Trusts in legal documents sometimes cause confusion in the mind of the average person who is not an attorney, for obvious reasons. First, there are many types of trusts used for various planning purposes. So, to ask the question “is a trust appropriate in this situation” usually leads to other questions such as “what is its purpose;” “what goals would it be attempting to obtain?” Also, Pennsylvania estate planning does not tend toward “living trusts” so much as some other states such as Florida, California, Virginia and New York.
I tend to believe this is largely because of the taxing structure. Pennsylvania has an inheritance tax that taxes on death from dollar one unless there is some exception such as zero tax rate for a spouse or receipt of life insurance so even where there is a living trust, inheritance tax forms generally must be filed and taxes paid.
A related issue is, once a trust is formed, how should funds be distributed? Here are some examples.
A will might state that, in the event a minor is named to inherit, the funds are to be held until a given age is reached. The will would also name a trustee. This is referred to as a minor’s trust and it is “testamentary” since it was established by a will and only goes into effect on the death of the person who made the will, the testator. The testamentary trust might state that the funds are to be used for the “health, education, maintenance and support” of the minor beneficiary. This is referred to as a “support” trust.
The question arises, however, if you are appointed as trustee for the minor beneficiary, how specifically should the funds be used? Medical bills are one obvious choice since they fit under the definition of “health” although these might be covered by health insurance anyway. College funds are another possibility but is it necessary to wait until the minor reaches college age to use the trust funds? Probably not, especially if special education or related programs are involved. Maintenance and support are broad terms. They probably do not include major purchases that only indirectly benefit the minor. Some individuals drafting their Wills include specific provisions to be certain their intent is clear.
This kind of “support” trust can also be established during lifetime for the benefit of an individual or a group of individuals and there can be questions there also as to whether and when funds should be distributed.
There is another broad category of trusts known as “special needs” or “supplemental needs” trusts. Distributions for the benefit of those individuals named are restricted, the primary reason being to prevent loss of government or other benefits that the beneficiary is currently or will likely receive. Distributions cannot be made directly to the beneficiary. The rules are much less liberal than those applying to support trusts.
For wills, the document must contain language indicating payments cannot be demanded by the beneficiary in that way giving the trustee “absolute and unfettered discretion” regarding funds to be paid for the benefit of the beneficiary in such amount or proportions as the trustee deems appropriate.” The trustee must take into account any and all other assets, programs, benefits and sources available, it being the intent of the trustor (person making the trust) that “such funds shall supplement and not supplant any federal, state, local or other assistance as might be available to him.” The language, “supplement and not supplant” is critical. However, there are other criteria.
Funds are not expected to be used for food or shelter, although ironically a house could be purchased with the funds in some circumstances. Since the intended beneficiary is or may be on Supplemental Security Income or a form of Medicaid or other benefits with restrictions, the beneficiary’s funds and available assets can be subject to review.
Additionally, there is another form of supplemental needs trust referred to as a d4A or “payback” trust that is established with the funds of the disabled individual that requires pay back to the government that provided the benefits on the death of the beneficiary. Recognizing that there are so many detailed restrictions, consultation with a qualified elder law or estate planning attorney is seriously recommended.
Janet Colliton, Esq. is a Certified Elder Law Attorney recognized by the American Bar Association and Pennsylvania Supreme Court and limits her practice to elder law, retirement, special needs, estate planning and estate administration with offices at 790 East Market St., Suite 250, West Chester, 610-436-6674, [email protected] She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.