Q & A Trusts

Questions Answered on This Page

✦     What is a trust, and how does it work in Vermont?

✦     What are the legal requirements to create a valid Vermont trust?

✦     What is the difference between a revocable and an irrevocable trust?

✦     Does a living trust avoid probate in Vermont?

✦     Who can serve as a trustee in Vermont — and how is a trustee removed?

✦     What duties does a Vermont trustee owe?

✦     Can an irrevocable trust be changed or terminated in Vermont?

✦     Can creditors reach assets in a Vermont trust?

✦     What is a spendthrift trust in Vermont?

✦     Can a trust protect assets from Medicaid and nursing home costs?

✦     What is a special needs trust in Vermont?

✦     Can I leave money in trust for my pet in Vermont?

Five Ways a Valid Vermont Trust May Be Created (14A V.S.A. § 401)

✦     Transfer to Another Trustee — The settlor transfers property to another person or institution as trustee during the settlor's lifetime

✦     Self-Declaration — The settlor declares that they hold their own property as trustee — no transfer to a third party required

✦     Will or Trust Document at Death — A testamentary trust created by a will or trust document that takes effect at the settlor's death

✦     Agent Under Power of Attorney — An agent acting under a power of attorney may create a trust, provided the settlor had capacity when the power was executed

✦     Court Judgment or Decree — A court may order that assets be held and administered in a trust-like manner

Revocable vs. Irrevocable Trust — Vermont Law Comparison

•       Revocable Trust — Can be amended or revoked by the settlor at any time. Does NOT protect against the settlor's creditors. Provides no Vermont or federal estate tax benefit. The primary purpose is probate avoidance — assets held in the trust pass directly to beneficiaries at death without going through Vermont's probate process.

•       Irrevocable Trust — Generally cannot be amended or revoked once established — though Vermont law provides several pathways to modify irrevocable trusts in specific circumstances (see Question 7 below). CAN be drafted to provide Medicaid asset protection, creditor protection, and estate tax benefits. Also avoids probate.

The Critical Word: Funded

A trust document sitting in a drawer does nothing until assets are actually transferred into the trust. An unfunded or underfunded trust does not avoid probate for the assets left outside it.

•       Vermont real estate — Requires recording a deed conveying the property from the individual to the trust — this is a specific legal act that must be completed

•       Financial accounts — Must be retitled in the trust's name or the trust designated as payable-on-death beneficiary through the financial institution

•       Personal property — Can be transferred by a written assignment of personal property to the trust

Vermont's probate process can involve court filings, public records, delays, and costs. A fully funded living trust bypasses all of that, keeps your affairs completely private, and allows your successor trustee to immediately begin managing assets upon your incapacity or death — without any court involvement.

Removal of a Vermont Trustee (14A V.S.A. § 706)

The Probate Division of the Superior Court may remove a trustee for any of the following reasons:

•       Serious breach of trust

•       Lack of cooperation among co-trustees that substantially impairs trust administration

•       Unfitness or persistent failure to administer the trust effectively

•       Where removal best serves the interests of the beneficiaries

Even the settlor of an irrevocable trust has standing to petition for the removal of a trustee. Beneficiaries and co-trustees may also petition.

Core Vermont Trustee Duties (14A V.S.A. Ch. 8)

✦     Duty of Loyalty — The trustee must administer the trust solely in the interest of the beneficiaries — no self-dealing, no personal benefit at the beneficiaries' expense

✦     Duty of Prudent Administration — The trustee must administer the trust as a prudent person would, exercising reasonable care, skill, and caution

✦     Duty of Impartiality — The trustee must act impartially among beneficiaries when the trust has multiple beneficiaries with potentially conflicting interests

✦     Duty to Inform and Report — The trustee must keep qualified beneficiaries reasonably informed of the trust and its administration, and respond to reasonable requests for information

✦     Duty to Segregate Assets — The trustee must keep trust assets separate from personal assets — no commingling of funds

✦     Duty to Keep Records — The trustee must maintain complete and accurate records of trust assets, transactions, and administration

✦     Duty to Pursue Claims — The trustee must take reasonable steps to enforce claims belonging to the trust and defend claims against it

Some of these duties are default rules that a settlor may modify in the trust document. However, certain duties are mandatory and cannot be waived — including the duty to act in good faith, the requirement that the trust have a lawful purpose, and the court's power to modify or terminate a trust (14A V.S.A. § 105). Failure to comply can result in personal liability, surcharge, or removal.

Vermont Pathways to Modify or Terminate an Irrevocable Trust

•       Consent of Beneficiaries (14A V.S.A. § 411) — A noncharitable irrevocable trust may be modified or terminated by consent of the settlor and all qualified beneficiaries — or by consent of all qualified beneficiaries alone if the court concludes modification is not inconsistent with a material purpose of the trust. This is the most commonly used route.

•       Unanticipated Circumstances (14A V.S.A. § 412) — The Probate Division may modify administrative or distributive terms, or terminate a trust, if circumstances not anticipated by the settlor arise and modification would further the trust's purposes. The modification must align with the settlor's probable intent to the extent practicable.

•       Cy Pres — Charitable Trusts (14A V.S.A. § 413) — When a charitable purpose becomes unlawful, impracticable, impossible to achieve, or wasteful, the court may modify or terminate the trust and select a charitable purpose that better approximates the settlor's original intent.

•       Termination of Uneconomic Trusts (14A V.S.A. § 414) — After notice to qualified beneficiaries, a trustee may terminate a trust with total assets under $100,000 if the cost of continued administration is not justified. The court may also modify or terminate small trusts on petition.

•       Trust Decanting (14A V.S.A. Ch. 14) — Vermont adopted the Uniform Trust Decanting Act, allowing a trustee with discretionary distribution authority to 'pour' trust assets into a new trust with updated terms — without court involvement. Decanting is a powerful tool for modernizing older trusts, extending distribution periods, adding a spendthrift provision, or changing trustees.

Creditor Access to Vermont Trust Assets — The Rules

•       Revocable Trusts — No Protection — Because the settlor can reclaim assets at any time, creditors of the settlor can reach revocable trust assets during the settlor's lifetime just as they could reach any other personal asset. After death, the revocable trust becomes irrevocable, but creditors may still make valid claims against it.

•       Irrevocable Trusts — Greater Protection — Assets in a properly structured irrevocable trust are generally not reachable by the settlor's future creditors, because the settlor has given up control of and beneficial interest in those assets.

•       Beneficiary Creditors — A beneficiary's creditors generally cannot reach trust assets before they are distributed to the beneficiary — if the trust contains a valid spendthrift provision. For discretionary trusts, a creditor generally cannot compel a distribution even without a spendthrift clause, because the beneficiary has no enforceable right to receive anything until the trustee exercises discretion (14A V.S.A. § 504).

Vermont Spendthrift Trust — Key Rules

✦     What a Spendthrift Provision Does — Prevents the beneficiary from voluntarily assigning, pledging, or transferring their trust interest before distribution, AND prevents the beneficiary's creditors from reaching that interest before it is actually distributed

✦     Discretionary Trusts — Extra Layer of Protection — Where the trustee has complete discretion over whether to make any distribution, a creditor of the beneficiary generally cannot compel a distribution — even without a spendthrift clause — because the beneficiary has no enforceable right to receive anything (14A V.S.A. § 504)

✦     Exceptions to Spendthrift Protection — Vermont law recognizes exceptions that can override even a valid spendthrift provision — including claims for child support, alimony, and certain government claims

✦     Self-Settled Spendthrift Trusts — Vermont does not recognize self-settled spendthrift trusts (also called domestic asset protection trusts) — meaning you cannot create a trust for your own benefit and claim spendthrift protection against your own creditors under Vermont law

Revocable Trusts — Zero Medicaid Protection

Because you retain the right to revoke the trust and reclaim assets, Vermont's Medicaid program counts all revocable trust assets as available resources for nursing home cost-sharing purposes. The same rule applies under federal Medicaid law. A revocable living trust provides no Medicaid protection whatsoever.

Irrevocable Trusts — Potential Medicaid Protection With Strict Rules

•       The 60-Month Look-Back Period — Vermont Medicaid has a 60-month (5-year) look-back period for long-term care Medicaid. Any assets transferred to an irrevocable trust within the five years before a Medicaid application may trigger a penalty period during which Medicaid will not pay for care.

•       Early Planning Is Essential — To achieve meaningful Medicaid protection through an irrevocable trust, the trust must be funded more than five years before you apply for Vermont Medicaid long-term care benefits. The earlier you plan, the more options are available.

•       Trust Structure Matters Enormously — Not every irrevocable trust qualifies for Medicaid protection. The trust's terms — particularly who controls distributions and who can receive income — are scrutinized carefully by Vermont Medicaid. The specific rules are complex, and the details matter.

How a Vermont Special Needs Trust Works

✦     Supplements, Does Not Replace, Government Benefits — The trust is designed to pay for things that government programs do not cover — recreation, education, transportation, personal care items, technology, and quality-of-life expenses — without disqualifying the beneficiary from Medicaid or SSI

✦     Assets Are Not Counted as Beneficiary Resources — Assets properly held in a special needs trust are generally not counted as the beneficiary's resources for Medicaid or SSI eligibility purposes — preserving access to critical government programs

✦     Federal and Vermont Compliance Required — The trust must comply with both Vermont trust law (14A V.S.A. § 402(c)) and federal SSI and Medicaid rules under 42 U.S.C. § 1396p(d)(4). These federal requirements govern trust terms, trustee duties, and what distributions are permissible

✦     Two Types — A third-party special needs trust is created and funded by someone other than the beneficiary — typically a parent or grandparent. A first-party (or self-settled) special needs trust is funded with the beneficiary's own assets, such as a personal injury settlement, and includes a Medicaid payback provision

Vermont Pet Trusts — How They Work

✦     Governing Statute — 14A V.S.A. § 408 expressly authorizes trusts for the care of one or more designated animals living during the settlor's lifetime. The trust terminates when no living animal covered by the trust is alive.

✦     Enforcement — A person appointed to enforce the pet trust has the rights of a qualified beneficiary under the Vermont Trust Code (14A V.S.A. § 103(c)) — meaning they can hold the trustee accountable for proper administration and ensure the trust funds are actually being used for the animal's care

✦     What the Trust Can Cover — Veterinary care, food, housing, grooming, boarding, and any other care needs specified in the trust document

✦     Excess Funds — Any trust assets remaining after the animal's death pass as specified in the trust document — or, if not specified, to the settlor's estate

✦     Other Non-Charitable Purpose Trusts — Vermont also allows trusts for other non-charitable purposes without an ascertainable human beneficiary under 14A V.S.A. § 409, provided a person is named or appointed by the court to enforce the trust's terms

Revocable Living Trust

Probate avoidance, incapacity planning

Can be amended or revoked anytime; no creditor protection

Irrevocable Trust

Asset protection, estate tax, Medicaid planning

Cannot be changed; assets removed from settlor's estate

Spendthrift Trust

Beneficiary protection from creditors

Prevents beneficiary from transferring interest; blocks creditor claims

Special Needs Trust

Protect disabled beneficiary's government benefits

Supplements — does not replace — Medicaid and SSI

Medicaid Asset Protection Trust

Protect assets from nursing home spend-down

Must be funded 5+ years before Medicaid application

Charitable Remainder Trust

Charitable giving + income to grantor

Income to beneficiary during term; remainder to charity

Charitable Lead Trust

Charitable giving + pass assets to heirs

Income to charity during term; remainder to family

Credit Shelter Trust

Vermont and federal estate tax reduction

Uses first spouse's exemption; assets outside survivor's estate

QTIP Trust

Provide for spouse; control ultimate distribution

Income to spouse; principal to grantor's chosen beneficiaries

Spendthrift / Substance Abuse Trust

Protect inheritance from misuse

Trustee controls distributions; conditions can require treatment

Pet Trust

Care for animals after owner's death

Enforceable under 14A V.S.A. § 408

Testamentary Trust

Created by will; takes effect at death

Goes through probate; provides controlled inheritance for heirs