Trusts Aren’t Just for Billionaires: Reasons for a Trust

Occasionally clients are hesitant to utilize trusts in their estate plan because they “just have a simple estate” or believe they need substantial assets to warrant a trust.   In fact, trusts are for everyone and solve a variety of purposes in estate planning.  According to an article entitled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch, trusts give great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate. Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust.  This person is known by many different names based upon the convention of where the trust is established, but is often known as the “grantor” or “trustor” or something similar.   These are commonly used because they allow a high degree of control while you are living, especially if your goal is to avoid probate while being able to revise your plan in the future.  The idea is that if your trust is the owner of an asset or properly receives the assets at your death, there will be no need for a Will to be probated through the court system.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust or directed to it upon death, depending on the type of asset and what your goals are. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

See here for a more robust discussion of how a trust works versus a will.  https://www.galliganmanning.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed subject to a few caveats. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.  These types of trust are becoming more and more useful as the estate tax exemption is expected to go down leaving more and more clients exposed to potential estate taxes.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s a few reasons for a trust and why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, Massachusetts exempts $1 million, Texas has none at all.  Some states are even more complicated in having inheritance tax (taxes are applied against the exact amount transferred).  Further, it is widely accepted that the federal estate tax exemption will be lowered as well.  An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.  You can also see here for a recent article I wrote on life insurance trusts as a good example of a common trust used to reduce estate tax exposure.  https://www.galliganmanning.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/ 

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

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Trusts offer many benefits, so speak with your attorney on how to fit them in your estate plan.

How Do Trusts Work in Your Estate Plan?

Trusts offer many benefits including probate avoidance, tax and disability planning and protecting beneficiaries.
Trusts offer many benefits including probate avoidance, tax and disability planning and protecting beneficiaries.

Trusts can be useful tools for passing on assets, allowing them to be held by a responsible trustee for the benefit of the beneficiaries. However, determining which type of trust is best for each family’s situation and setting them up so they work with an estate plan can be complex. You’ll do better with the help of an estate planning attorney, says The Street in the article “How to Set Up a Trust Fund: What You Need to Know.”

There are lots of reasons to use trusts.  Many are used to avoid the time and difficulty involved with the probate process.  Others are used for estate tax planning and Medicaid planning.  Still others are used to pass financial assets to beneficiaries who might not be able to use them well or by themselves, such as with a disabled beneficiary, a beneficiary who wastes money or has creditors, or perhaps is struggling with addiction.  Many parents leave assets to their children in trusts so that the assets are excluded from their child’s potential divorce.  Trusts can even be used for your pets!  We have many blog posts on different reasons to use a trust, and here are a few:  https://www.galliganmanning.com/special-estate-planning-considerations-for-a-blended-family/ (blended families)  https://www.galliganmanning.com/do-you-need-a-pet-trust-in-your-estate-plan/ (pets) https://www.galliganmanning.com/some-common-estate-planning-mistakes-best-avoided/.    

If you are considering using a trust as part of your estate planning, you have to consider whether it will be revocable or irrevocable.  I’ll briefly describe both varieties.

Revocable Trusts are trusts that can be changed. They are often called Living Trusts.  This form of trust is typically used to avoid probate because assets properly owned or directed to the trust will not be probate assets.  Because of its flexibility, you can change beneficiaries, terminate it, or leave it as is. You have options, and it can change with you as your needs, wishes and plan change over time.  Once you die, the revocable trust becomes irrevocable and distributions and assets shift to the beneficiaries in the manner you chose. 

A revocable trust avoids probate for the assets it directs, but will be counted as part of your “estate” for estate tax purposes. They are includable in your estate, because you maintain control over them during your lifetime.  Under current law, very few people have an estate large enough to pay federal estate taxes, so having assets as part of your “estate” for estate tax purposes is actually a good thing.

Revocable Trusts are also used to help manage assets as you age, help you maintain control of assets if you don’t believe the trustees are ready to manage the funds, or to appoint other trustees in case you can no longer manage the assets yourself.

Irrevocable Trusts are called irrevocable because in theory you cannot change or revoke them.  However, most states have laws which permit revocation or change of irrevocable trusts in certain circumstances.  But, you should be careful about irrevocable trusts if you expect a need to change it in the future.

If estate taxes are a concern, it’s likely you’ll consider this type of trust. The assets are given to the trust, thus removing them from your taxable estate.  Irrevocable trusts of this type are less common than revocable trusts, but still can be a powerful weapon in your estate planning arsenal. 

These are just two of many different types of trusts. There are trusts set up for distributions to pay college expenses, providing for disabled individuals to preserve government benefits, charitable funds for philanthropic purposes, planning for pets after you are gone, leaving assets to a second spouse or children in a blended family and more.

Your estate planning attorney will be able to identify which types are most appropriate for your situation.  Here’s how to prepare for your meeting with an estate planning attorney when considering a trust:

Why do you want the Trust? Consider your goal.  Is it to avoid probate?  Is it for tax planning?  Is it because you know a beneficiary shouldn’t receive the assets but you still want to provide for them?

List beneficiaries. Include primary beneficiaries and have a plan for what happens when the primary beneficiary is deceased.

Map out the specifics. Who do you want to receive the assets? How much do you want to leave them? Why shouldn’t receive the assets immediately?  You should be as detailed as possible.

Choose a trustee. You’ll need to name someone who will respect your wishes, who understands your financial situation and who will be able to stand up to any beneficiaries who might not like how you’ve structured your plan. It can be a professional trustee as well.

Don’t forget to fund the it! This last step is very important. The trust does no good if it is not properly funded. You should speak with your estate planning attorney about how to fund the trust based upon the plan you selected.

Creating a trust can be a complex task. However, with the help of an experienced estate planning attorney, this strategy can yield a lifetime of benefits for you and your loved ones.

Reference: The Street (July 22, 2019) “How to Set Up a Trust Fund: What You Need to Know”

Continue ReadingHow Do Trusts Work in Your Estate Plan?