The word, “Trust”, often leads people to think about extremely wealthy people and spoiled “trust fund babies”. However, Trusts are one of the most important tools in the Estate Planner’s Toolbox. At its most basic, a trust is simply a relationship between a Trustee and a Beneficiary. The Trustee has the job of managing assets for the benefit of the Beneficiary or Beneficiaries. Trusts can be set up for many different reasons, including protecting inheritance for a minor, tax avoidance, asset preservation, and probate avoidance. There is no one size fits all trust document. Each person or family has unique needs and desires and the trust document should be carefully crafted to ensure that those needs and desires are met.
A Living Revocable Trust is a great tool to simplify your estate plan while you are living, and then peacefully transfer your estate to your beneficiaries after you pass away. The transfer of the estate is easier because the revocable trust eliminates the need to go through Probate of the decedent’s estate. Probate is the legal process used to ensure the estate is handled properly after a person passes away. It involves making court appearances, paying debts, inventorying the estate, and dealing with creditors. The amount of time and money spent for Probate varies depending on the specific case; however, it is not uncommon for Probate to take several months, even years, and cost several thousand dollars. Many people who choose to have a Living Revocable Trust do so specifically to avoid Probate for their family members. They recognize the time and money they can save their family members in the future by setting up a Living Revocable Trust now.
The Living Revocable Trust is created by the Grantor, who serves as the Trustee (Manager), and the Beneficiary, the party who benefits from the Trust. As the name of the Trust implies, it is fully revocable during the lifetime of the Grantor. After the trust is initially created, ownership of all of the Grantor’s real and personal property are transferred into the name of the Trust. Houses, other real estate properties, bank accounts, 401ks, IRAs, and life insurance can all be moved into the Trust. All of these accounts and properties continue to operate in the same manner as before without any change in tax status or other issues. As property is sold or purchased, the titles to the properties are transferred into or out of the name of the Trust. When the Grantor passes away, the Trust can simply terminate and distributions can be made to the beneficiaries. There is no need to go through Probate because all the assets are still titled in the name of Trust.
People who own multiple pieces of real estate, real estate in more than one state, their own business, or even a share in a business should strongly consider a Living Revocable Trust. Additionally, people who simply want to protect their beneficiaries from having to deal with the Probate process should consider a revocable trust.
The Supplemental Needs Trust (SNT) is a mechanism that allows persons with special needs and disabilities to maintain their eligibility for government benefits such as SSI, Medicare, and Medicaid. The purpose of an SNT is to supplement the public benefits the beneficiary receives, if those benefits fail to meet the beneficiary’s full need, while still preserving the beneficiary’s eligibility for the benefit programs.
It is common for parents to choose to leave everything directly to a child with special needs in their will or trust, but this should not be done. Nor should naming a person with special needs as the direct beneficiary on a life insurance policy, IRA, 401k, or other medium that provides an outright distribution. If that money is transferred to the individual, benefits such as Social Security and Medicaid may be discontinued, because, the disabled person now has funds to pay for his or her own care. Most governmental benefit programs will disqualify persons if they receive income greater than a particular amount, usually $2,000.00
The way to properly provide for disabled persons is to create an Supplemental Needs Trust so that they can retain their government benefits, while still allowing the Trust to supplement any additional costs beyond those received from SSI, Medicaid, or Medicare.
A Bypass Trust is an estate planning technique aimed at avoiding estate tax liability for couples who may be subject to the federal estate tax. Currently, the federal estate tax exemption is approximately $5.45 million per individual. A married couple can pass twice that amount tax free through the use of a Bypass Trust or the use of Portability. A Bypass Trust allows the deceased spouses share of the estate to pass into a trust that benefits the surviving spouse during his/her lifetime, but ultimately benefits their children. By doing this, the deceased spouse is able to use their entire estate tax exemption without risking losing a portion of it by leaving the assets all to their spouse. In a Bypass Trust, the surviving spouse can receive distributions from the Trust for health, education, maintenance, and support. Persons with an estate value of at or near $5 million should consider advanced trust planning through tools such as the Bypass Trust.
There are circumstances where it is appropriate to create an irrevocable trust. By design, an irrevocable trust is one that cannot be altered or amended after it is created. Irrevocable trusts should be considered in situations where the grantor has an estate that, because of its value, could be subject to federal estate tax. Creating an irrevocable trust is an effective way of reducing the value of an estate while the grantor is still living because the estate essentially rids itself of its assets with the goal of avoiding or reducing federal estate taxes. The key feature of an irrevocable trust is the relinquishment by the grantor of dominion or control to modify or amend the trust. If there is a suspicion that the grantor has retained control over the trust, the estate is likely going to be unable to obtain the benefits of the trust’s irrevocable nature for estate tax purposes.
A common type of irrevocable trust involves life insurance policies. The Trustee of the Trust can purchase a life insurance policy that names the trust as the beneficiary of the policy. Having the Irrevocable Life Insurance Trust (ILIT) own the life insurance policy, rather than the individual keeps the benefits outside the estate for estate tax purposes. Gifts made to the trust for the purpose of paying the premiums on the life insurance policies further reduce the value of the estate.
The full spectrum of available trusts is too voluminous to detail here. Below is a list of several types of trusts which we have experience working with. If you would like more information about any of these trusts, please contact our office.
- QTIPs and Reverse QTIPS
- Credit Shelter Trusts
- CRT, CRATs & CRUTs
- GRTs, GRATs, GRUTs
- CLTs, CLATs, CLUTs