Trustee

Trusts: The Swiss Army Knife of Estate Planning

Trusts serve many different purposes in estate planning. They all have the intent to protect the assets. The type of trust determines what those protections will be, and from whom assets are protected, says the article “Trusts are powerful tools which can come in many forms,” from The News Enterprise. To understand how trusts protect assets, start with the roles involved.

Trusts
The versatility of a trust makes it one of the most powerful estate planning tools available.

The person who creates the trust is called a “grantor” or “settlor.” The individuals or organizations receiving the benefit of its property or assets are the “beneficiaries.” There are two basic types of beneficiaries: present interest beneficiaries and “future interest” beneficiaries. The beneficiary, by the way, can be the same person as the grantor, for their lifetime, or it can be other people or entities.

The person who is responsible for managing the property within the trust is the “trustee.” This person is responsible for overseeing the assets and following the instructions in the document. The trustee can be the same person as the grantor, as long as a successor is in place when the grantor/initial trustee dies or becomes incapacitated. However, a grantor cannot gain asset protection through a trust, where the grantor controls the assets and is the principal beneficiary.

One way to establish asset protection during the lifetime of the grantor is with an irrevocable trust. Someone other than the grantor must be the trustee, and the grantor should not have any control over the assets. The less power a grantor retains, the greater the asset protection.

One additional example is if a grantor seeks lifetime asset protection but also wishes to retain the right to income from property and provide a protected home for an adult child upon the grantor’s death. Very specific provisions within the document can be drafted to accomplish this particular task.

There are many other options that can be created to accomplish the specific goals of the grantor.

Some trusts are used to protect assets from taxes, while others ensure that an individual with special needs will be able to continue to receive needs-tested government benefits and still have access to funds for costs not covered by government benefits.

An estate planning attorney will have a thorough understanding of the many different types of trusts and which one would best suit each individual situation and goals.

Reference: The News Enterprise (July 25, 2020) “Trusts are powerful tools which can come in many forms”

What Happens If I Don’t Fund My Trust?

Trust funding is a crucial step in estate planning that many people forget to do.

However, if it’s done properly, funding will avoid probate, provide for you in the event of your incapacity and save on estate taxes.

Forbes’s recent article entitled “Don’t Overlook Your Trust Funding” looks at some of the benefits of trusts.

Avoiding probate and problems with your estate. If you’ve created a revocable trust, you have control over the trust and can modify it during your lifetime. You are also able to fund it, while you are alive. You can fund the trust now or on your death. If you don’t transfer assets to the trust during your lifetime, then your last will must be probated, and an executor of your estate should be appointed. The executor will then have the authority to transfer the assets to your trust. This may take time and will involve court. You can avoid this by transferring assets to your trust now, saving your family time and aggravation after your death.

Protecting you and your family in the event that you become incapacitated. Funding the trust now will let the successor trustee manage the assets for you and your family, if your become incapacitated. If a successor trustee doesn’t have access to the assets to manage on your behalf, a conservator may need to be appointed by the court to oversee your assets, which can be expensive and time consuming.

Taking advantage of estate tax savings. If you’re married, you may have created a trust that contains terms for estate tax savings. This will often delay estate taxes until the death of the second spouse, by providing income to the surviving spouse and access to principal during his or her lifetime while the ultimate beneficiaries are your children. Depending where you live, the trust can also reduce state estate taxes. You must fund your trust to make certain that these estate tax provisions work properly.

Remember that any asset transfer will need to be consistent with your estate plan. Your beneficiary designations on life insurance policies should be examined to determine if the beneficiary can be updated to the trust.

You may also want to move tangible items to the trust, as well as any closely held business interests, such as stock in a family business or an interest in a limited liability company (LLC). Ask an experienced estate planning attorney about the assets to transfer to your trust.

Fund your trust now to maximize your updated estate planning documents.

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

Why Is Trust Funding Important in Estate Planning?

Trust funding is a crucial part of estate planning that many people forget to do. If done properly with the help of an experienced estate planning attorney, trust funding will avoid probate, provide for you in the event of your incapacity and save on estate taxes, says Forbes’ recent article entitled “Don’t Overlook Your Trust Funding.”  

If you have a revocable trust, you have control over the trust and you can modify it during your lifetime. You should also fund the trust while you’re alive. This will save your family time and aggravation after your death.

You can also protect yourself and your family, if you become incapacitated. Your revocable trust likely provides for you and your family during your lifetime. You are able to manage your assets yourself, while you are alive and in good health. However, who will manage the assets in your place, if your health declines or if you are incapacitated?

If you go ahead and fund the trust now, your successor trustee will be able to manage the assets for you and your family if you’re not able. However, if a successor trustee doesn’t have access to the assets to manage on your behalf, a conservator may need to be appointed by the court to oversee your assets, which can be expensive and time consuming.

If you’re married, you may have created a trust that has terms for maximizing estate tax savings. These provisions will often defer estate taxes until the death of the second spouse, by providing income to the surviving spouse and access to principal during her lifetime. The ultimate beneficiaries are your children.

You’ll need to fund your trust to make certain that these estate tax provisions work properly.

Any asset transfer will need to be consistent with your estate plan. Ask an experienced estate planning attorney about transferring taxable brokerage accounts, bank accounts and real estate to the trust.

You may also want to think about transferring tangible items to the trust and a closely held business interests, like stock in a family business or an interest in a limited liability company (LLC).

Reference: Forbes (July 13, 2020) “Don’t Overlook Your Trust Funding”

What’s the Difference between Revocable and Irrevocable Trusts?

A trust is an estate planning tool that you might discuss with an experienced estate planning attorney, beyond drafting a last will and testament.

KAKE.com’s recent article entitled “Revocable vs. Irrevocable Trusts” explains that a living trust can be revocable or irrevocable.

You can act as your own trustee or designate another person. The trustee has the fiduciary responsibility to act in the best interests of the trust beneficiaries. These are the people you name to benefit from the trust.

There are three main benefits to including a trust as part of an estate plan.

  1. Avoiding probate. Assets held in a trust can avoid probate. This can save your heirs both time and money.
  2. Creditor protection. Creditors can try to attach assets held outside an irrevocable trust to satisfy a debt. However, those assets titled in the name of the irrevocable trust may avoid being accessed to pay outstanding debts.
  3. Minimize estate taxes. Estate taxes can take a large portion from the wealth you may be planning to leave to others. Placing assets in a trust may help to lessen the effect of estate and inheritance taxes, preserving more of your wealth for future generations.

What’s the Difference Between Revocable and Irrevocable Trusts?

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the person making the trust. When the grantor dies, a revocable trust automatically becomes irrevocable, so no other changes can be made to its terms.

An irrevocable trust is essentially permanent. Therefore, if you create an irrevocable trust during your lifetime, any assets you place in the trust must stay in the trust. That’s a big difference from a revocable trust: flexibility.

Whether a trust is right for your estate plan, depends on your situation. Discuss this with a qualified estate planning attorney. This has been a very simple introduction to a very complex subject.

Reference: KAKE.com (March 31, 2020) “Revocable vs. Irrevocable Trusts”

When Should I Update My Estate Plan?

Forbes’ recent article entitled “Do You Need A Trust? 8 Important Goals A Trust Can Help You Achieve” discusses eight ways a trust can help you achieve specific legacy planning goals. The first step is to meet with an experienced estate planning attorney.

Everybody needs a will, but not everyone requires a trust. A trust provides greater flexibility and control over how your property and assets are distributed. Many people create a trust to avoid probate. As a result, it’s faster and easier for your named trustee(s) to distribute your assets to your heirs. There are a many different types of trusts with advantages and disadvantages. Talk about what will be best for you with your estate planning attorney.

  1. No probate. This process can take months or more to complete, and it can be very expensive. A trust is designed to settle your estate in a timely and relatively inexpensive manner.
  2. Privacy and confidentiality. Probate is public, so your will and other private financial and business info is available to everyone. However, a trust maintains privacy and confidentiality.
  3. Protection for beneficiaries. A trust can shield beneficiaries from lawsuits, creditors, or divorce. A trust can also protect the interests of a minor, by including direction for when distributions are made.
  4. Provide for children. This type of trust provides for the health care and personal needs of a minor child.
  5. Flexibility. As the creator of the trust, you determine the terms of the trust, and can put restrictions on how trust assets are managed. For instance, the trust could state that assets may only be used by the beneficiary to purchase a home or to pay medical bills but may not be distributed directly to the beneficiary.
  6. Preserve family wealth. Divorce and remarriage can result in assets that were supposed to stay in the family wind up leaving with the ex-spouse. A trust can make certain that your estate is preserved for grandchildren.
  7. Family values. A trust can be a wonderful way to pass down family values concerning education, home ownership, land conservation, community service, religious beliefs and other topics.
  8. Lessening family conflict. Challenging a trust is difficult and costly. Having a trust in place that clearly articulates your wishes for your family, reduces the potential for misunderstanding.

Whether you have a trust in place or are thinking about creating one, it’s important to meet regularly with your estate planning attorney to be certain your strategy and estate planning documents reflect any new state and federal tax laws, as well as any changes in your goals and circumstances.

Reference: Forbes (Feb. 24, 2020) “Do You Need A Trust? 8 Important Goals A Trust Can Help You Achieve”

How Long Do You Have to Settle an Estate?

The beneficiaries of an estate are typically eager to receive their inheritance. In a common scenario, a trust was left instead of a will. All the parties received their respective shares, except for the two brothers and a sister who is the executor. The trust instructed the brothers to divide the real estate property in half for each of them. The sister was to get $15,000.

However, one of the brothers lives in the home.

As you may know, the administrator or executor of an estate has the job of collecting the decedent’s assets, paying debts, making distributions to the beneficiaries and finally closing the estate in an expeditious manner.

nj.com’s recent article entitled “How long does it take to pay out a family trust?” tries to sort out what the siblings need to do to settle the estate. The key factor in this scenario is the wording of the trust.

There are situations in which a trust is used as a substitute for a will. In that case, a person’s assets are placed in trust. The trustee pays all the liabilities and administers the assets in the trust in accordance with the instructions of the trust during the individual’s life and after death.

Even when trusts are used as will substitutes, they aren’t always designed to be closed with distribution to happen immediately after the debts are paid, as in the case of the estate. The terms of the trust dictate the trustee’s duties as to the distribution of trust assets.

If you’re a beneficiary of a trust and think that the trustee is breaching his fiduciary duties, you should inform the trustee of the nature of the suspected breach. If nothing is done to remedy this, you may ask the court for help.

One option is that you can request the court to order the trustee to take actions, which you state in your complaint filed with the probate court. Another option is to request that the court direct the trustee to stop taking specific actions that you detail in your complaint.

A third choice is to ask the court to remove the trustee due to breach of fiduciary duties that you set forth in your complaint filed with the court.

However, such court intervention can be expensive. Another thing to consider is that the trustee may petition the court to have his legal fees paid from the trust funds—which will deplete the money in the trust. Because of this, it is usually best to attempt and resolve these issues before getting the court involved.

Reference: nj.com (Feb. 12, 2020) “How long does it take to pay out a family trust?

Fixing an Estate Plan Mistake

When an issue arises, you need to seek the assistance of a qualified and experienced estate planning attorney, who knows to fix the problems or find the strategy moving forward.

For example, an irrevocable trust can’t be revoked. However, in some circumstances it can be modified. The trust may have been drafted to allow its trustees and beneficiaries the authority to make certain changes in specific circumstances, like a change in the tax law.

Those kinds of changes usually require the signatures from all trustees and beneficiaries, explains The Wilmington Business Journal’s recent article entitled “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess.”

Another change to an irrevocable trust may be contemplated, if the trust’s purpose has become outdated or its administration is too expensive. An estate planning attorney can petition a judge to modify the trust in these circumstances when the trust’s purposes can’t be achieved without the requested change. Remember that trusts are complex, and you really need the advice of an experienced trust attorney.

Another option is to create the trust to allow for a “trust protector.” This is a third party who’s appointed by the trustees, the beneficiaries, or a judge. The trust protector can decide if the proposed change to the trust is warranted. However, this is only available if the original trust was written to specify the trust protector.

A term can also be added to the trust to provide “power of appointment” to trustees or beneficiaries. This makes it easier to change the trust for the benefit of current or future beneficiaries.

There’s also decanting. This is when the assets of an existing trust are “poured” into a new trust with different terms. This can include extending the trust’s life, changing trustees, fixing errors or ambiguities in the original language, and changing the legal jurisdiction. State trust laws vary, and some allow much more flexibility in how trusts are structured and administered.

The most drastic option is to end the trust. The assets would be distributed to the beneficiaries, and the trust would be dissolved. Approval must be obtained from all trustees and all beneficiaries. A frequent reason for “premature termination” is that a trust’s assets have diminished in value to the extent that administering it isn’t feasible or economical.

Again, be sure your estate plan is in good shape from the start. Anticipating problems with the help of your lawyer, instead of trying to solve issues later is the best plan.

Reference: Wilmington Business Journal (Jan. 3, 2020) “Repairing Estate Planning Mistakes: There Are Ways To Clean Up A Mess”

How Do I Incorporate My Business into My Estate Plan?

When people think about estate planning, many just think about their personal property and their children’s future. If you have a successful business, you may want to think about having it continue after you retire or pass away.

Forbes’ recent article entitled “Why Business Owners Should Think About Estate Planning Sooner Than Later” says that many business owners believe that estate planning and getting their affairs in order happens when they’re older. While that’s true for the most part, it’s only because that’s the stage of life when many people begin pondering their mortality and worrying about what will happen when they’re gone. The day-to-day concerns and running of a business is also more than enough to worry about, let alone adding one’s mortality to the worry list at the earlier stages in your life.

Business continuity is a big concern for many entrepreneurs. This can be a touchy subject, both personally and professionally, so it’s better to have this addressed while you’re in charge rather than leaving the company’s future in the hands of others who are emotionally invested in you or in your work. One option is to create a living trust and will that outs parameters in place for a trustee to carry out. With these decisions in place, you’ll avoid a lot of stress and conflict for those you leave behind.

Let them be upset with you, rather than with each other. This will give them a higher probability of working things out amicably at your death. The smart move is to create a business succession plan that names a successor to be in charge of operating the business, if you should become incapacitated or when you pass away.

A power of attorney document will nominate an agent to act on your behalf, if you become incapacitated, but you should also ask your estate planning attorney about creating a trust to provide for the seamless transition of your business at your death to your successor trustees. The transfer of the company to your trust will avoid the hassle of probate and will ensure that your business assets are passed on to your chosen beneficiaries.

Estate planning may not be on tomorrow’s to do list for young entrepreneurs and business owners. Nonetheless, it’s vital to plan for all that life may bring.

Reference: Forbes (Dec. 30, 2019) “Why Business Owners Should Think About Estate Planning Sooner Than Later”

What Estate Planning Do I Need With a New Baby?

Congratulations, you’re a new mom or dad. There’s a lot to think about, and there is one vital task that should be a priority. That is making an estate plan. People usually don’t worry about estate planning, when they’re young, healthy and starting a new family. However, your new baby is depending on you to make decisions that will set him or her up for a secure future.

What estate planning do I need with a new baby
Having an estate plan is the only way to legally name a guardian for your child.

Motley Fool’s recent article, “If You’re a New Parent, Take These 4 Estate Planning Steps” says there are a few key estate planning steps that every parent should take to make certain they’ve protected their child, no matter what the future holds.

  1. Purchase Life Insurance. If a parent passes away, life insurance will make sure there are funds available for the other spouse to keep providing for the children. If both parents pass away, life insurance can be used to raise the child or to fund the cost of college. For most parents, term life insurance is used because the premiums are affordable, and the coverage will be in effect long enough for your child to grow to an adult.
  2. Draft a Will and Name a Guardian for your Children. For parents of minor children, the most important reason to make a will, is to name a guardian for your children. When you designate a guardian, select a person who shares your values and who will do a good job raising your children. By being proactive and naming a guardian to raise your children, it’s not left to a judge to make that selection. Do this as soon as your children are born.
  3. Update Beneficiaries. Your will should say what happens to most of your assets, but you probably have some accounts with a designated beneficiary, like a 401(k), and IRA, or life insurance. When you have children, you’ll need to update the beneficiaries on these accounts for your children to inherit these assets as secondary beneficiaries, so they will inherit them in the event of your and your spouse’s passing.
  4. Look at a Trust. If you pass away prior to your children turning 18, they can’t directly take control of any inheritance you leave for them. This means that a judge may need to appoint someone to manage assets that you leave to your child. Your child could also wind up inheriting a lot of money and property free and clear at age 18. To have more control, like who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, ask your estate planning attorney about creating a trust. With a trust, you can designate an individual who will manage money on behalf of your children and provide instructions for how the trustee can use the money to help care for your children, as they age. You can also create conditions on your children receiving a direct transfer of assets, such as requiring your children to reach age 21 or requiring them to use the money to cover college costs. Trusts are for anyone who wants more control over how their property will help their children, after they’ve passed away.

When you have a new baby, working on your estate planning probably isn’t a big priority. However, it’s worth taking the time to talk to an attorney for the security of knowing your bundle of joy can still be provided for, in the event that the worst happens to you.

Reference: Motley Fool (September 28, 2019) “If You’re a New Parent, Take These 4 Estate Planning Steps”

How Does an Irrevocable Trust Work?

How does an irrevocable trust work
Irrevocable trusts are extremely difficult to change and amend.

There are pros and cons to using a revocable trust, which allows the grantor to make changes or even eliminate the trust entirely if they want to, and an irrevocable trust, which doesn’t allow any changes to be made from the creator of the trust once it’s set up, says kake.com in the article “How an Irrevocable Life Insurance Trust (ILIT) Works.”  

Revocable trusts tend to be used more often, since they allow for flexibility as life brings changes to the person who created the trust. However, an irrevocable life insurance trust may be a good idea in certain situations. Your estate planning attorney will help you determine which one is best suited for you.

This is how an irrevocable trust works. A grantor sets up and funds the trust, while they are living. If there are any gifts or transfers made to the trust, they are permanent and cannot be changed. The trustee—not the grantor—manages the trust and handles how distributions are made to the beneficiaries.

Despite their inflexibilities, there are some good reasons to use an irrevocable trust.

With an Irrevocable Life Insurance Trust (or “ILIT”), the death benefits of life insurance may not be part of the gross estate, so they are not subject to state or federal estate taxes. They can be used to cover estate tax costs and other debts, as long as the estate is the purchaser and not the grantor. (Just bear in mind that the beneficiaries’ estate may be impacted by the inheritance.)

Minors may not be prepared to receive large assets. If there is an irrevocable trust, the death proceeds may be placed directly into a trust, so that beneficiaries must reach a certain age or other milestone, before they have access to the assets.

The IRS notes that life insurance payouts are typically not included among your gross assets, and in most instances, they do not have to be reported. However, there are exceptions. If interest has been earned, that is taxable. And if a life insurance policy was transferred to you by another person in exchange for a sum of money, only the sum of money is excluded from taxes.

An ILIT should shield a life insurance payout and beneficiaries from any legal action against the grantor. A key aspect of how an irrevocable trust works is that the ILIT is not owned by the beneficiary, nor is it owned by the grantor. This makes it tough for courts to label them as assets, and next to impossible for creditors to access the funds.

However, there are some quirks about ILITs that may make them unsuitable. For one thing, some of the tax benefits only kick in if you live three or more years after transferring your life insurance policy to the trust. Otherwise, the proceeds will be included in your estate for tax purposes.

Giving the trust money for the policy may make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer notifying them of their right to claim the gifted funds for a certain period of time (e.g., 30 days), there won’t be gift taxes.

The biggest downside to an ILIT is that it is truly irrevocable, so the person who creates the trust must give up control of assets and can’t dissolve the trust.

Speak with your estate planning attorney to learn more about how an irrevocable trust works and if an ILIT is suitable for you. It may not be—but your estate planning attorney will know what tools are available to reach your goals and to protect your family.

Reference: kake.com (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”

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