How a Trust Can Benefit Your Loved Ones

In the toolbox of estate planning techniques, trusts should not be overlooked. Because they

can be tailored to meet a variety of goals, trusts can offer flexibility and ease transitions both during life and after death.

Let’s begin with some basic terminology about trusts:

When is the best time to set up a trust?

A trust can be established during life or at death and fall into two primary categories.

Trusts that are established during life can be revocable or irrevocable and are called “inter vivos trusts”. A revocable trust becomes irrevocable upon the grantor’s death.

Trusts that are established through a will are irrevocable and are called “testamentary trusts” and only come into play when the will is probated. Including such a trust in your estate plan means you want your estate (at least in part) to pass through the probate process.

Inter Vivos Trusts

As stated above, there are two kinds of trusts created during your lifetime: revocable and irrevocable.

Revocable Trusts

Revocable trusts are often referred to as "living" trusts. With a revocable trust, the grantor maintains complete control over the trust and may amend, revoke, or terminate it at any time. This means that the grantor can take back the funds put in the trust or change the trust's terms. Thus, the grantor can reap the benefits of the trust arrangement while maintaining the ability to change the trust at any time prior to death.

With revocable trusts, there can be one set of beneficiaries during the grantor’s life and another set -- often the grantor’s children -- who begin to benefit only after the first group has died. The first are often called "life beneficiaries" and the second "remaindermen."

● The secret to making revocable trusts work is to fund them.

● Retitle assets such as real estate, bank accounts, or investment accounts, in the name of the trust.

● When assets are retitled, the revocable trust can be named as the beneficiary of certain assets so the funds will pass according to the terms of the trust upon the grantor’s death. The result will be avoiding probate, creating flexible options into the future, and allowing for efficient management of trust assets.

● If your assets are not retitled, you can execute a “pour-over” will with your trust, so that upon your death, your assets will be distributed to your trust and your estate wishes will be carried out. However, it will not avoid probate. In addition, in the event you become incapacitated during life, your protection will not be as strong as if you had set up a revocable trust and retitled your assets.

Revocable trusts are generally used for the following purposes:

Asset Management

The trust permits the named trustee to administer and invest the trust property for the benefit of one or more beneficiaries. This can be important in many different scenarios, including:

● The continuation of business operations for closely-held business interests during a time of the grantor’s incapacity

● Helping a loved one protect against financial elder abuse

● Handling financial affairs for individuals who could greatly benefit from a trustee acting on their behalf. Examples include minors, incapacitated individuals, and individuals with addiction issues, creditor concerns, divorce concerns, spendthrift habits, as well as individuals susceptible to scammers, bad investment decisions, and other such potential financial calamities

Business Interests

The trust can permit a successor trustee to manage the business interests in the event of the donor’s incapacity without any disruption in business operations. In addition, upon the donor’s death, the successor trustee can continue with business operations and handle all that needs to be done with the business interests without being affected by delays due to probate.

This allows a donor to hand select the person with the right skill set to make smooth transitions when needed. The successor trustee is typically different than a family member who is handling other assets and not part of the business operations and business management matters.

Having your business interests unattended to or handled by the wrong person for any period of time, both during life and upon your passing, can mean the difference between the business surviving and thriving or deteriorating and rapidly decreasing in value. Buy-sell agreements for your business interests should also be considered during the estate planning process.

Probate Avoidance

At the death of the grantor, the trust may continue for any number of years according to the terms of the trust or the trust may be terminated with trust assets distributed to beneficiaries named in the trust. It does not come under the jurisdiction of the probate court and is then not held up by the probate process. The property of a revocable trust will be included in the grantor's estate for tax purposes (which by the way, can be considered a good thing for capital gains purposes).

Unlike wills, trusts are private documents, and only those individuals with a direct interest in the trust need to know of trust assets and distribution. Avoiding probate can be considered an advantage for many reasons especially where there are family and/or beneficiary concerns.

Tax Planning

First, trusts can be used to achieve tax advantages not otherwise attained with outright gifting of assets during a person’s life or by simply adding another person as an owner of an asset. This is due to what is called a “step-up” in basis. This is beneficial when it comes to capital gains taxes because the tax basis of property in a revocable trust is stepped up when you die, which means the basis would be the then-current value of the property.

Second, revocable trusts can also contain credit shelter trusts. Credit shelter trusts are a way to take full advantage of state and federal estate tax exemptions. Although such trusts may appear needless unless you are a multi-millionaire, there are still reasons for those of more modest means to do this kind of planning, including planning for state estate taxes.

For example, in New York, there is no “portability” between spouses. This means that if the first spouse to die does not use all his or her state estate tax exemption, the estate of the surviving spouse cannot use it. This is in comparison to the federal estate tax which provides for such portability (provided the surviving spouse makes an “election” on the first spouse’s estate tax return).

Establishing the Rules of Your Revocable Trust

The rules or instructions under which the trustee operates are set out in the trust instrument. These instructions are the roadmap for the trustee to follow and are tailored according to the goals of the person setting up the trust.

The trust lays out any number of provisions, including:

● When does the successor trustee take over?

● How do you define the incapacity of a trustee?

● What can the trust invest in?

● May it pay the debts of your estate?

● If there’s an absence of trustees for any reason and you are not available, who appoints the new trustee? Do you want to require that new trustees have any particular qualifications?

● Do you want to give anyone else the right to remove trustees?

● What accounts or statements, if any, must the trustee provide to beneficiaries?

● Do you want distributions to be made to beneficiaries under age 18, or just made on their behalf? Would you prefer the trustee to continue managing the funds until your children or other beneficiaries reach, say 25 or 30? You can also provide partial distributions at various ages.

● What powers should the trustees have?

These and more issues need to be decided for all trusts. More complex trusts designed for tax and asset protection purposes present even more choices and get even longer and more complex.

Irrevocable Trusts

An irrevocable trust set up during life cannot be changed or amended by the grantor. Any property placed into the trust may only be distributed by the trustee as provided for in the trust document itself. However, a Trust Protector can be an important role added into the trust which can be very beneficial so that certain trust provisions may be amended by the Trust Protector into the future. A Power of Appointment is also an important provision that can be added into the trust to allow the grantor to change beneficiaries through his or her will, for example.

Irrevocable trusts can be set up with many different terms with certain of the same provisions as a revocable trust. Of course, the main difference from a revocable trust is that an irrevocable trust is deemed to be irrevocable from the start.

Advantages of Irrevocable Trusts:

● Assets can be protected from lawsuits and creditors for beneficiaries.

● Assets may be protected in the form of Medicaid planning where the grantor cannot receive trust principal and/or income.

● A life insurance trust is another use of an irrevocable trust so that the value of the policy will not be a part of an individual’s estate for estate tax purposes. Without an irrevocable trust, If the total amount of your taxable estate exceeds the then-current state or federal estate tax exemption, then your policy will be taxed.

To avoid having your life insurance policy taxed, you can either transfer the policy to someone else or put the policy into a trust. Once you transfer a policy to a trust or to someone else, you will no longer own the policy, which means you won't be able to change the beneficiary or exert control over it.

Testamentary Trusts

As noted above, a testamentary trust is a trust created by a will. Such a trust has no power or effect until the will of the grantor is probated. Although a testamentary trust will not avoid the need for probate and will become a public document as it is a part of the will, it can be useful in accomplishing other estate planning goals. For instance, the testamentary trust can be used for creditor protection for a beneficiary, reduce estate taxes on the death of a spouse, or provide for the care of a disabled child in a supplemental needs trust.

A supplemental needs trust can be set up during life or through your will. Its purpose is to enable the donor to provide for the continuing care of a disabled spouse, child, relative, or friend. The beneficiary of a well-drafted supplemental needs trust will benefit from the trust assets for purposes other than those provided by public benefits programs. In this way, the beneficiary will not lose eligibility for benefits such as Supplemental Security Income, Medicaid, and low-income housing.

In Summary

Remember two main points – trusts create flexibility and smooth transitions. There are many options with trusts. I believe we are all on an estate planning spectrum. Trusts may not be something you think about or want at the beginning of your estate planning life, but please do not rule them out completely. There may come a time when this special estate planning tool makes sense for you.

I’m here to help. If you have any questions or are ready to begin the estate planning process, please contact me to schedule a consultation.