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”