Trusts 101 for physicians

Medical Economics Journal, Medical Economics May 2022 edition, Volume 99, Issue 5

Trusts can be effective and important legal tools, but they are not all the same and they are not universally interchangeable.

Trusts can be effective and important legal tools, but they are not all the same and they are not universally interchangeable. We examine some of the trust law basics and terms every successful physician should know when evaluating their own legal planning needs.

What is a ‘trust’?

  • For the purposes of our discussion, a trust is a formal, binding, legal document that allows an individual to create and transfer title to property or value of any kind to the control of another for the benefit of a third party.
  • The entity that creates and funds a trust is known as a “grantor” or “settlor.” If there is more than one, they are known as “co-grantors”; e.g., husband and wife as co-grantors.
  • The trust is under the control of a “trustee.” If more than one trustee is serving at the same time, they are known as “co-trustees”
  • The trustee manages the trust in accordance with the terms it provides, most commonly for the benefit of a third party, known as the “beneficiary.”
  • There may be one or more beneficiaries and some trusts name “primary” and “contingent” beneficiaries; e.g., a wife leaves her estate to her husband as primary and to her three children as contingent beneficiaries if he predeceases her.

There are also cases where one may create and fund a trust for their own benefit, during their own lives, as opposed to those created solely for the benefit of third parties. These “self-settled trusts” are commonly seen in various forms of asset protection trusts, including those used by successful, high-risk professionals like doctors and those for Medicaid asset protection planning.

Trust situs – jurisdictional issues

The term “situs” refers to the jurisdiction and choice of law selected for the trust. Trusts may be established under the law of your state, another U.S. state, or the laws of a foreign nation or “offshore.” Different jurisdictions may have significantly different laws, taxation, and compliance requirements, including which asset protection benefits they provide.

Some special purpose asset protection trusts don’t rely on specific creditor protection laws, but rather on other well-established legal principles, including arm’s length sales transactions (e.g., you sell an asset to a trust for fair market value) and gifts to trusts that are considered “completed gifts” by the IRS for tax purposes and of which you relinquish title and control.

The myth of trust ‘secrecy’

Any asset protection plan or planner that uses the term “secret” should be a red flag and most likely avoided. There is no such thing as secrecy in the law (as opposed to privacy, which does exist and can be a trust benefit) and any plan that relies on assets being held in a trust, limited liability company, etc., that you hope isn’t found will also require your willingness to actively lie to conceal it. Why? Because an experienced litigator will simply ask you, under oath in discovery, in a deposition, in a debtor’s exam, etc. to disclose “any trust, partnership, corporation, foundation or similar device that you are a grantor, trustee, beneficiary, officer, member or director of.” You’ll either answer honestly or you’ll be committing perjury.

Two key trust terms: ‘revocable’ and ‘irrevocable’

These are key terms in any trust. Understanding them is especially important to those who are using a trust as part of an asset protection plan. A revocable trust can be revoked at any time up until your last breath, allowing you to change the trust details, including the trust’s assets and beneficiaries. As such, a revocable trust is defective against your creditors and liabilities, during your lifetime. An irrevocable trust, on the other hand, makes a permanent transfer of assets away from yourself to the trust so that the assets are trust property and not available for your personal or professional liability. With these basics in mind, we will look at specific types of trusts in greater detail.

Ike Devji, J.D., has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for 16 years. Send your legal questions to Medec@mjhlifesciences.com.