What is a Trust?

By: Robert B. Bellitto

WHAT IS A TRUST?

In simplest terms, a trust is an instrument that directs the distribution of assets and income. It is further defined by state statute (C.G.S. Section 802c) and more recently, the Connecticut Uniform Trust Code (Public Act No. 19-137) which became effective January 1, 2020. 

WHO ARE THE PARTIES TO A TRUST?

All trusts have three primary parties:

1. SETTLOR (a/k/a GRANTOR or TRUSTOR): The party who creates the trust and owns the assets to be put in trust
2. TRUSTEE: The party that manages and distributes the assets and income
3. BENEFICIARIES: The parties who benefit from the trust by receiving the assets and income from the Trustee under the direction of the Settlor

 WHAT ARE THE TYPES OF TRUSTS?

There are three primary types of trusts, as well as some miscellaneous specialized trusts which are less common.

1. REVOCABLE INTER VIVOS TRUST: Settlor retains the right to revoke the trust at their sole discretion. Settlor maintains control over assets during their lifetime and may reclaim ownership upon revocation of the trust. Assets and income may be distributed to Beneficiaries during Settlor’s lifetime.
2. IRREVOCABLE INTER VIVOS TRUST: Settlor relinquishes the right to revoke trust and relinquishes control and ownership of assets to the Trustee. Assets and income may be distributed to Beneficiaries during Settlor’s lifetime.
3. TESTAMENTARY TRUST: Trust is set up in the Settlor’s Will and is only effective upon the death of the Settlor.
4. MISCELLANEOUS SPECIALIZED TRUSTS:
   1. SPENDTHRIFT TRUST: Trust where Trustee is given specific direction to withhold assets and income to Beneficiaries, or to distribute solely for the support of said Beneficiaries.
   2. SPECIAL NEEDS TRUST: Trust designed to provide for medical care of Beneficiaries with special needs. Used in conjunction with “Title 19” Medicaid benefits.
   3. CHARITABLE TRUST: Trust which is set up for the benefit of non-profit organizations or for charitable purposes.
   4. DAPT (Domestic Asset Protection Trust): This is a new type of trust in Connecticut where the Settlor is also the Trustee and Beneficiary. It is specifically designed to avoid claims by FUTURE creditors.

WHY WOULD SOMEONE WANT A TRUST?

While there are many reasons to set up a trust, these are the most common: 

1. TO AVOID PROBATE
2. TO AVOID TAXES
3. TO AVOID CREDITORS

1. AVOIDING PROBATE: It can take a year or more to fully probate even a basic estate with a will. If there is family drama and objections to the will, the timetable can be even longer. If there is no will, the laws of intestacy will apply, and the decision of who gets what is prescribed by statute, regardless of the decedent’s intent. In addition, probate court records are generally available to the public, so private family matters can become public spectacle.

COUNTERPOINT: Even where a trust exists, there is no way to completely avoid some involvement with the Probate Court. At a minimum, a decedent’s death certificate and an affidavit in lieu of probate or administration would need to be filed with the Probate Court where the decedent was last domiciled.

2. AVOIDING TAXES: Assets and income that are distributed from a trust have been generally exempt from estate and gift taxes. However, you should ALWAYS consult with your accountant on the tax ramifications of your trust. Also, be advised that recent changes enacted by the IRS may impact the tax situation for your trust, or that of your beneficiaries.

COUNTERPOINT: The Federal and State of Connecticut estate tax thresholds are currently $13.99 million (Federal) and $13.61 million (CT). However, the Federal estate tax threshold is scheduled to revert to $15 million (adjusted for inflation) in 2026. Most people have assets that are well below these thresholds, and if their assets passed through a will or intestacy, they would be exempt from estate taxes.

3. AVOIDING CREDITORS: Assets that are held by a trust are generally harder for creditors to identify and attach. Assets that are held in a SPENDTHRIFT TRUST are generally not reachable by creditors of beneficiaries. Assets that are held in an IRREVOCABLE TRUST are generally not reachable by creditors of the Settlor. Also, as mentioned above, a DAPT may be used to avoid claims of FUTURE creditors but may not shield against existing claims.

COUNTERPOINT: Per C.G.S. Section 52-301, creditors may bring an action against beneficiaries where the trustee is not directed to withhold income. While an irrevocable trust can shield a settlor from creditors, the settlor has no ownership or control over such assets. In addition, a court may set aside an irrevocable trust under specific circumstances.