Guide to Maryland Trusts

Using Trusts to Create Your Legacy

Maryland Trust Attorney’s Guide to Trusts

Many clients would like to have some benefits of a trust but also want the simplicity of setting up a last will and testament. Using a testamentary trust, your Maryland trusts and estate attorney may be able to provide you exactly that.

An important tool for sustaining your family

While living trusts get far more attention, Maryland estate attorneys create testamentary trusts far more often than all others.

What is a testamentary trust?

A testamentary trust is a legal trust created in your will to provide support for a beneficiary when you die. It allows you to provide for your spouse, children, and other beneficiaries without  giving them immediate control of the inherited assets.

Similar to other trusts, parties to a testamentary trust include:

  • Settlor - the person who creates the trust, in this case the person who created the will;
  • Trustee - the person who will control the trust and its assets; and
  • Beneficiary - the one or more people receiving the benefits of the trust

The purpose of a testamentary trust

Maryland estate lawyers will use testamentary trusts for many client purposes. The most common would be if you want to leave your estate to your spouse, children, or grandchildren, but you know it’s not in their best interests to receive it all immediately upon your death.

Because of the ability to distribute the assets over time, Maryland estate lawyers often use a last will with a testamentary trust to:

  • Provide for a surviving spouse
  • Allow children and grandchildren to receive assets while supervised
  • Provide for spouses, children, and step-children in blended families

The trustee will be required to distribute the assets to the beneficiaries according to the instructions that you, the creator of the trust, provide in your last will and testament. The last will and testament will include all terms of the trust, including naming the trustee, instructions on how to invest the assets, and the rules for making distributions from the trust.

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Common Uses of Trusts

Trusts can be useful in many situations. Despite common thoughts, you do not need to be on a Forbes magazine list for a reason to form a trust. Maryland trust attorneys form most trusts for purposes unrelated to estate tax planning. Those trusts generally address the family’s specific concerns or goals. A trust may be the only way to address those issues. Most estate and trust attorneys create trusts to deal with the following common issues and goals:

Estate Planning – Trusts can be a powerful legal tool for estate planning because they do not need to be limited to one initial beneficiary. Trusts can benefit multiple beneficiaries over time. For instance, the trust could use its assets to provide for your spouse first, then your children, then your grandchildren. In contrast, a last will and testament distributes assets immediately to your heirs. Once distributed, you have no control over how the heir uses those assets. The heir could waste the assets or lose them to creditors.

You can use trusts to avoid those issues of estate law. Trusts also allow the family to avoid probate, avoid the costs of probate, and avoid your family’s finances becoming public records. Of course, you can sometimes use trusts to reduce taxes.

Children and Young Beneficiaries – Trusts for children are likely the most popular reason for including a trust in Maryland estate planning. For estate planning, young can mean anyone who does not yet have gray hair. While it is obvious that a trustee should hold money on behalf of children, most realize the legal age of majority is rarely the age of maturity. You can usually expect young adults to make many mistakes before becoming settled. It is usually in the best interests of the child to hold portions of the trust’s assets until much later.

The trustee can use trust assets to support the young person before final distributions. As a parent or grandparent would, the trustee may pay for education, food, healthcare, and similar expenses. The trust may hold the remaining assets until you believe it’s time to begin releasing assets without conditions.

Disabilities – The disabled face many challenges in their life, including financial challenges. As such, families like to assist disabled family members, particularly if they cannot work and depend on government assistance. They want to provide financial assistance but do not want to jeopardize their government benefits.

Properly drafted and administered Special Needs Trusts will not prevent disabled persons from receiving SSI, Medicaid, and similar benefits.

Beneficiaries with Baggage -The more you work with families, the more you realize every family has a member with issues. Giving them money can be the most damaging thing you can do to them. They may be in troubled relationships, have trouble handling money, or more serious issues, like an addiction.

Trusts can delay or stop payments if needed to protect the beneficiary. This can keep the assets out of the reach of the beneficiary’s creditors, spouse, or bad habits.

The above, or a combination of the above, are the most common reasons families use trusts.

The paths of assets to beneficiaries using a last will and testament or trusts in Maryland estate planning

Main types of trusts:

Despite the many uses of trusts, you can sort all trusts into a few categories. It is possible to use any of these trusts to accomplish the same goals. Other goals may require a particular type of trust. Your Maryland trust attorney will guide you to the correct trust for your situation. Below is a brief discussion of each:

Revocable Trusts

The settlor can always modify or terminate a revocable trust. So, the settlor can change the trust agreement’s beneficiaries, distributions, or reclaim the trust assets. This may be useful, for example, if:

  • You later decide to sell the main asset of a revocable trust
  • Your financial situation or goals change
  • Your beneficiary’s creditor, marital, or health changes
  • Your beneficiary joins a cult (or quits yours) and you want to change beneficiaries

Some Maryland estate and trust attorneys call revocable trusts a living trust or a revocable living trust, depending on how confusing they want to be. Most people form revocable trusts to:

  • Avoid probate
  • Keep family matters secret
  • Avoid dividing a business or real estate
  • Distribute family assets over time

Unlike a testamentary trust, you form a revocable trust during your life. The trust remains revocable while you are alive. After your death, the trust can no longer be modified or terminated. But, during your lifetime, you may have decided that the trust will distribute all assets immediately after your death or that the trust will distribute assets over an extended time. The trust no longer being revocable does not mean it’s indefinite.

Revocable trusts are ineffective for estate tax planning. The IRS considers property transfers to a revocable trust to be incomplete gifts to your beneficiaries. The IRS considers your right to reclaim the asset to be a continuing interest.  IRS Regulation 26 CFR § 25.2511-2 states that if you have not ended your dominion and control of the asset, you remain its owner. When you pass away, the IRS will include the asset for estate tax purposes.

This eliminates your ability to use revocable trusts to reduce estate taxes by transferring assets before they fully appreciate, thereby “freezing” their value when transferred. Maryland Estate and Trust Attorneys commonly use asset freezing techniques to reduce estate taxes.

However, a revocable trust’s assets receive a step-up in basis because the IRS includes the property for estate tax purposes. This step-up in basis may significantly reduce the beneficiary’s income taxes upon its sale. Most families are exempt from estate taxes nowadays, so the income tax benefit of a stepped-up basis makes revocable trusts attractive for families without estate tax concerns.

Irrevocable Trusts

The trust settlor cannot revoke or modify an irrevocable trust once it is formed. Maryland trust attorneys use irrevocable trusts to address more complicated issues, rather than just avoiding probate. While the irrevocable trust may not be modified or revoked except under certain circumstances, this does not mean you will have completely lost control of the assets of the trust. You choose the trustee of the trust and maintain some control through that choice.

Irrevocable trusts are most often used when federal or state laws require you have given up your right to reclaim or otherwise control the assets. Maryland Estate Attorneys use irrevocable trusts for the following types of trusts:

Special Needs Trusts – In circumstances where the person who is disabled receives assets that jeopardize their benefits, they will need to form a particular type of special needs trust to reduce their assets. A type of special needs trust known as a (d)(4)(A) trust, referencing a federal code section, is the type needed. Among other requirements, a self-settled special needs trust of this type must be irrevocable, must have an independent trustee, and must limit access to the funds.

Estate Tax Planning – For an asset to be considered not part of your estate at the time of your death, you must have given up control of the asset at an earlier time. A transfer that you can take back or have a right to use, such as a life estate over real property, will cause the transfer to be considered an incomplete gift or transfer. Once out of your estate, any further appreciation will not be included as subject to either estate or gift taxes, thereby reducing your total tax burden.

If estate taxes are not a concern for your family, terms can be included in the irrevocable trust agreement allowing the transfer to be considered having been completed for legal purposes but not complete for estate and gift tax purposes, thereby allowing a step up in the assets’ basis for income tax purposes.

Asset Protection – Losing the ability to reclaim assets is a prerequisite for preventing creditors from seizing those assets. There are many other requirements as well. The timing of the transfers, the debtor not having control of the trust, and the applicable state’s laws can also affect the trust’s ability to avoid creditor claims.

Income Tax Planning – By transferring the assets to an irrevocable trust, the income from those assets can be shifted to family members that are in lower tax brackets. If this is not desired, then it is also possible to have the income taxes pass to the settlor by including provisions to be an effective transfer for estate taxes but not for income taxes.

Elder Law Planning – Irrevocable trusts are used for elder law purposes since the settlor’s assets need to be reduced to qualify for Medicaid long-term care benefits. Medicaid considers the assets having been gifted or transferred and no longer part of the settlor’s assets for Medicaid purposes after the passing of five years.

Life Insurance Trusts – Planning can be used so life insurance proceeds are not included in the taxable estate by transferring a life insurance policy or having the trust purchase the life insurance policy. This type of trust is common enough to be known as an Irrevocable Life Insurance Trust or by its acronym, an ILIT.

Testamentary Trusts

While a living trust is any trust formed during the lifetime of the settlor, the settlor does not form a testamentary trust until the settlor’s death.

The last will and testament of the settlor includes the formation of a trust. The last will and testament includes bequests to at least the initial beneficiaries. It will then provide some criteria used to determine if the bequest will go directly to the beneficiary or be put into a trust. The criteria will often be the age of the beneficiary.

Similar terms you will find in a normal trust agreement will be inserted into the last will and testament. The terms will name a trustee and provide the trustee with instructions on how to manage the trust and when distributions from the trust should be made.

Not all testamentary trust assets will need to come from the estate of the settlor and non-probate assets, such as life insurance proceeds, bank accounts, and other assets that can be passed through beneficiary designations can name the testamentary trust as the destination for the assets upon your death.

Even if there are no probate assets that would require the opening of the succession, for the testamentary trust to be formed the last will and testament will need to go through the probate process for the trust to be recognized.

The most common testamentary trusts you will find are bypass or marital trusts and trusts intended to benefit children, grandchildren, and other younger persons inheriting under the last will and testament.

Funded or Unfunded

Whether a trust is funded or unfunded often depends upon the source of the assets. When you form a trust there is no need to immediately fund it. You can establish the trust with the intention it will receive funds at a later date, such as upon the payment of life insurance proceeds. In such case, the last will and testament or the life insurance policy’s beneficiary designation form will name the trust as the recipient of the funds.

If the trust is funded, there could be income tax requirements since the trust will have assets and related income being produced in the trust. Using an unfunded trust to receive the proceeds of a last will and testament could also preserve some privacy for the beneficiary. This is because the distribution terms will not be part of a testamentary trust and, thus, will not be in the public record. So, if you do not want people to know the beneficiary will receive a big payday when they turn 30 or if the beneficiary has drug issues addressed by the trust’s terms, then using an unfunded trust would keep those issues private.


Common Questions Regarding Trusts:

How do I create a trust?

You create a trust by creating a trust agreement, which will give the terms of the trust, name the trustees, designate the powers and obligations of the trustees, name the beneficiaries, and provide for distributions. In addition, the trust will need to be funded with assets either immediately or at some point in the future.

Who is in charge of the trust?

The trustee is the person responsible for managing the trust. Among the trustee’s responsibilities, the trustee will ensure the terms of the trust agreement are being followed, make sure the assets are being maintained or invested prudently, hire advisors, prepare trust accountings for courts and beneficiaries, determine whether distributions should be made. Essentially, they are the CEO of the trust.

I’m a trust beneficiary. What does that mean?

As a trust beneficiary, you are entitled to receive the benefits of the trust. This may mean income and assets should be distributed to you or the trust agreement may limit your right to receive those benefits. The trustee of the trust may send you a K-1 annually so you can report on your income tax return the trust income the trust generates and distributes. You may also be entitled to demand accountings from the trustee showing how trust assets are being invested and used.

How do I transfer assets to my revocable trust?

The answer will depend upon the type of asset.  You can transfer assets either by an assignment of those assets to the trust or by changing the title to the property. If the asset is real estate, then a new deed to the property will need to filed in the appropriate county.  So, if you own a home in Cockeysville and hunting land outside Williamsport, then you will need to file new deeds with the Baltimore County recordation office in Towson and with the Washington County recordation office in Hagerstown. .




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