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The Care and Feeding of Trusts

Someone asked me if you write up trusts or set them up. Fair question. Estate planning has become increasingly complex, and more and more people are looking at trusts. A little history might help.

When I started practicing, most people just got a Will which was stapled to a piece of blue paper, folded, placed in a fancy Last Will and Testament envelope, and deposited in the client’s safe deposit box at their local bank. They knew the bank manager and tellers and they went to the bank often to not just deposit checks, but to say hello. Another time.

Today, everyone has a Will, Durable General Power of Attorney, Living Will, Health Care Power of Attorney and perhaps a Trust, Memorandum of Trust and Quitclaim deed transferring their home into the trust. All of these could not fit in any one envelope, let alone the little fancy one, so binders had to be used. And most safe deposit boxes were too small, which did not matter because no one chatted with local tellers, having switched to ATM machines and online banking.

Along the way, money changed too. Defined benefit pensions (money from a company that paid you a set and specific amount for life like social security) became defined contribution plans which meant that you were able to defer taxes on money you saved for retirement, but you were on your own to figure out how to make that last. Enter 401ks and 403bs and IRAs and Roth IRAs and annuities. Life changed and estate planning had to change too, or at least adapt, to this new financial world.

And then there was the Medicaid dance. Sometime in the 80s, laws were passed saying that the federal government would pay for someone’s care if he or she had a low monthly income and small amount of assets. Some attorneys figured out that if you gave away your assets six months prior to the application for Medicaid, the client would qualify for government assistance for their care. Hence Medicaid trusts were created that passed millions of dollars to children so their parents could go into a nursing home at the government's expense. This went from 6 months to 12 months to 18 months to 3 years to 5 years, at which time the dance slowed down. The world of Medicaid was changing just as nursing homes and assisted living facilities and elder care in general were changing, and different types of trusts were created to fit these changes.

People also did trusts for tax reasons. At one time only “rich people” had to worry about that, but suddenly more middle class people found themselves "upper middle" and had to think about federal taxes and how to make sure the surviving spouse would be protected. So the A/B Trust and Marital Trust and Family Trust expanded, along with trying to manage the monies after the first to die.

And that is the other reason for a trust - control. A Will gives everything outright (with some exceptions) but a Trust can hold the funds for different reasons like when heirs are minors, or maybe stop bequests entirely if certain problems arise like divorces or credit issues.

Which brings me back to the question – do you write up a trust or set up a trust? The answer: both. The Trust is written up to match the client’s needs and goals, but then it must be “set up” or funded. The assets have to relate to the trust, or it is simply another piece of paper. If a client has a million-dollar account with Morgan Stanley and the beneficiaries are Jack and Jill, they will receive the funds even if the Trust says it is to go to Sue and Sam.

Hence the care and feeding of the Trust. Like a child, it takes more time when it is first set up but it will still need attention over the years. There might be significant changes over time – new beneficiaries, new trustees – because like those children and life in general, it keeps changing.

The care and feeding analogy is a bit silly, but drafting and maintaining Trusts can be a challenge. I find that it helps to slow the process down if necessary and maybe even laugh a bit. Visions of highchairs and high school do come to mind. Funding will be tedious and a bit irritating in the beginning (too bad trusts aren’t cute like a baby) and life may change dramatically like those rebellious teen years (when cuteness is long gone) so more adjustments will have to be made.

Ah yes, care and feeding of trusts is real. Maybe I should add a growth chart to my Trust documents. Might make the funding easier. Or at least funnier.

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