all of the tax, Medicaid, or asset-protection consequences of a trust. The trust's actual provisions and the rights retained by the creator matter.

New York also has an important default rule: a lifetime trust is irrevocable unless the trust expressly provides that it is revocable.

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What Is a Living Trust?

A living trust, also called an inter vivos trust, is created during the lifetime of the person establishing it.

A living trust may be revocable or irrevocable. The term “living trust” therefore does not automatically mean “revocable trust.”

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A revocable living trust can allow the creator to retain substantial control over trust property during life while providing for a successor trustee to administer property if the creator becomes unable to do so or after the creator's death.

An irrevocable living trust may be created for very different objectives and can involve significant restrictions on the creator's access to or control over the trust property.

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What Is a Testamentary Trust?

A testamentary trust is created under a will and comes into existence after the person who made the will dies and the applicable provisions become operative through estate administration.

Testamentary trusts can be useful when someone wants property managed for a beneficiary rather than distributed outright. For example, a trust may provide for a minor child, a beneficiary who should not receive an inheritance immediately, or other circumstances requiring continued management.

Because a testamentary trust is created through a will, it does not serve as a mechanism for avoiding probate of the assets that must pass through the will before being transferred to the trust.

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What Can You Put in a Trust?

Many different kinds of property can potentially be transferred to a trust, including:

• Real estate

• Bank accounts

• Investment accounts

• Business interests

• Certain tangible personal property

• Other financial assets

However, whether a particular asset should be placed in a trust is a separate question.

Different assets can carry different ownership, beneficiary-designation, tax, contractual, lending, insurance, or administrative considerations. Retirement accounts, for example, require particularly careful beneficiary planning rather than simply retitling the account into a trust during the owner's lifetime.

The assets used to fund a trust should therefore be reviewed as part of the overall estate plan.

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Why Does a Trust Need to Be Funded?

Creating and signing a trust agreement does not necessarily place your property into the trust.

Funding is the process of transferring appropriate assets into the trust or otherwise arranging for the trust to receive them.

New York law provides that a lifetime trust is valid as to assets to the extent those assets have actually been transferred to the trust. For assets capable of registration—such as real estate, stocks, bonds, bank accounts, and brokerage accounts—funding may require changing title or registration. Other property may require an appropriate written assignment.

This distinction is critical. A trust designed to avoid probate for a particular asset generally cannot accomplish that goal if the asset was never properly transferred to the trust.

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Does a Trust Avoid Probate in New York?

It can, but the answer depends on the trust and the assets involved.

Property properly transferred to an appropriate lifetime trust can generally be administered according to the trust terms rather than passing under a will through probate.

However, simply signing a trust does not make every asset non-probate property. Assets that remain individually owned and do not pass through another non-probate arrangement may still become part of the probate estate.

This is one reason trust funding is so important. Probate avoidance depends not simply on having a trust document, but on coordinating ownership of the relevant assets with the estate plan.

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Do You Still Need a Will If You Have a Trust?

In many estate plans, yes.

A trust and a will perform different functions. Even someone using a revocable living trust commonly has a will as part of the overall estate plan.

Among other things, a will can address property that remains outside the trust at death and can nominate guardians for minor children. Depending on the plan, a pour-over will may direct certain probate assets into the trust after death.

Having a trust therefore does not necessarily make a will unnecessary.

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What Is a Pour-Over Will?

A pour-over will is a will designed to direct certain assets remaining in a person's probate estate into an existing trust after death. It can function as a backstop for property that was not transferred to the trust during life.

However, a pour-over will should not be confused with lifetime trust funding. Property that must pass under the pour-over will generally still goes through the applicable estate process before reaching the trust.

For someone whose primary objective is avoiding probate for particular assets, properly funding the trust during life remains important.

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Can a Trust Help If You Become Incapacitated?

A properly structured and funded revocable living trust can provide a mechanism for managing trust assets if the creator becomes unable to manage them personally. For example, the trust can provide for a successor trustee to assume responsibility for administering trust property under circumstances specified in the trust. But a trust only governs property and matters within its scope. It is not a complete substitute for other incapacity-planning documents. A comprehensive estate plan may also include a durable power of attorney, health care proxy, living will, and other appropriate documents.

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Does a Revocable Trust Protect Assets From Creditors?

A revocable trust generally should not be viewed as a way to place the creator's assets beyond the reach of the creator's creditors merely by transferring them into the trust.

Because the creator typically retains substantial control and beneficial rights over property in a revocable trust, the arrangement is fundamentally different from certain irrevocable trusts designed with asset-protection objectives.

Even with an irrevocable trust, however, “asset protection” is not automatic. The trust terms, retained rights, identity of the beneficiary, timing of transfers, applicable creditor law, and purpose of the transfer can all matter.

Statements that an “irrevocable trust protects assets” without those qualifications can be misleading.

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Does a Revocable Living Trust Reduce Estate Taxes?

Not merely because the assets have been transferred to a revocable living trust.

For federal income-tax purposes, revocable living trusts are generally treated as grantor trusts, meaning the creator continues to be treated as the owner for tax purposes during life.

Estate-tax planning is a separate issue and can involve different types of trusts, ownership arrangements, gifting strategies, exemptions, and other considerations.

Someone considering a trust primarily for tax purposes should have the proposed structure evaluated specifically for the relevant federal and New York tax consequences.

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Do Trusts Pay Income Taxes?

The answer depends on the type of trust.

For federal income-tax purposes, a grantor trust generally attributes the trust's income and deductions to the person treated as its owner. Revocable living trusts are generally grantor trusts during the creator's lifetime.

Other trusts may be treated as separate taxpayers and may have their own income-tax filing and reporting obligations. Distributions to beneficiaries can also affect how trust income is reported and taxed.

New York has additional rules concerning resident and nonresident trusts.

Because “revocable,” “irrevocable,” “grantor,” and “nongrantor” describe different legal or tax characteristics, it is important not to assume that every irrevocable trust is taxed the same way.

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Can a Trust Help With Medicaid Planning in New York?

Certain trusts can play an important role in Medicaid and long-term-care planning, but simply placing assets in a trust does not automatically protect those assets or make someone eligible for Medicaid.

New York's Medicaid rules distinguish between different types of trusts and the rights retained by the person establishing the trust.

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For example, New York State Department of Health guidance generally treats the entire corpus of a revocable trust established with an applicant's assets as an available resource. Different rules apply to irrevocable trusts depending on whether and under what circumstances payments can be made to or for the benefit of the individual.

Transfers to trusts can also implicate separate Medicaid transfer rules.

Medicaid trust planning is therefore highly dependent on the trust terms, assets, timing, type of Medicaid benefits sought, and individual circumstances.

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What Is a Medicaid Asset Protection Trust?

A Medicaid Asset Protection Trust is a type of irrevocable trust used in certain long-term-care planning strategies.

Its purpose is generally to structure ownership and access to assets in a way that may eventually prevent certain trust principal from being treated as an available resource for Medicaid eligibility, provided the arrangement satisfies applicable law and planning requirements.

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However, creating the trust does not produce immediate or universal protection. Medicaid transfer rules, retained rights, distributions, the type of care sought, and timing can materially affect the outcome.

Because this is a substantial subject in its own right, Medicaid Asset Protection Trusts should be considered separately from general revocable trust planning.

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What Is a Special Needs Trust?

A special needs trust—also commonly called a supplemental needs trust—is designed to hold and administer assets for a person with a disability while addressing the effect those assets may otherwise have on eligibility for certain means-tested government benefits.

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There are different types of special needs trusts, and the source of the assets matters.

For example, a trust established using the beneficiary's own assets can be subject to requirements different from a trust funded with assets belonging to a parent, grandparent, or another third party.

New York Medicaid rules also recognize qualifying special needs and pooled trusts under specified circumstances.

Because benefit eligibility and distribution rules can be highly technical, special-needs planning should be coordinated with the beneficiary's particular circumstances and benefit programs.

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Can You Be the Trustee of Your Own Trust?

In some types of trusts, yes.

A person establishing a revocable living trust commonly serves as the initial trustee and continues managing the trust property during life.

Other trusts may require or benefit from an independent trustee depending on their purpose, tax treatment, asset-protection objectives, beneficiary circumstances, or the powers contained in the trust.

The appropriate trustee arrangement therefore depends on what the trust is intended to accomplish.

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What Does a Trustee Do?

A trustee is responsible for administering trust property according to the terms of the trust and applicable fiduciary law.

Depending on the trust, responsibilities can include:

• Managing and safeguarding trust assets

• Investing trust property

• Maintaining appropriate records

• Making distributions to beneficiaries

• Handling tax and reporting obligations

• Communicating with beneficiaries as required

• Following the distribution standards and other instructions contained in the trust

Choosing a trustee is therefore an important planning decision. Reliability, financial judgment, impartiality, longevity, family dynamics, complexity of the assets, and willingness to serve may all be relevant.

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Can an Irrevocable Trust Ever Be Changed?

Sometimes.

The word irrevocable does not necessarily mean that no provision of the trust can ever be modified under any circumstances. Whether an irrevocable trust can be modified or terminated depends on the trust's terms and applicable New York law. Different legal mechanisms may be available depending on the creator, beneficiaries, trustees, purpose of the trust, and circumstances. This is another reason the label attached to a trust should not be used as a substitute for reviewing the actual document and applicable law.

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Are Trusts Only for Wealthy Families?

No.

Whether a trust is useful depends more on the planning objective than on a single minimum level of wealth.

A family may consider a trust because it owns real estate, wants ongoing management for children's inheritances, has a beneficiary with special needs, wants incapacity planning, owns property in multiple states, is concerned about probate, needs long-term-care planning, or has other circumstances that make continued asset management useful.

At the same time, not everyone needs a trust. In some situations, a properly drafted will, beneficiary designations, powers of attorney, health care documents, and appropriate asset titling may accomplish the person's objectives more simply.

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What Is the Difference Between a Will and a Trust?

A will and a trust are different estate-planning tools.

A will generally takes effect at death and can direct the distribution of probate property, nominate an executor, and nominate guardians for minor children.

A lifetime trust begins operating during the creator's lifetime and can hold and manage assets both during life and after death. Properly funded trust assets may also avoid probate.

Many estate plans use both rather than choosing one or the other.

The more useful question is therefore often not “Do I need a will or a trust?” but “What combination of estate-planning tools best accomplishes my objectives?”

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How Do You Know If You Need a Trust?

There is no single answer based solely on age or net worth.

A trust may be worth considering when your objectives include:

• Avoiding probate for particular assets

• Planning for incapacity

• Providing long-term management of an inheritance

• Protecting a beneficiary who should not receive assets outright

• Planning for a beneficiary with special needs

• Addressing long-term-care or Medicaid concerns

• Owning property in more than one state

• Addressing estate or tax-planning objectives

• Providing greater control over how and when beneficiaries receive property

The appropriate type of trust depends on the objective.

Before creating one, it is important to identify what problem the trust is supposed to solve, what control or access you need to retain, what assets would fund it, and how the trust fits with the rest of your estate plan.

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Sources & Legal References

New York Estates, Powers and Trusts Law, Article 7 — Trusts

New York's statutory provisions governing trusts, including lifetime trusts and related requirements.

New York Estates, Powers and Trusts Law § 7-1.16 — Revocation of Lifetime Trust by Will

Provides, among other things, New York's rule that a lifetime trust is irrevocable unless it expressly provides that it is revocable.

New York Estates, Powers and Trusts Law § 7-1.17 — Execution, Amendment and Revocation of Lifetime Trusts

Addresses execution requirements for lifetime trusts and certain amendments and revocations.

New York Estates, Powers and Trusts Law § 7-1.18 — Funding of Lifetime Trust

Addresses when assets have been transferred to and are held by a lifetime trust.

New York State Department of Health — Trusts Information

Provides official New York guidance concerning the treatment of trusts for Medicaid eligibility.

Internal Revenue Service — Instructions for Form 1041

Provides federal tax information concerning trusts, estates, grantor trusts, revocable living trusts, and fiduciary income-tax reporting.

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