What Trusts are Available for Estate Planning?

A trust is a legal agreement that has at least three parties. The same person(a) can be in more than one of these roles at the same time. The terms of the trust usually are embodied in a legal document called a trust agreement. Forbes’s recent article entitled “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts” explains that the first party is the person who creates the trust, known as a trustor, grantor, settlor, or creator.

The trustee is the second party to the agreement. This person has legal title to the property in the trust and manages the property, according to the instructions in the trust and state law. The third party is the beneficiary who benefits from the trust. There can be multiple beneficiaries at the same time and there also can be different beneficiaries over time.  The trustee is a fiduciary who must manage the trust property only for the interests of the beneficiaries and consistent with the trust agreement and the law. Although a trust is created when the trust agreement is signed and executed, it isn’t really operational until it’s funded by transferring property to it. An estate planning attorney would be a good trustee as they understand the trusts.

A living trust, also called an inter vivos trust, is a trust that’s created during the trustor’s lifetime. A testamentary trust is created in the trustor’s last will and testament. A trust can be revocable, which means that the trustor can revoke it or modify the terms at any time. An irrevocable trust can’t be changed or revoked.

Assets that are owned by a trust avoid the cost, delay and publicity of probate. However, there are no tax benefits to a revocable living trust. The settlors-trustees are taxed as though they still own the assets. The trust assets are also included in their estates under the federal estate tax.

An irrevocable trust typically is created to reduce income and/or estate taxes. This type of trust can also protect assets from creditors. When assets are transferred to an irrevocable trust, the income and gains are taxed to the trust when they are retained by the trust and taxed to the beneficiaries when distributed to them.

Under the federal estate tax and most state estate taxes, assets that are retitled to an irrevocable trust aren’t part of the grantor’s estate. Transfers to the trust are gifts to the beneficiaries. The grantor’s gift tax annual exclusion and lifetime exemption can be used to avoid gift taxes, until gifts exceed the exclusion and exemption limit.

An irrevocable trust typically is created to reduce income and/or estate taxes. This type of trust can also protect assets from creditors. When assets are transferred to an irrevocable trust, the income and gains are taxed to the trust when they are retained by the trust and taxed to the beneficiaries when distributed to them.

A grantor trust is an income tax term that describes a trust where the grantor is taxed on the income. That’s because he or she retained rights to or benefits of the property. The revocable living trust is an example of a grantor trust.

A trust can be discretionary or nondiscretionary. A trustee of a discretionary trust has the power to make or withhold distributions to beneficiaries as the trustee deems appropriate or in their best interests. In a nondiscretionary trust, the trustee makes distributions according to the directions in the trust agreement.

Another type of trust is a spendthrift trust. This is an irrevocable trust that can be either living or testamentary. The key term restricts limits the beneficiary’s access to the trust principal, and the beneficiary and the beneficiary’s creditors can’t force distributions. The spendthrift provision is used when the settlor is worried that a beneficiary might waste the money or have trouble with creditors. Many states permit spendthrift trusts, but some limit the amount of principal that can be protected, and some do not recognize spendthrift provisions.

Finally, a special needs trust can be used to provide for a person who needs assistance for life. In many cases, it’s a child or sibling of the trust settlor. It can be either living or testamentary. Critical to a special needs trust is it has provisions that make certain the beneficiary can receive financial support from the trust, without being disqualified from federal and state support programs for those with special needs.

For more about trusts and how one may fit into your estate planning, contact an experienced estate planning attorney.

Reference: Forbes (Oct. 26, 2020) “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts”

 

How Do I Include Care for My Children in Estate Planning?

To make certain that parents’ wishes are followed, they should create a will that designates a guardian and a conservator in case both parents die, counsels The Choteau (MT) Acantha article entitled “Plan for children’s future when making out a will.” 

A guardianship provides for the care of the children until they reach adulthood (usually age 18) and gives the guardian the authority and responsibility of a parent. A guardian makes decisions about a child’s well-being, education and health. A conservatorship is designed to manage and distribute funds and assets left to children until they’re age 18. A single individual can be appointed to do both roles or separate people can be designated as guardian and conservator.

Frequently, the toughest decisions parents have is agreeing who they want to have the responsibility of raising their children and managing their money. Usually they select a person with similar values, lifestyle and child rearing beliefs.  It can be important to talk about the issue with older children, because some states (like Montana) permit children ages 14 and older to ask a court to appoint a guardian other than the person named in parents’ wills. You should also name a backup guardian and conservator in case their first choices aren’t up to the task and review your choices periodically.

In many states, the law stipulates that when children attain the age of 18, they are able to get the property that was in the care of a conservator, no matter what their capability to manage it. Another option is to leave the assets in a trust rather than a conservatorship.  Parents can provide in their wills the property that they want to pass directly to the trust, which is also called a testamentary trust. These assets can include life insurance payments, funds from checking accounts, stocks, bonds, or other funds. Parents can create a trust agreement with an experienced estate planning attorney that provides their named trustee with the power to manage the trust assets and use the income for their children’s benefit.

The trust agreement goes into effect at the death of both parents. It says the way in which the parents want the money to be spent, who the trustee should be and when the trust ends. The trustee must follow the parents’ instructions for the children.

Reference: Choteau (MT) Acantha (May 13, 2020) “Plan for children’s future when making out a will”

 

Why a Will Is the Foundation of an Estate Plan

An estate planning lawyer has many different tools to achieve clients’ estate planning goals. However, at the heart of any plan is the will, also known as the “last will and testament.” Even people who are young or who have modest levels of assets should have a will—one that is legally valid and up to date. For parents of young children, this is especially important, says the article “Wills: The Cornerstone of Your Estate Plan” from the Sparta Independent. Why? Because in most states, a will is the only way that parents can name guardians for their children.

Having a will means that your estate will avoid being “intestate,” that is, having your assets distributed according to the laws of your state. With a will, you get to determine who is to receive your property. That includes your home, car, bank and investment accounts and any other assets, including those with sentimental value.

Without a will, your property will be distributed to your closest blood relatives, depending upon how closely related they are to you. Few individuals want to have the state making these decisions for their property. Most people would rather make these decisions for themselves.

Property can be left to anyone you choose—including a spouse, children, charities, a trust, other relatives, a college or university, or anyone you want. There are some limits imposed by law that you should know about: a spouse has certain rights to your property, and they cannot be reversed based on your will.

For parents of young children, the will is used to name a legal guardian for children. A personal guardian, who takes personal custody of the children, can be named, as well as a property guardian, who is in charge of the children’s assets. This can be the same person, but is often two different people. You may also want to ask your estate planning attorney about using trusts to fund children’s college educations.

The will is also a means of naming an executor. This is the person who acts as your legal representative after your death. This person will be in charge of carrying out all of your estate settlement tasks so they need to be someone you trust who is skilled with managing property and the many tasks that go into settling an estate. The executor must be approved by the probate court before they can start taking action for you.

There are also taxes and expenses that need to be managed. Unless the will provides directions, these are determined by state law. To be sure that gifts you wanted to give to family and loved ones are not consumed by taxes, the will needs to indicate that taxes and expenses are to be paid from the residuary estate.

A will can be used to create a “testamentary trust,” which comes into existence when your will is probated. It has a trustee, beneficiaries and directions on how distributions should be made. The use of trusts is especially important if you have young children who are not able to manage assets or property.

Note that any assets distributed through a will are subject to probate, the court-supervised process of administering and proving a will. Probate can be costly and time-consuming, and the records are available to the public which means anyone can see them. Many people chose to distribute their assets through trusts to avoid having large assets pass through probate.

Talk with an experienced estate planning attorney about creating a will and the many different functions that the will plays in settling your estate. You’ll also want to explore planning for incapacity, which includes having a Power of Attorney, Health Care Proxy, and Medical Directives. Estate planning attorneys also work on tax issues to minimize the taxes paid by the estate.

Reference: Sparta Independent (Dec. 19, 2019) “Wills: The Cornerstone of Your Estate Plan”

 

Should I Use a Trust to Protect My Children’s Inheritance?

Parents with savings have several options for their children’s future inheritances.

nj.com’s recent article answers this question: “We have $1.5 million. Should we get a trust for our children’s inheritance?” According to the article, parents could create lifetime trusts or trusts in their wills for the benefit of the surviving spouse during the spouse’s lifetime.  After that they can have the remainder of the assets pass in trusts for each of the children until they reach a certain age or ages.

A lifetime trust or living trust is a type of trust that’s created during an individual’s lifetime. This is different from a testamentary trust which is a trust created after a person’s lifetime through the operation of that person’s will.

Usually the individual who settles the trust (the “Grantor”) will retain control over the assets in the trust, including the right to revoke the assets during his or her lifetime. These forms of lifetime trusts are known as grantor trusts.

Another option is to have these types of trusts continue for the benefit of the grandchildren. The grandchildren’s trusts can have instructions that the assets and income are to be used for the health, maintenance, education and support of the child.  The parents would need to name a trustee or co-trustee. This is the person who’s responsible for investing the assets, filing tax returns and paying taxes (if necessary). He or she will also distribute the assets according to the terms of the trust.

Trusts are complicated business, so meet with an experienced estate planning attorney to determine the best strategies based on your circumstances and goals.

Reference: nj.com (October 16, 2019) “We have $1.5 million. Should we get a trust for our children’s inheritance?”