HOW CAN A TRUST-BASED ESTATE PLAN WORK FOR YOU? YOU MIGHT BE SURPRISED!
We love talking about estate planning with clients, helping them evaluate their goals as they look to the future. We encourage our clients to think about who will care for them or their loved ones if they become incapacitated, or when they die. Planning for minor children or those with special needs is especially important. Clients often wish to steward their resources and direct assets to chosen beneficiaries in specific ways. A trust-based estate plan is one of the most popular ways to accomplish these goals.
In estate planning, a trust is a legal entity established to hold or manage assets on behalf of yourself or others that you designate. Depending on the type of trust, the trust agreement typically contains instructions for your own care and the care of your family if you become disabled, and a distribution plan for your assets upon your death. A well-drafted trust agreement can allow you to keep your instructions and financial affairs private and ensures that your wishes are carried out efficiently without unnecessary judicial involvement.
What is included in a trust-based estate plan?
While a trust-based estate plan will be centered around one or more trusts that hold most of your assets, it is important that your estate plan addresses more than just how your assets are held and distributed.
In addition to the trust(s), you will also want to have:
Pour-Over Will
“Catches” any assets that may not have made their way into your trust and “pours” them into the trust via probate
Financial Power of Attorney
Designates someone to handle your finances and property on your behalf
Health Care Power of Attorney
Designates someone to communicate your healthcare wishes and make medical decisions on your behalf if you become incapacitated
Advance Health Care Directive (or Living Will)
Communicates your wishes for health care and end-of-life choices when you are unable to make decisions for yourself
HIPAA authorization
Gives your doctor or other healthcare providers the authority to disclose your medical information to the agent(s) you select
With this type of well-rounded planning, you—and your family—can be prepared for when the unexpected happens.
REVOCABLE TRUSTS VS. IRREVOCABLE TRUSTS
While there are many types of trusts, the major distinction between trusts is whether they are revocable or irrevocable.
Revocable Trust
A revocable trust is also known as a “living trust” because it can benefit you during your lifetime and you can change or cancel it if your circumstances or goals change.
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- You stay in control of your revocable trust. You can transfer ownership of property into the trust and take it out, serve as the trustee (the individual in charge of managing the accounts and property owned by the trust), and be the beneficiary. You retain full control, a feature which is of particular interest to many of our clients.
- You select the back-up trustees to manage the trust if you become unable to do so while alive and when you die. You, not the courts, select who is in charge when you need help.
- The accounts and pieces of property owned by the trust avoid probate. This is because although you may die, a trust does not. The trust continues as the owner of the accounts and property until the trustee has been instructed by the trust document to transfer those accounts and property to the intended recipients. By avoiding probate, you are saving your loved ones' time and money, and keeping the details of your estate private.
- You determine how your beneficiaries will receive their inheritance. If your beneficiary is young, going through a divorce, bad at managing money, or has a possibility of being sued, a properly drafted trust can protect the money and property you leave the beneficiary.
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Learn more about Revocable Living Trusts by visiting The ABCs of RLTs.
Irrevocable Trust
There are three reasons, generally, to create an irrevocable trust: minimizing estate taxes, protecting your assets, and becoming eligible for government programs. Similar to a revocable trust, when an irrevocable trust is used, money and property are transferred out of the trustmaker's individual name and into the name of the trust. However, with an irrevocable trust, you, as the trustmaker, cannot alter, change, or cancel this trust after it has been signed. Additionally, in order to maximize the benefits of an irrevocable trust, you usually cannot control what happens to the money and property once it is given to the trust.
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- Your personal tax liability is often reduced because, in most cases, the accounts and property owned by the irrevocable trust are no longer part of your estate.
- Accounts and property owned by an irrevocable trust have increased protections from creditors and lawsuits.
- In some cases, a trust protector can modify your irrevocable trust if there is a change in circumstances and your initial goals for the trust become frustrated.
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Common Types of Trusts
Here is a look at the basics of a few common trusts to provide you with a general understanding of the options available.
Charitable Lead Trust
A charitable lead trust is a trust which provides a stream of income to a charity of your choice for a period of years or a lifetime. At the completion of the period of years, or at death, whatever is left goes to you or your loved ones with significant tax savings.
Charitable Remainder Trust
A charitable remainder trust is a trust which provides a stream of income to you for a period of years or a lifetime and then gives the remainder to the charity of your choice with significant tax savings once the period of years or death has occurred.
Special Needs Trust
A special needs trust allows you to provide money or property for the benefit of someone with special needs without disqualifying them from receiving governmental benefits. Federal laws allow special needs beneficiaries to receive certain types of benefits from a carefully crafted trust without defeating eligibility for government benefits.
Grantor Retained Annuity Trust
A grantor retained annuity trust is an irrevocable trust which provides you with an annuity for a specific amount of time based on the value of the property in the trust and upon completion of the annuity period, the remaining money and property is transferred to those you have named. This type of trust is used to make large financial gifts to your loved ones of accounts or property that are expected to grow in value at a higher rate than the annuity rate being paid back to you.
Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust is designed to own high-value life insurance and receive the payment of the death benefit upon the trustmaker's death. The benefit of this type of trust is that the life insurance proceeds are excluded from the deceased's estate for tax purposes. However, the proceeds are still available to provide liquidity to pay taxes, equalize inheritances, fund buy-sell agreements, or provide an inheritance.
Qualified Terminable Interest Property Trust (QTIP Trust)
A qualified terminable interest property trust initially provides income to the surviving spouse and, upon the surviving spouse's death, the remaining money and property are distributed to other named beneficiaries, while still allowing the trust to qualify for the unlimited marital deduction. These are commonly used in second marriage situations and to maximize estate and generation-skipping tax exemptions and tax planning flexibility.
Testamentary Trust
A testamentary trust is a trust created in a will. This type of trust is created upon the individual's death and is commonly used to protect the money and property on behalf of a beneficiary as opposed to transferring the money and property to the beneficiary outright. It can be used when a beneficiary is too young to manage their own money or property, has medical or drug issues, or may be incapable of responsibly managing their own money. The trust can also provide asset protection from lawsuits, or a claim by a divorcing spouse brought against the beneficiary. Unlike a revocable living trust or an irrevocable trust, where property should be transferred into a trust during the trustmaker's lifetime to work properly and avoid probate, testamentary trusts require the sometimes lengthy and expensive probate process before the trust is created.
The good news is that you don't have to decide now what trust works best for you. When we meet, all you need to do is be prepared to share your goals and provide insight into your family and financial situation. We will design a plan that incorporates the best documents for your situation.
LET OUR TEAM HELP YOU
Considering the myriad of trusts available and the questions that arise in funding a trust, creating the right estate plan can seem daunting. We pride ourselves on making complicated legal issues easy to understand and would be pleased to meet with you to discuss designing an estate plan that addresses your specific situation. Contact us today to schedule your appointment. We look forward to hearing from you!
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Have questions about estate planning basics? Visit our Estate Planning Basics & Benefits page!
