How Do Trusts Work in Your Estate Plan?
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”

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Do You Need a Pet Trust in Your Estate Plan?

Consider a pet trust to make sure your pets are cared for after you are gone.
Consider a pet trust to make sure that your pets are cared for after you are gone.

Many of us consider our pets to be part of our family. So it’s only natural that we want to make sure that they are taken care of after we pass away. In addition to providing for our human beneficiaries, an estate plan can include provisions to protect the well-being of our beloved companion animals, says The Balance in the article “Estate Planning for Fido: How to Set Up a Pet Trust.”

Texas now has a law governing the creation and use of pet trusts. Knowing how these trusts work and what they can and cannot do will be helpful, if you are considering having a pet trust included in your estate plan.

When you set up a trust, you have the authority as creator of the trust to direct how you want the assets in the trust to be managed for yourself and any beneficiaries of the trust. The same principal holds true for pet trusts. You set up the trust and name a trustee. The trustee oversees the money and any other assets placed in the trust. Because under Texas law a pet cannot be considered a beneficiary of the trust, you would name a “caretaker” as beneficiary. The caretaker would be charged with the responsibilty of using the funds in the trust for the  pet’s care and related expenses. These expenses can include:

  • Regular care by a veterinarian,
  • Emergency veterinarian care,
  • Grooming, and
  • Feeding and boarding costs.

A pet trust can also include directions for end of life care and treatment for pets, as well as burial or cremation arrangements for your pet.

Creating a pet trust is like creating any other type of trust. An estate planning attorney can help with drafting the documents and advise you on selecting a trustee and caretaker. 

Here are some things to consider when setting up your pet’s trust:

  • What’s your pet’s current standard of living and care?
  • What kind of care do you expect the pet’s new caregiver to offer?
  • Who do you want to be the pet’s caregiver, and who should be the successor caregivers?
  • How often should the caregiver report on the pet’s status to the trustee?
  • How long do you expect the pet to live?
  • How likely your pet is to develop a serious illness?
  • How much money do you think your pet’s caregiver will need to cover all pet-related expenses?
  • What should happen to the money, if any remains in the pet trust, after the pet passes away?

The last item is important if you want to avoid a conflict of interest which might occur if the funds in the pet trust go to the trustee or caretaker after the pet passes away. For that reason many people choose a charity, often a charity that relates to animals, as the beneficiary of any assets left in the trust at the pet’s death. Another option is to direct the trustee to divide the funds remaining in the trust among the human beneficiaries named in your will.

Another point: think about when you want the pet trust to go into effect. You may not expect to become incapacitated, but these things do happen. Your pet trust can be designed to become effective, if you become incapacitated.

Make sure the trust clearly identifies your pet so no one can abuse its terms and access trust funds fraudulently. One way to do this is to have your pet microchipped and record the chip number in the pet document. 

You can also leave specific instructions regarding the care of your pet.  If there are certain types of foods that you use, list them. If there are regular routines that your pet is comfortable with and that you’d like the caregiver to continue, then detail them. The more information you can provide, the more likely it will be that your pet will continue to live the same way as when you were caring for your pet.

Finally, it’s always a good idea to let the caretaker and the trustee know that you are trusting them with the responsibility of caring for your pet after you are gone. That way you’ll know if they have any reservations about taking on this role and you can make other arrangements, if necessary. 

Reference: The Balance (March 27, 2019) “Estate Planning for Fido: How to Set Up a Pet Trust”

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