Trusts

Parents often come to us asking how they can protect an inheritance they want to give to a child who has a shaky marriage. A trust can provide protection if it is properly crafted and implemented.  It all hinges on whether the child has the ability compel a distribution from the trust.

Let’s take as an example. the case of Ferri v. Powell-Ferri. This case shows us how a trust can provide no protection of the assets for the benefit of a child embroiled in a divorce. It also clarifies how giving the people managing the trust (“the Trustees”) complete authority over whether and when to make distributions can provide effective protection of assets in a divorce. 

In 1983, Paul J. Ferri funded the Paul John Ferri, Jr. Trust with $1M for the sole benefit of his 18 year old son, Paul John Ferri, Jr. (known as “the 1983 Trust”). The trust was created in Massachusetts and is governed by Massachusetts law. The 1983 Trust established two methods by which the Trustees can distribute assets to Paul Jr. First, the Trustees may "pay to or segregate irrevocably" trust assets to Paul Jr. This means the Trustees can either pay trust funds directly to Paul Jr. or can set aside funds for his future use. Second, after Paul Jr. reaches the age of thirty-five, Paul Jr. may request certain withdrawals of up to fixed percentages of trust assets, increasing from 25% of the principal at age 35 to 100% after age 47.

In 1995, when Paul Jr. was 30 years old he married Nancy Powell. Fifteen years later in October, 2010, Nancy filed for divorce in Connecticut. In March, 2011, the current trustees of the 1983 Trust, Michael Ferri (Paul, Jr’s brother) and Anthony Medaglia (the “Trustees”) create the Declaration of Trust for Paul John Ferri, Jr. (known as “the 2011 Trust”) in order to shield the trust assets from Paul Jr.’s soon to be ex-wife. They subsequently moved the assets from the 1983 Trust to the 2011 Trust.

As with the 1983 Trust, Paul Jr. is the sole beneficiary of the 2011 Trust. Under the 2011 Trust, the Trustees have complete authority over whether and when to make payments to Paul Jr., if at all; Paul Jr. had no power to demand payment of trust assets. The spendthrift provision of the 2011 Trust bars Paul Jr. from transferring or encumbering his interest. This means the 2011 Trust shields the trust from Paul's creditors including his ex-wife Nancy. The Trustees moved the assets into the 2011 Trust out of concern that Nancy would get part of the assets of the 1983 Trust in the divorce. They moved the assets without informing Paul Jr. and without his consent.

At the time the assets were moved from the 1983 Trust to the 2011 Trust, Paul Jr. had a right under the 1983 Trust to request a withdrawal of up to 75% of the principal. During the course of the divorce, his vested interest matured into 100% of the assets in the 1983 Trust.

In August, 2011, the Trustees of the 1983 Trust and the 2011 Trust commence a declaratory judgment action against Nancy and Paul Jr. in the Connecticut Superior Court. A declaratory judgment action is a type of lawsuit that interprets a legal document like a trust. The Trustees asked the Court to declare that: 

(1) the Trustees validly exercised their powers under the 1983 Trust to distribute and assign the property and assets to the 2011 Trust; and 

(2) Nancy has no right, title, or interest, directly or indirectly, in the 2011 Trust or its assets, principal, income, or other property. 

Nancy moved for summary judgment asking the court to rule in her favor without a trial, and the Trustees filed a cross motion to block Nancy from receiving any of the Trust assets. In support of their cross motion, the Trustees filed an affidavit from Paul Sr. (“the Settlor”) who was still alive. The affidavit stated that the Paul Sr. intended to give the Trustees of the 1983 Trust the specific authority to do whatever they believed necessary and in the best interest of Paul Jr., including irrevocably setting aside the trust principal in a separate trust for Paul Jr.’s sole benefit.

In August, 2013, the Connecticut trial judge struck Paul Sr.’s affidavit and granted Nancy's motion for summary judgment. If upheld on appeal, the court’s ruling would allow Nancy to reach the Trust assets in the divorce. The court determined that the affidavit was not necessary to the disposition of this case because the 1983 Trust document itself was clear. According to Judge Munro, allowing the assets from the 1983 Trust to move to the 2011 Trust would improperly remove the provisions of the 1983 Trust that gave Paul Jr. the right to withdraw money from the trust. If Paul Sr. had wanted to make the Trustees power absolute, he could have done so in the 1983 Trust. Anything less than giving the Trustees absolute power over the trust principal could not defeat the intent of the trust section giving Paul Jr. the absolute right to withdraw the trust property. 

The Connecticut court ruled that the Trustees of the 1983 Trust moved the assets to the 2011 Trust without the proper authority to do so. In June, 2014, Judge Munro ordered restoration of 75% of the assets of the 2011 Trust to the same terms as the 1983 Trust, an accounting of the 2011 Trust from inception to the date of restoration, and an award of reasonable attorney's fees to Nancy.

Paul Jr. appealed the decision to the Connecticut Supreme Court. The Connecticut Supreme Court referred the case to the Massachusetts Supreme Judicial Court (“Mass. SJC”) because it is the state in which the 1983 Trust was set up.  In a decision dated March 20, 2017, the Mass. SJC ruled that under Massachusetts law the Trustees had the power to move the assets from the 1983 Trust to the 2011 Trust.  The Court found that the Trustees had a lot of latitude when it came to deciding what to do with the 1983 Trust. The 1983 Trust plainly allows the Trustees to act with no oversight other than the requirement to provide reporting at the request of Paul Jr. The Court noted that the 1983 Trust allowed the Trustees to "segregate irrevocably for later payment to” Paul Jr. and show that Paul Sr.’s intent was to allow the Trustees to move assets to a new trust for Paul Jr. The Court also mentioned that the Trustees not only had the power to pay trust assets directly to Paul Jr.; they could apply the payment for his or her benefit which included moving the assets from the 1983 trust to the 2011 trust. Because the language of the trust was almost identical to another case where assets were moved from one trust to another in Morse v. Kraft, a 2013 case, the Court said the Trustees could move the assets from the 1983 Trust. 

Nancy’s lawyers argued that the assets in the trust should be included in the divorce because Paul Jr. had the ability to ask for trust assets. The Mass. SJC recognized that Paul Jr. had the power to withdraw the trust principal.  Yet, the Court found that Paul Jr.’s ability to request assets from the trust did not prevent the Trustees from being able to move the assets from the 1983 Trust to the 2011 Trust. The Court reasoned that if the Trustees couldn’t move the assets over which Paul had the power to withdraw, it meant that the Trustees would lose the ability to exercise their fiduciary duties over those assets. Under Nancy' s interpretation, the Trustees would be without a role when Paul Jr. turned 47. At the time the Trustees moved the assets from the 1983 Trust to the 2011 Trust, Paul Jr. had withdrawn only a small percentage of the assets. Therefore, a substantial portion of the trust assets remained in the 1983 Trust, subject to the Trustee's authority and stewardship. This means that just because Paul Jr. had the ability to withdraw assets from the trust, it did not mean the Trustees lost the authority to move the assets from the 1983 Trust into the 2011 spendthrift trust.  In other words, the Trustees did have the power to deny creditors like Nancy access to the trust assets.

In a concurring opinion, Chief Justice Gants made clear that the Mass. SJC was not deciding whether Massachusetts law will permit assets to be moved from one trust to another for the sole purpose of removing trust assets from the marital estate that might be distributed to the beneficiary’s spouse in a divorce action. Chief Justice Grant wrote, “I do not offer any prediction as to whether this court might invalidate as contrary to public policy a new spendthrift trust created for the sole purpose of decanting the assets from an existing non-spendthrift trust in order to deny the beneficiary’s spouse any equitable distribution of these trust assets. I simply make clear that, in this opinion, we do not decide this issue; we will await a case that presents such an issue before we decide it.”     

In conclusion, the case of Ferri v. Powell-Ferri recognizes that trusts can play an important role in protecting family assets in a divorce.  Trusts with withdrawal powers or that allow the child to compel distribution will not work.  For instance, a trust that requires distributions be made for the child’s health, education, maintenance and support will not protect the trust principal. Instead, like the 2011 Trust, the Trustee must have complete authority over whether and when to make payments to the beneficiary.  

Come see the estate planning attorneys at Cipparone & Zaccaro, PC if you want to leave an inheritance to a child with a shaky marriage. 

As we age, most of us will find the costs of long term care unaffordable. The current average cost of a semi-private room in a nursing home in Connecticut is over $12,000 per month. This charge can quickly wipe out even a large estate, depending on the length of the resident’s stay. Fortunately, Medicaid is available to pay these costs if you qualify for assistance. 

Estate Recovery

When you die, the state will attempt to recover from your estate any Medicaid benefits paid on your behalf. One of the ways the state uses to recover the benefits paid is by recording a lien against the decedent’s home in the land records of the town where the property is located. The state can lien the property as long as no other person receiving Medicaid benefits is living in the home. This process is known as “estate recovery.” For the majority of Medicaid recipients, the house is the only asset remaining on which the state can recover Medicaid payments. If the Medicaid payments exceed the value of the house, your family may not inherit anything from you.

The best way to protect your house from the Medicaid lien upon death is to transfer it to an Irrevocable Grantor Trust.

Irrevocable Grantor Trusts for the Home

A trust is an arrangement where a Trustee holds the property for family members.   The Trustee’s job is to administer the assets of the person who set up the trust (i.e. - the parent) and ultimately to disburse the assets to the beneficiaries of the trust (i.e. -- the children). The parent retains no interest in the Trust. In an Irrevocable Grantor Trust, one or more of your children manage the property as Trustee.  The Trust is not recorded on the land records of any town. You continue to live in your home and pay all of the expenses of the property including real estate taxes and insurance. 

If you have to sell the home to go to an assisted living facility or nursing home, the grantor trust provisions allow you to use your entire $250,000 capital gain exclusion to shelter the gain in value from income taxation.  Contrast that result with transferring the house to your children and retaining a life estate.  With a life estate, the $250,000 capital gain exclusion for the sale of a home will only apply to the life tenant’s portion of the net sale proceeds.  The children will have to pay thousands of dollars in income tax on the difference between the cost basis of the property and the sales price multiplied by their percentage interest. 

If the house has to be sold, the Irrevocable Grantor Trust also has an advantage over the life estate from the creditor standpoint. The property stays in the trust and the creditors of any child cannot reach it because the proceeds are held by the Trustee and not the child/beneficiary.  Because the sale proceeds remain in the trust, the family does not have to scramble to spend sale proceeds within the month of receipt so that the parent can remain on Medicaid.

Once you convey your house to the Irrevocable Grantor Trust, you no longer own the property. If the conveyance occurred more than 5 years before applying for Medicaid, the State of Connecticut cannot put a lien on it.  The Trustee can sell the property and distribute the net sale proceeds to your children without having to pay the state.  Nevertheless, because you no longer own the house you conveyed to the Irrevocable Grantor Trust, you can’t refinance the house and there is no possibility of increasing your income through a reverse mortgage.

The attorneys at our law firm also include a special power of appointment in the Irrevocable Grantor Trust so that you retain the power to change the disposition of your home among your descendants.  If one of your children goes through a messy divorce, an unforeseen bankruptcy, needs public benefits, or you have a falling out with a child, the trust protects your home. 

The grantor trust provisions in the Trust allow the step up in basis of your home at your death to its fair market value . When your children sell the home, they will pay little or no income taxes on the sale because of the stepped up basis. In this respect, the Irrevocable Grantor Trust is just like the life estate.

Plan Ahead!

Don’t wait until it is too late. A transfer to an Irrevocable Grantor Trust only works if you do not apply for Medicaid for 5 years after the transfer of property into the Trust.  Contact an estate planning attorney to find out how you can protect your home from Medicaid recovery with an Irrevocable Grantor Trust.  

A Transparent Trust is a trust in which the sole beneficiary (the person receiving the assets) serves as the sole Trustee (the person responsible for managing and distributing the assets). This means an adult child can both receive and manage the assets of the Trust.

For example, Bill and Judy set up a Transparent Trust for their son, Matt.  Matt will be the Trustee of the Transparent Trust.  As beneficiary, Matt could appoint the property at any time to his children free of any gift tax.  The Transparent Trust lasts for Matt’s lifetime.  When he dies, the Trust goes to his children.

The benefit of a Transparent Trust is that it requires Matt to keep the funds in a trust account that is separate from his own funds.  Matt, as the Trustee, can only spend the trust funds on his own health, education, maintenance and support; his spouse, for example, has no access to the trust.  After Matt dies, the trust assets go to his children.

The trust account is usually named “Trust for [Child] u/a [Parent] dated [mm/dd/yyyy].” (The ‘u/a’ means “under agreement”).  The “agreement” is his parents’ Revocable Trust that contains the Transparent Trust.  Matt must then set up a trust account at a financial institution and manage it, as Trustee, in accordance with the Transparent Trust provisions of his parent’s Revocable Trust.

WHEN IS A TRANSPARENT TRUST APPROPRIATE?

A Transparent Trust is often recommended so that that property bequeathed to a child could then be passed down to the grandchildren.  Without the Transparent Trust, if Matt, for instance, were to remarry, his property, upon his death, would go to that spouse instead of his own children.  So, a Transparent Trust is ideal for those who want to make sure the property passes to their grandchildren if the child dies and to prevent property from going outside the family.

Also, a Transparent Trust is ideal for those who do not want to burden their child with a bank trustee, regular accountings and yearly income tax returns.  The child just reports the trust account income on Schedule E of his or her income tax return.  And, the child does not have to ask a bank or other Trustee for money. 

WHAT ARE POTENTIAL DISADVANTAGES TO A TRANSPARENT TRUST? 

Like an outright inheritance, the child has control over the disposition of the funds in a Transparent Trust.  And, as such, it is subject to the claims of creditor including spouses or state or federal governments.  In that regard, a Transparent Trust is NOT advised if the child is deep in debt, on the verge of a divorce, subject to lawsuits because of malpractice claims, or receives or will likely receive public benefits.  The lender, spouse, victim, or the state could seize the funds in the Transparent Trust.  In those instances, there are better ways of protecting the inheritance such as an Asset Protection Trust.

Most people do not realize that there are many ways to leave property to your children.  For children who do not receive public benefits, these include:

Outright.  Your children receive your property, no strings attached.  It is simple and clean.  It also means that a child can spend it unwisely or fail to properly manage it.  A child can commingle it with other money, and creditors can seize it.  Your grandchildren might never receive it.  If your child dies, the property could pass to the child’s spouse, the spouse could remarry, and all of it could go to the spouse’s new mate. 

Uniform Transfers to Minors Act.  If your child is a minor, you can have your Executor choose a Custodian for the child under the Uniform Transfers to Minors Act (UTMA) and transfer the property to the Custodian.  The Custodian would then put the funds in a UTMA account and spend the funds on the child’s needs as they arise.  At the age of 21, the child receives the balance of the account outright.  Once the child receives the balance, all of the advantages and disadvantages of outright distribution apply. 

Installment Trust.  You can choose to delay the receipt of property until the child reaches a certain age by leaving it for them in trust.  It does not prevent the child from obtaining access to the property; the child can always ask the Trustee for distributions of principal or income.  The Trustee may provide for expenses such as a wedding, purchase a home, or establish a business or profession.  You can give direction to the Trustee on proper distributions from the trust.  When the child reaches the age you chose in the trust document, the Trustee distributes the balance of the trust to the child.  Once the child receives the balance, all of the advantages and disadvantages of outright distribution apply. 

Transparent Trust.  A Transparent Trust holds property in trust for the life of an adult child.  The child would be the sole Trustee of the trust.  The Trustee can make distributions for his or her support in reasonable comfort, maintenance in his or her accustomed manner of living, education, and health.  The child can appoint the property at any time to his or her own children.  Upon your child’s death, all of the property goes to your grandchildren.  The advantage of a Transparent Trust is that it requires the child to keep the funds in a separate account as Trustee and spend it only for the child or his or her children.  If a spouse of a child wants to spend it, the child can say “I am sorry, that money was given to me by my parents for my health, education, maintenance and support, and after I die, it goes to our children.”  The funds in the trust would be subject to claims of creditors because the child has control over the disposition of the funds.  The child would show any income from the trust on Schedule E of the child’s income tax return, so no separate tax return is required. 

Asset Protection Trust.  An Asset Protection Trust protects assets from creditors and spouses during your child’s lifetime.  Either you or your child can appoint an independent Trustee.  A trusted family member, friend, or professional trustee would be the best to choose for an independent Trustee.  As the Trustee deems advisable, the Trustee can spend the funds on behalf of your child.  The child could also borrow funds from the Trust, and the Trustee could buy property for the child’s use.  The child would have the power to remove the Trustee for any reason, but then an independent successor Trustee would have to be appointed.  When a child reaches a certain age, the child can become the Co-Trustee.  The Trustee would have to file a separate income tax return (Form 1041) to report income earned by this trust, unless certain provisions are added to make it a grantor trust under the tax law.  Although an Asset Protection Trust is more cumbersome, it can protect the property and keep it in the family.  

Which is the best way to give to your children?  It all depends.  Make an appointment with an experienced estate planning attorney to discuss how to leave your estate to your children.

For many people, the decision to prepare a Will is easy, but the motivation to follow through is missing. The thinking goes something like this:

What’s the rush?  I am in good health.  There are more pressing matters.  I’ll get to it eventually.  I plan on being around for a long time.  Right now, I need to focus on supporting my family, saving for college and retirement, and paying for health care.  I’ll prepare a Will at the end of the year when things slow down.

The problem is most people repeat this thinking year after year… Things never seem to slow down.  Juggling time between work, family, and social events is difficult.  Who has time to plan an exit strategy?

As estate planning attorneys, we can’t imagine why people aren’t lined up at our office door every morning like Apple customers waiting for the release of the next iPhone.  Death and taxes – everyone’s favorite topics, right?

All kidding aside, preparing a Will is very important for the future of your family.  If you unexpectedly pass away, your family must deal with the great emotional void created by your absence.  They also must find a way to manage without your financial support.  One can ease this burden by proper planning.  So, why doesn’t everyone prepare an estate plan?

Recent surveys find that only about 50% of American adults have prepared a Will.  According to one Gallup Poll, 71% of respondents aged 50 and older had a Will. That percentage fell to 37% for people under 50.

Why don’t people prepare an estate plan?  Many people just haven’t gotten around to it.  Others don’t believe they own enough assets to worry about estate planning.  Still others believe that state laws mirror the wishes they would express in a Will or Trust.  Are they right?  Let’s take a look.

If you die without a Will in Connecticut, the laws of intestacy become your estate plan and determine who gets your probate property.  If you think you don’t have a Will, think again.  Did you know state law requires if you don’t have a Will and  you are survived by children, your spouse gets the first one hundred thousand dollars, plus one-half of the balance of your estate, and the remainder is divided among your children (regardless of their age)?  If any of your children are from a prior marriage, your spouse only gets one-half of your estate and the remainder is divided among your children.  If you are married but have no children, the first $100,000 goes to your spouse, but after that your spouse gets 3/4 of the remainder and your parent(s) gets the remaining 1/4 . You would be hard pressed to find anyone who has prepared a Will intentionally dividing their assets in that manner, but that is what would happen without a Will. A Will ensures your property goes to the people you choose as you desire, not according to state law.

So, all I need is a simple will, right?  No!  A proper estate plan should address more than just the final distribution of your property.  What about the important question of who will care for  your kids if you die?  Certainly, if you have children under 18, you owe it to them to choose a proper Guardian to take care of them. If you do not make a written nomination of guardians for your children, a judge will choose the guardians.  Do you really want a judge to make that choice without your input?

A comprehensive plan should also cover the potential for physical or mental incapacity.  Who will manage your assets if you become incapable?  Who will make your healthcare decisions if you are unable?  To address these concerns, your plan should include a Durable Power of Attorney to designate a person to manage your assets and an Appointment of Health Care Representative to designate a person to manage your health care.

What about your cherished pet?  Will someone take care of Fluffy or will she spend her final days in an animal shelter waiting to be euthanized?  A thorough estate plan will also cover the care of your pets when you are gone.

You should also consider the benefits of a trust.  If you have children who haven’t reached 22, or adult children who are either disabled, owe a lot of debt, or are in the middle of divorce, including a trust in your estate plan gives you an opportunity to choose a person who will manage your child’s funds and assure the funds are not squandered or distributed outside the family to creditors or an ex-spouse.  You can name a trusted friend, family member or professional to serve as trustee and oversee the trust investments and distributions.  You can also avoid the need to probate the assets held in the trust at your death, which is desirable for out-of-state real estate.

Most conversations about estate planning begin with a client’s desire for a “simple Will.”  However, a will is only one of many important documents that should be part of every estate plan.  A proper estate plan addresses all of these issues and often more.  Will 2014 be the year you finally prepare a thoughtful estate plan?

Most people who have adult children figure it is easiest to give an inheritance to your children outright with no strings attached. It is simple and clean. But there are downsides to giving to your adult children in a simple manner. Your grandchildren may never receive it. It could pass to the child’s spouse, the spouse could remarry, and all of the inheritance you gave to your child could go outside your family to the new mate of your child's spouse.

There is a better alternative. Why not give property to adult children in a Transparent Trust? A Transparent Trust holds property for the life of a child. The child is the Trustee of the trust. The child takes his or her inheritance and puts it in a trust account at a financial institution. The child could spend the funds for his or her support in reasonable comfort, maintenance in her or his accustomed manner of living, education, and health. The child would show any income from the trust on Schedule E of the child’s income tax return. The child could appoint the property at any time to his or her children. At the child’s death, all of the property goes to the child’s children (your grandchildren).

The benefit of a Transparent Trust is that it requires the child to keep the funds in a separate account as Trustee and spend it only for the child’s or grandchild’s health, education, maintenance and support. If a spouse of a child wants to spend it, the child can say, “I am sorry that money was given to me by my parents for my benefit and after I die for the benefit of our children.” The child controls the trust accounts so the account remains subject to claims of creditors. But the result would have been the same as when you give an inheritance to your son or daughter outright.

If you want to protect your grandchildren while giving your adult child complete control of the funds, consider using a Transparent Trust.