What Is a ‘Residuary’ Estate?

Sometimes lawyers use words and people don’t know what they mean.  We’ll get carried away explaining complicated legal concepts, ideas, laws, or the beauty of the work we’ve done for clients, only to forget we never defined our terms and the client has no idea what we are talking about.  One common example in estate planning is the “residuary estate” or “residuary clause”.  This blog will address both what that is its relevancy in your estate plan. This is also partially inspired by an article from earlier this year entitled  “How to Write a Residuary Estate Clause in a Will” from yahoo! although be wary as it has some mistakes.

You can also find the definitions of other common terms here:  https://galligan-law.com/common-estate-planning-terms/

The residuary estate is also known as estate residue, residual estate and can also be referred to trust residue or trust estate in that context. It simply means the assets left over after final debts and expenses have been paid and specific distributions are made. It is the general, catch all beneficiary designation of the estate plan.  For the purposes of this blog I’ll talk about it in a will, but it applies to trusts as well.

I’ll use myself as an example.  Let’s say that my wife and I have wills.  The wills don’t control all of our assets, as things like life insurance and retirement plans will be distributed directly to named beneficiaries.  The wills leave everything to the other upon the first of us to die.  If spouse is already deceased (let’s assume I survive because it’s my blog), then I may leave $10,000 to a friend, $50,000 to a charity, my pet to the trustee of a pet trust, a favorite book to my brother and the rest goes to my kids.

In my estate, my executor would pay my final debts and expenses (funeral, medical, final bills, etc), and make the specific distributions which are the money to the friend, charity, pet to the trust and book to my brother.  Whatever is left is the residuary estate, and that’s what goes to my kids.

Now, that assumes competent estate planning.  I would arrange the beneficiaries of my life insurance and retirement plans to coordinate with my wills and other assets to flow through my will because I want them to go to the beneficiaries of the residuary estate.  However, the residuary estate clause of the wills can be disrupted, either deliberately or unintentionally, by common mistakes often made without advance planning.

Here’s some examples of how that happens:

  • You forget to include appropriate assets in your plan to generate the residuary estate.
  • You have accounts that naturally pass outside of the will (e.g. life insurance and retirement) and the beneficiaries aren’t coordinated with the will.
  • You use too many transfer on death designations which take property away from the residuary estate. (This is a very common mistake)
  • If you acquired new assets after making the will that disrupt the flow and plan.
  • Someone named in the will dies before you or is unable to receive the inheritance you left for them.
  • You don’t do your own advanced long-term care planning and the assets which would create the residuary are all spent.
  • You lose the value of the residuary estate to the creditors of the beneficiaries or to the government if a beneficiary is using government benefit.
  • The will has inequitable tax planning that requires the taxes owed on my distributed outside of the will to be paid from the residuary estate.

Speak with an experienced estate planning attorney to determine how to structure your estate plan and assets to ensure the residuary estate and other assets go to the beneficiaries you wish while avoiding the pitfalls.

Reference: yahoo! (Dec. 4, 2022) “How to Write a Residuary Estate Clause in a Will”

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Revocable vs. Irrevocable Trusts

A living trust can be revocable or irrevocable, says Yahoo Finance’s recent article entitled “Revocable vs. Irrevocable Trusts: Which Is Better?” It is certainly true that not everyone needs a trust, and there are many different types of trusts you can establish. But, when considering a trust, clients need to consider the pros and cons of revocable versus irrevocable trusts.

Revocable Trust

A revocable trust is a trust that can be changed or terminated at any time during the lifetime of the trustor (i.e., the person making the trust). This means you could:

  • Add or remove beneficiaries at any time
  • Transfer new assets into the trust or remove ones that are in it
  • Change the terms of the trust concerning how assets should be managed or distributed to beneficiaries; and
  • Terminate or end the trust completely.

When you die, a revocable trust automatically becomes irrevocable and no further changes can be made to its terms.

The big advantage of choosing a revocable trust is flexibility. A revocable trust allows you to make changes and to grow with your needs. Revocable trusts can also allow your beneficiaries to avoid probate when you die.  Most clients use revocable trusts during their lifetimes, although they might establish irrevocable trusts for other people or to address specific circumstances.

However, a revocable trust doesn’t offer the same type of protection against creditors as an irrevocable trust. If you’re sued, creditors could still try to attach trust assets to satisfy a judgment. The assets in a revocable trust are part of your taxable estate and subject to federal estate taxes when you die, which is usually a good thing, but in some assets isn’t sufficient tax planning.  It also provides no advance asset protection for Medicaid.

Irrevocable Trust

An irrevocable trust is permanent. If you create an irrevocable trust during your lifetime, any assets you transfer to the trust stay in the trust. You can’t add or remove beneficiaries or change the terms of the trust.

Irrevocable trusts are commonly used for creditor protection or tax planning.  There are times, such as when considering long-term care Medicaid in a nursing home, or reducing the size of your estate for estate tax purposes, that you want the asset not in your name and out of your personal control.  The irrevocable trust can achieve that by having the trustee own it instead of you.

Irrevocable trusts created during your lifetime are often done in addition to a revocable trust so that you achieve the particular benefits of an irrevocable trust only for that property which needs the advantage.

Irrevocable trusts are more commonly something you set up to be effective at your death.  We’ve written extensively on this, but it is extremely common to leave your children’s inheritance to them in irrevocable trusts that set the rules by which they benefit from the trust and provide creditor and divorce protection to the beneficiary.  This also works with spendthrift beneficiaries and similar trusts are used when a beneficiary has a disability and is using government benefits.

See here for more:  https://galligan-law.com/how-do-trusts-work-in-your-estate-plan/  

It is worth noting that irrevocable trusts, despite their name, sometimes can be revoked, changed or you can remove property from them.

For example, irrevocable trusts might have a power of substitution allowing you to take out property as long as you put equal value property back in.  Irrevocable trusts can sometimes be revoked or changed by the agreement of all parties (including beneficiaries) although that doesn’t work if minors are involved.  Irrevocable trusts that are broken and no longer serve their original purpose can also sometimes be fixed by a process called decanting.  It involves creating a new trust and “decanting” the assets of the first into the second.

If you are using irrevocable trusts you are working with very sophisticated tax and creditor laws, so you’d have to check with your attorney if those options will fit with the trust you are creating.  It is also not something we like to rely on, which is one of the reasons irrevocable trusts are used less.

Speak with an experienced estate planning or probate attorney to see if a revocable or an irrevocable trust is best for you and your goals.

Reference: Yahoo Finance (Sep. 10, 2022) “Revocable vs. Irrevocable Trusts: Which Is Better?”

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Should I Use a Corporate Trustee?

Recently, a client decided to include a corporate trustee as part of their estate plan.  When discussing the matter, they were surprised at how affordable they can be, and that they were glad they choose that route.  Thinking of that conversation and how important it is to name a proper trustee, I wanted to highlight some benefits of corporate trustees.

The Quad Cities Times’ recent article entitled “Benefits of a corporate trustee” warns that care should be taken when selecting someone to serve in this role. Now, many clients have loved ones in their lives who are capable of serving as a trustee or other fiduciary, but for some, family members may not have the experience, ability and time required to perform the duties of a trustee. Those with personal relationships with beneficiaries may cause conflicts within the family. You can name almost any adult, including family members or friends, but think about a corporate or professional trustee as the possible answer.  I also covered how to choose a trustee here:  https://galligan-law.com/how-to-pick-a-trustee/

Here are some reasons to use a corporate trustee:

Experience and Dedication. Corporate trustees can devote their full attention to the trust assets and possess experience, resources, access to tax, legal, and investment knowledge that may be hard for the average person to duplicate. It’s their job and they hire professionals with backgrounds in these areas.  Many people who choose a corporate trustee do so for this reason.

Relative Cost.  This may seem a strange reason to consider a corporate trustee.  Most people don’t consider them at all because professionals will charge fees to serve.  However, trustee fees are often regulated by law or by the trust document.  Both individuals such as family members, and corporate trustees might only be able to charge the same rate.  Given the fact the trust might pay your middle child and an office of professionals the same rate, that isn’t a bad deal.  Further, corporate trustees sometimes take assets under management.  This means they would invest your assets for you, and therefore make money on the investments like a financial advisor does.  If they do, they often include those fees at a reduced rate when serving as a trustee.  This means you actually save money in the end.  It is also possible that they don’t take money under management so that your investment advisor can continue to invest the funds if that’s your preference.

Successor Trustee. If you choose to name personal trustees, you may provide in your trust documents for a corporate trustee as a successor, in case none of the personal trustees is available, capable, or willing to serve. Corporate trustees are institutions that don’t become incapacitated or die. You should consider the type of assets you own and then choose the most qualified trustee to manage them.

Middleman.  Clients sometimes struggle to admit to their estate planning attorney that their families don’t get along.  They don’t want to talk about how a child of theirs struggles with addiction, is dependent on them for support or otherwise would be difficult for a family member trustee to deal with.  In that situation, corporate trustees have the benefit of professional detachment.  The beneficiary can be as angry with them as they want, and the anger won’t be directed to one of your loved ones.  This can make professional trustees an attractive middleman or wall between a difficult beneficiary and the rest of the family.

In sum, many estate owners can benefit from the advantages of a corporate trustee.

Ask an experienced estate planning attorney when working on a trust about naming the appropriate corporate trustee, and the advisability of including terms for your registered investment advisor to manage assets for your trust.

Reference: Quad Cities Times (Nov. 28, 2021) “Benefits of a corporate trustee”

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