Trusts

What Are the Basics About Trusts?

Forbes’s recent article, “A Beginner’s Guide To Reading A Trust,” says that as much as attorneys have tried to simplify documents, there’s some legalese that just can’t be avoided. Let’s look at the basics about trusts and a few tips in reviewing your trust.

Basis about trusts
Understanding basic trust terms is essential.

First, familiarize yourself with the terms. There are basic terms of the trust that you’ll need to know. Most of this can be found on its first page, such as the person who created the trust. He or she is usually referred to as the Donor, Grantor or Settlor (here in Florida we use the term Settlor). It is also necessary to identify the Trustee and any successor trustees, who will hold the trust assets and administer them for the benefit of the Beneficiaries.

You should next see who the Beneficiaries are and then look at the important provisions concerning asset distribution. See if the trustee is required to distribute the assets all at once to a specific beneficiary, or if she can give the money out in installments over time.

It is also important to determine if the distributions are completely left to the discretion of the trustee, so the beneficiary doesn’t have a right to withdraw the trust assets.  You’ll also want to check to see if the trustee can distribute both income and principal.

The next step is to see when the trust ends. Trusts usually end at a specific date or at the death of a beneficiary.

Other important basic trust provisions include whether the beneficiaries can remove and replace a trustee, if the trustee has to provide the beneficiaries with accountings and whether the trust is revocable or irrevocable. If the trust is revocable and you’re the settlor, you can change it at any time.

If the trust is irrevocable, you won’t be able to make any changes without court approval. If your uncle was the donor and he passed away, the trust is most likely now irrevocable.

In addition, you should review the basic trust boilerplate language, as well as the tax provisions.

Talk to an estate planning attorney about any questions you may have and to help you interpret the basic trust terms.

Reference: Forbes (June 17, 2019) “A Beginner’s Guide To Reading A Trust”

What Should I Keep in Mind in Estate Planning as a Single Parent?

Most estate planning conversation eventually come to center upon the children, regardless of whether they’re still young or adults.  So what should you keep in mind in estate planning as a single parent?

Talk to a qualified estate planning attorney and let him or her know your overall perspective about your children, and what you see as their capabilities and limitations. This information can frequently determine whether you restrict their access to funds and how long those limitations should be in place, in the event you’re no longer around.

Kiplinger’s recent article, “Estate Planning for Single Parents” explains that when one parent dies, the children typically don’t have to leave their home, school and community. However, when a single parent passes, a child may be required to move from that location to live with a relative or ex-spouse.

After looking at your children’s situation with your estate planning attorney to understand your approach to those relationships, you should then discuss your support network to see if there’s anyone who could serve in a formal capacity, if necessary. A big factor in planning decisions is the parent’s relationship with their ex. Most people think that their child’s other parent is the best person to take over full custody, in the event of incapacity or death. For others, this isn’t the case. As a result, their estate plan must be designed with great care. These parents should have a supportive network ready to advocate for the child.

Your estate planning attorney may suggest a trust with a trustee. This fund can accept funds from your estate, a retirement plan, IRA and life insurance settlement. This trust should be set up, so that any court that may be involved will have sound instructions to determine your wishes and expectations for your kids. The trust tells the court who you want to carry out your wishes and who should continue to be an advocate and influence in your child’s life.

Your will should also designate the child’s intended guardian, as well as an alternate, in case the surviving parent can’t serve for some reason. The trust should detail how funds should be spent, as well as the amount of discretion the child may be given and when, and who should be involved in the child’s life.

A trust can be drafted in many ways, but a single parent should discuss all of their questions with an estate planning attorney.

Reference: Kiplinger (May 20, 2019) “Estate Planning for Single Parents”

What You Need to Know about Trusts for Estate Planning

There are many different kinds of trusts used to accomplish a wide variety of purposes in creating an estate plan. Some are created by the operation of a will, and they are known as testamentary trusts—meaning that they came to be via the last will and testament. That’s just the start of a thorough look at trusts for estate planning offered in the article “ON THE MONEY: A look at different types of trusts” from the Aiken Standard.

trusts for estate planning
The two most common types of trusts for estate planning are revocable trusts and irrevocable trusts.

Another way to view trusts for estate planning is in two categories: revocable or irrevocable. As the names imply, the revocable trust can be changed, amended or revoked entirely, and the irrevocable trust usually cannot be changed.

A testamentary trust is a type of revocable trust, since it may be changed during the life of the testator. However, upon the death of the testator, it becomes irrevocable.

In most instances, a revocable trust is managed for the benefit of the grantor, although the grantor also retains important rights over the trust during her or his lifetime. The rights of the grantor include the ability to instruct the trustee to distribute any of the assets in the trust to someone, the right to make changes to the trust and the right to terminate the trust at any time.

If the grantor becomes incapacitated, however, and cannot manage her or his finances, then the provisions in the trust document usually give the trustee the power to make discretionary distributions of income and principal to the grantor and, depending upon how the trust is created, to the grantor’s family.

Note that distributions from a revocable trust to a beneficiary other than the grantor, may be subject to gift taxes. Those are paid by the grantor. In 2019, the annual gift tax exclusion is $15,000. Therefore, if the distribution is under that level, no gift taxes need to be filed or paid.

When the grantor dies, the trust property is distributed to beneficiaries, as directed by the trust agreement.

Irrevocable trusts are established by a grantor and cannot be amended without the approval of the trustee and the beneficiaries of the trust. The major reason for creating such a trust in the past was to create estate and income tax advantages. However, the increase in the federal estate tax exemption means that a single individual’s estate won’t have to pay taxes, if the value of their assets is less than $11.4 million ($22.8 million for a married couple).

Once an irrevocable trust is established and assets are placed in it, those assets are not part of the grantor’s taxable estate, and trust earnings are not reported as income to the grantor.

The downside of using irrevocable trusts for estate planning is that the transfer of assets into the trust may be subject to gift taxes, if the amount that is transferred is greater than $15,000 multiplied by the number of trust beneficiaries. However, depending upon the size of the grantor’s estate, larger amounts may be transferred into an irrevocable trust without any gift tax liability to the grantor, if the synchronization between gift taxes and estate taxes is properly done. This is a complex strategy that requires an experienced trust and estate attorney.

Trusts for estate planning are also used to address charitable giving and generating current income. These trusts are known as Charitable Remainder Trusts and are irrevocable in nature. In this type of trust there is a current beneficiary who is either the donor or another named individual and a remainder beneficiary, which is a qualified charitable organization. The trust document provides that the named beneficiary receives an income stream from the income produced by the trust assets during the grantor’s lifetime, and when the grantor dies, the remaining assets of the trust pass to the charity.

Speak with your estate planning attorney about how trusts might be a valuable part of your estate plan. If your estate plan has not been reviewed since the new tax law was passed, there may be certain opportunities that you are missing.

Reference: Aiken Standard (May 17, 2019) “ON THE MONEY: A look at different types of trusts”

Estate Planning Documents and Medicaid Planning

The conversation that you have with an estate planning attorney, when you are in your thirties with a new house, young children, and many years ahead of you is different than the one you’ll have when you are much older, maybe just before you retire. The estate planning attorney will know that you are about to enter a time in your life, when the legal documents you prepare are more likely to be used, says the article “Learn about legal documents and Medicaid” from the Houston Chronicle.

The need for long term care increases as we age.

It should be noted that everyone needs an estate plan at any time of life, so they can state their wishes for how assets are distributed and name a person who will speak on their behalf in the event of incapacity because of an illness or injury.

An estate plan also includes a power of attorney, so someone you chose can serve as your agent to transact business and handle your financial matters. There should also be a declaration of guardian, in the event of later incapacity and a HIPAA medical authorization document. In some instances, a designation of remains is prepared in order to name an individual who will be the appointed agent to care for the body at the time of death.

However, there’s another reason why you’ll need to meet with an attorney at this time. As we get older, the need to address long term care becomes more important. Making the right decisions now, could have a big impact on the quality of your retirement and your later in life medical care.

If you have not updated your will or your powers of attorney, specifically a durable power of attorney for property, it would be wise to do so now. You will need a document to clearly authorize your agent to deal with assets. Any documents that are out of date, or in which named agents have predeceased you, won’t be effective, leading to problems for you and your heirs.

The document may also need to include a broad gifting power for your named agent, so assets can be transferred out of the estate. If this detail is overlooked, the agent may not be able to protect your assets.

This is the time when you may want to take steps to protect your children upon your death or upon the death of the second parent. If your goal is to eliminate assets to be eligible for Medicaid coverage, this planning needs to be done well in advance. In numerous states, there are state administered programs that pursue recovery of assets when a person has received Medicaid benefits.

Your attorney will be able to work with you and your family to address your specific situation. It may be that your estate plan will include trusts, or that certain assets need to be retitled. Meet with an estate planning attorney who is familiar with your state’s laws. And don’t procrastinate.

Reference: The Houston Chronicle (April 19, 2019) “Learn about legal documents and Medicaid”

Why Do Even the Middle Class Need Estate Planning?

When it comes to estate planning, you may think that you don’t have the wealth that would require you to engage in extensive estate planning. If you have a will, you might think that’s good enough.  Forbes’ recent article, “Why Estate Planners Aren’t Just for the Ultra-Rich,” says that nothing could be further from the truth.

estate planning for middle class
Estate planning for middle class families is important for many reasons.

Although some estate plans are more complicated than others, just about everyone can benefit from having one. Let’s examine the main reasons why:

Avoiding probate. This is a big reason why the importance of estate planning is for everyone. You don’t have to be part of the 1% to want to avoid putting your family through the stress and expense of probate. Creating a trust and strategically placing assets within its control, eliminates many headaches.

Naming a Guardian for Your Children.  Naming a Guardian for your children can only be done through estate planning documents.  In most states a will is the only document where you can legally name a guardian to raise your children.  If your estate planning documents don’t name a Guardian, the courts will name on for you, and it may not be the person you would have chosen.

Protecting your legacy. When you consider leaving a legacy for the next generation, it may have lofty pursuits. However, those aren’t necessarily reasonable goals for everyone. Leaving a legacy can also mean making certain that heirs properly respect all the effort and sacrifice that it took to save and create a retirement fund—whatever its size.

Creating a business succession plan. Among the countless small businesses in the U.S., most will continue to remain viable after the legacy owner dies. A business owner can plan for this within an estate plan, which details exactly what they want to happen, if they die unexpectedly. That could include outlining specific roles and responsibilities for surviving heirs or putting into place a buy-sell agreement with a business partner and directing the distribution the proceeds of the sale.

Be sure to revisit your estate plan regularly, especially if your life includes big events, like a birth of a child, a divorce, or an irreconcilable difference with a loved one.

It’s a myth that estate planning is something only wealthy people do. The middle class need estate planning too.  It’s for everyone.

Reference: Forbes (April 15, 2019) “Why Estate Planners Aren’t Just For The Ultra-Rich”

What Happens When Unmarried Couples Don’t Have Wills?

Estate planning for unmarried couples is even more important than for married couples.

There can be serious problems when people live together without the benefit of marriage. One is that they don’t have any legal right to make medical decisions for each other. Another is that without any will or estate plan in place, the surviving partner has no legal right to any of the decedent’s property. That’s just for starters, explains the article “Longtime unmarried couple hasn’t planned for future” from the Santa Cruz Sentinel.

The unmarried couple may be pleased with their decision to live on their own terms.  However, by not creating an estate plan an unmarried couple is creating unnecessary difficulty for their loved ones. The children and grandchildren of the couple are likely going to end up having to sort out the mess, after one of the couple dies. They may end up in court, battling over the house or other assets.

If the couple wants their property to end up in the hands of their children when they pass away, having no estate plan is not the way to make that happen. When one spouse dies, any assets they own in joint tenancy will go to the surviving partner. When the surviving partner passes, those assets will go to their children, and nothing will be passed to the other family.

The surviving partner will have no legal right to the assets of the deceased partner, other than any that have been titled to joint tenancy. There is no community property between cohabitating couples, unless they have registered as domestic partners. This is how the law works in California, and every state has its own rules. Assets owned by the deceased partner that are titled in his or her name only, belong to the decedent’s probate estate and will pass to their children. If the gentleman dies first, in this example, will his companion be left homeless?

This is a situation that can be easily remedied with thoughtful estate planning for unmarried couples by creating wills and trusts that clearly spell out how they want their assets to be distributed upon death. There are many different ways to make this happen, but they will need to work with an estate planning attorney. Where the surviving non-homeowner will live after the homeowner dies is a serious issue, unless other plans have been made. One way to do this is to leave a life estate in the home in his will, or by creating a trust that holds the home for her use. When the survivor passes away, the home can then pass to the homeowner’s children. In that case, a series of agreements about how the home will be maintained may need to be created.

Taking the time and making the investment in an estate plan, is for the benefit of the individual and the family. An indifferent attitude about the future is hurtful to those who are left behind.

Reference: Santa Cruz Sentinel (April 7, 2019) “Longtime unmarried couple hasn’t planned for future”

What If My Beneficiary Isn’t Ready to Handle an Inheritance?

A recent Kiplinger article asks: “Is Your Beneficiary Ready to Receive Money?” In fact, not everyone will be mentally or emotionally prepared for the money you wish to leave them. Here are some things estate planning attorney’s suggest you consider:

inheritance
Even the most responsible young adults aren’t likely ready to handle an inheritance.

The Beneficiary’s Age. Children under 18 years old cannot sign legal contracts. Without some planning, the court will take custody of the funds on the child’s behalf. This could occur via custody accounts, protective orders or conservatorships. If this happens, there’s little control over how the money will be used. The conservatorship will usually end and the funds be paid to the child, when they become an adult. Giving significant financial resources to a young adult who’s not ready for the responsibility, often ends in disaster. Work with an estate planning attorney to find a solution to avoid this result.

The Beneficiary’s Lifestyle. There are many other circumstances for which you need to consider and plan. These include the following:

  • A beneficiary with a substance abuse or gambling problem;
  • A beneficiary and her inheritance winds up in an abusive relationship;
  • A beneficiary is sued;
  • A beneficiary is going through a divorce;
  • A beneficiary has a disability; and
  • A beneficiary who’s unable to manage assets.

All of these issues can be addressed, with the aid of an estate planning attorney. A testamentary trust can be created to make certain that minors (and adults who just may not be ready) don’t get money too soon, while also making sure they have funds available to help with school, health care and life expenses.

Who Will Manage the Trust? Every trust must have a trustee. Find a person who is willing to do the work. You can also engage a professional trust company for larger trusts. The trustee will distribute funds, only in the ways you’ve instructed. Conditions can include getting an education, or using the money for a home or for substance abuse rehab.

Estate Plan Review. Review your estate plan after major life events or every few years. Talk to a qualified estate planning attorney to make the process easier and to be certain that your money goes to the right people at the right time.

Reference: Kiplinger (April 1, 2019) “Is Your Beneficiary Ready to Receive Money?”

Forgot to Update Your Beneficiary Designations? Your Ex Will be Delighted

Your will does not control who inherits all your assets when you die. This is an aspect of estate planning that many people do not know. Instead, many of your assets will pass by beneficiary designations, says Kiplinger in the article “Beneficiary Designations: 5 Critical Mistakes to Avoid.”

The beneficiary designation is the form that you fill out, when opening many different types of financial accounts. You select a primary beneficiary and, in most cases, a contingency beneficiary, who will inherit the asset when you die.

estate planning beneficiary
If you don’t update your beneficiaries after a divorce your ex will receive some of your assets.

Typical accounts with beneficiary designations are retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs, life insurance, annuities and investment accounts. Many financial institutions allow beneficiaries to be named on non-retirement accounts, which are most commonly set up as Transfer on Death (TOD) or Pay on Death (POD) accounts.

It’s easy to name a beneficiary and be confident that your loved one will receive the asset, without having to wait for probate or estate administration to be completed. However, there are some problems that occur and mistakes get expensive.

Here are mistakes you don’t want to make:

Failing to name a beneficiary. It’s hard to say whether people just forget to fill out the forms or they don’t know that they have the option to name a beneficiary. However, either way, not naming a beneficiary becomes a problem for your survivors. Each company will have its own rules about what happens to the assets when you die. Life insurance proceeds are typically paid to your probate estate, if there is no named beneficiary. Your family will need to go to court and probate your estate.

When it comes to retirement benefits, your spouse will most likely receive the assets. However, if you are not married, the retirement account will be paid to your probate estate. Not only does that mean your family will need to go to court to probate your estate, but taxes could be levied on the asset. When an estate is the beneficiary of a retirement account, all the assets must be paid out of the account within five years from the date of death. This acceleration of what would otherwise be a deferred income tax, must be paid much sooner.

Neglecting special family considerations. There may be members of your family who are not well-equipped to receive or manage an inheritance. A family member with special needs who receives an inheritance, is likely to lose government benefits. Therefore, your planning needs to include a SNT — Special Needs Trust. Minors may not legally claim an inheritance, so a court-appointed person will claim and manage their money until they turn 18. This is known as a conservatorship. Conservatorships are costly to set up. They must also make an annual accounting to the court. Conservators may need to file a bond with the court, which is usually bought from an insurance company. This is another expensive cost.

If you follow this course of action, at age 18 your heir may have access to a large sum of money. That may not be a good idea, regardless of how responsible they might be. A better way to prepare for this situation is to have a trust created.  The trustee would be in charge of the money for a period of time that is determined by the personality and situation of your heirs.

Using an incorrect beneficiary name. This happens quite frequently. There may be several people in a family with the same name. However, one is Senior and another is Junior. The person might also change their name through marriage, divorce, etc. Not only can using the wrong name cause delays, but it could lead to litigation, especially if both people believe they were the intended recipient.

Failing to update beneficiaries. Just as your will must change when life changes occur, so must your beneficiaries. It’s that simple, unless you really wanted to give your ex a windfall.

Failing to review beneficiaries with your estate planning attorney. Beneficiary designations are part of your overall estate plan and financial plan. For instance, if you are leaving a large insurance policy to one family member, it may impact how the rest of your assets are distributed.

Take the time to review your beneficiary designations, just as you review your estate plan. You have the power to determine how your assets are distributed, so don’t leave that to someone else.

Reference: Kiplinger (April 5, 2019) “Beneficiary Designations: 5 Critical Mistakes to Avoid”

Should My Estate Plan Include a Trust?

There are as many types of trusts, as there are reasons to have trusts. They all have benefits and drawbacks. What type of trust is best for you? The answer is best discussed in person with an estate planning attorney. However, an article from U.S. News & World Report titled “8 Things to Know About Trusts,” gives a good overview.

Estate Plan
Determining whether your estate plan should include a trust is best done by consulting with an estate planning attorney.

Revocable or Irrevocable? Revocable trusts are usually established for a person (the grantor) during their lifetime, and then pass assets to the named beneficiaries, when the grantor dies. The revocable trust allows for a fair amount of flexibility during the grantor’s lifetime. An irrevocable trust is harder to change, and in some cases cannot be changed or amended. Some states do allow the option of “decanting” trusts, that is, pouring over assets from one trust to another. You’ll want to work with an experienced estate planning attorney to be sure trusts are set up correctly and achieve the goals you want.

Trusts can protect assets. Irrevocable trusts are often used, when a grantor must go into a nursing home and the goal is to protect assets. However, this means that the grantor no longer has access to the money and has fundamentally given it away to the trust. Putting assets into an irrevocable trust is commonly done to preserve assets, when a person will need to become eligible for Medicaid.  The trust must be created and funded five years before applying for benefits. Irrevocable trusts can also be used to obtain veteran’s benefits, if they are asset-based. VA benefits have a three-year look-back period, as compared to Medicaid’s five-year look-back period.

Trusts can’t own retirement accounts. Trusts can own non-retirement bank accounts, life insurance policies, property and securities. However, retirement accounts become taxable immediately, if they are owned by a trust.

Trusts help avoid probate after the grantor’s death. Most people think of trusts for this purpose. Assets in a trust do not pass through probate, which is the process of settling an estate through the courts. Having someone named as a trustee, a trusted family member, friend or a financial institution, means that the assets can be managed for the beneficiaries, if they are not deemed able to manage the assets. Another good part about trusts: you can direct how and when the funds are to be distributed.

Trusts offer privacy. When a will is filed in the courthouse, it becomes part of the public record. Trusts are not, and that keeps assets and distribution plans private. A grantor could put real estate and other personal property into a trust and title of ownership would remain private.

Tax savings. Before the federal estate tax exemptions became so high, people would put assets into trusts to avoid taxation. However, state taxes may still be avoided, if the assets don’t reach state tax levels. You can also transfer funds into an irrevocable trust to transfer it to others, without making it become part of a taxable estate. This is something to discuss in detail with an estate planning attorney.

Irrevocable Trusts can be expensive. If you are considering an irrevocable trust as a means of controlling the cost of an estate, this is not the solution you are looking for. Trusts require careful administration, annual tax filings and other fees. You may also lose the advantage of long-term capital gains by putting assets into trusts, since they are taxed upon withdrawal, and usually based upon current market value. The marginal rates for trust income of all kinds apply at much lower levels, so that the highest marginal taxes will be paid on very low levels of income.

Work with an experienced trusts and estates lawyer. Trusts and their administration can be complex. Seek the help of a trusts and estates attorney, who will be able to factor in tax liability and the impact of the trusts on the rest of your estate plan. Remember that every state has its own laws about trusts. Finally, an estate plan needs to be updated every few years. For example, trusts that were set up for a far lower federal estate tax exemption several years ago are now out of date, and may not work to achieve their intended goal. The laws changes, and the role of trusts also changes.

Reference: U.S. News & World Report (March 29, 2019) “8 Things to Know About Trusts”

Can I Revoke an Irrevocable Trust?

A trust can be revocable or irrevocable, says nj.com’s article, “Can an irrevocable trust be revoked?”

Revoke an Irrevocable Trust
In some states you can revoke an irrevocable trust if the revocation complies with the underlying purpose of the trust.

A revocable trust is a living trust that’s created with a written agreement between the person creating the trust (also called the grantor or settlor) and the trustee. That’s the person who will manage the assets in the trust. The person who creates the trust can also name herself as the trustee for her lifetime, and the trust agreement may say that the grantor can revoke or dissolve the trust. That’s why it’s called a revocable trust.

However, with an irrevocable trust, the grantor doesn’t reserve the right to revoke the trust. In effect, once the assets of an irrevocable trust are re-titled and placed in the trust, they belong to the trust beneficiaries, not the grantor. Nonetheless, an irrevocable trust can still be revoked in some situations. The grantor may be able to terminate an irrevocable trust by following the state laws on dissolution. The laws of each state vary in this area. For example, New Jersey has adopted the Uniform Trust Code, which stipulates that an irrevocable trust can be terminated by consent of the trustee and the beneficiaries.

In that state, an irrevocable trust may be terminated by a court, provided that the termination isn’t inconsistent with a material purpose of the trust. Likewise, the Minnesota Trust Code grants probate courts authority to modify non-charitable irrevocable trusts in specific situations. In the Gopher State, there are eight different sets of circumstances in which Minnesota’s probate courts have authority to modify or terminate a noncharitable irrevocable trust.

Speak with an experienced estate planning attorney, if you have questions about revocable and irrevocable trusts.

Reference: nj.com (March 25, 2019) “Can an irrevocable trust be revoked?”

Scroll to Top