How Do Trusts Work in Your Estate Plan? A trust can be a useful tool for passing on assets, allowing them to be held by a responsible trustee for 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.”
Depending upon the assets, a trust can help avoid estate taxes that might make the transfer financially difficult for those receiving the assets. The amount of control that is available with a trust, is another reason why they are a popular estate planning tool.
First, make sure that you have enough assets to make using a trust productive. There are some tax complexities that arise with the use of trusts. Unless there is a fair amount of money involved, it may not be worth the expense. Once you’ve made that decision, it’s time to consider what type of trust is needed.
Revocable Trusts are trusts that can be changed. If you believe that you will live for a long time, you may want to use a revocable trust, so you can make changes to it, if necessary. Because of its flexibility, you can change beneficiaries, terminate the trust, or leave it as is. You have options. Once you die, the revocable trust becomes irrevocable and distributions and assets shift to the beneficiaries.
A revocable trust avoids probate for the trust, 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.
They are used to help manage assets as you age, or help you maintain control of assets, if you don’t believe the trustees are not ready to manage the funds.
Irrevocable Trusts cannot be changed once they have been implemented. 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.
Deciding whether to use an irrevocable trust is not always easy. You’ll need to be comfortable with giving up complete control of assets.
These are just two of many different types of trusts. There are trusts set up for distributions to pay college expenses, Special Needs Trusts for disabled individuals, charitable trusts for philanthropic purposes and more. Your estate planning attorney will be able to identify what trusts are most appropriate for your situation.
Here’s how to prepare for your meeting with an estate planning attorney:
List all of your assets. List everything you might want to place in a trust: including accounts, investments and real estate.
List beneficiaries. Include primary and secondary beneficiaries.
Map out the specifics. Who do you want to receive the assets? How much do you want to leave them? You should be as detailed as possible.
Choose a trustee. You’ll need to name someone you trust implicitly, 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 trust. It can be a professional, if there are no family members or friends who can handle this task.
Don’t forget to fund the trust. This last step is very important. The trust document does no good, if the trusts are not funded. You may do better letting your estate planning attorney handle this task, so that accounts are properly titled with assets and the trusts are properly registered with the IRS.
How Do Trusts Work in Your Estate Plan? Creating a trust fund 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”
Do I Need a Living Trust or a Will? Or Both?
“Tax planning is one element of estate planning, and in many estates is the least important factor. The larger issue is: Who will inherit and what will they inherit?” First National Trust Update April 2015
“A man of 70 need not be always feeling, much less talking, about his approaching death, but a wise man of 70 should always take it into account. …He would be criminally foolish not to make, indeed not to have made long since, his will.” C. S. Lewis (1898-1963)
Do I need a living trust or a will? Or both? This is just one of the reasons people think they want a trust: to ensure that the value of their overall estate will not decrease, because of the cost of probate. The most common way to do that is with a trust, says The Houston Chronicle in the article “Elder Law: Which should I have—A Living trust or a will?”
In some states, probate is not an expensive or overly time-consuming issue. Texas, for example, has what is called an independent administration. Executors handle the tasks involved in settling an estate and distributing assets to beneficiaries. As a result, there’s very little court involvement. However, New York does not have that process and as a result probate has extensive court involvement. An estate planning attorney in your area will be able to explain the details of your state’s procedures and discuss whether a trust is right for your estate. They’ll also explain the difference between different types of trusts.
The trust most frequently used to avoid probate, is known as a revocable trust, living trust or an “inter vivos” trust.
Selecting the best type of trust for each situation is different. Here are some advantages of living trusts:
Avoiding probate. The cost of probate alone is not reason enough to use a trust. However, if your assets are in trusts, you may not need to file an inventory listing your assets with the court. That’s not always required in every jurisdiction, but if it is required where you live, a trust can help keep your asset list private, by ensuring that it is only seen by beneficiaries.
Asset management for incapacity. A living trust goes into effect, while you are alive. If you become incapacitated, an alternate trustee can step in to manage assets, pay bills and ensure that finances are taken care of.
Avoiding probate in another state. If you own out-of-state property, your estate may need to be probated in your home state and in the other state. If you have a living trust, out-of-state parcels of land can be deeded into the trust during your lifetime, thus avoiding the need for probate in another state. After your passing, your trustee can handle the out-of-state property in the living trust.
Administrative ease. There are, unfortunately, instances when Power of Attorney can be challenged by financial institutions. The authority of a trustee is more likely to be recognized, by banks, investment companies, etc.
There are some questions about whether it’s better to have a living trust or a will. The most complex part of having a living trust, is the process of funding the trust. It is imperative for the trust to work, that every asset you own is either transferred into the trust or retitled into the name of the trust. If assets are left out or incorrectly funded, then probate will probably be necessary. This can occur, even if only one single asset is left out.
If an asset is controlled by beneficiary designation, then the trust may not need to be named a beneficiary, should you want it to pass directly to one or more beneficiaries.
Funding the trust becomes complicated, when retirement accounts are involved. Consult with an experienced estate planning attorney, if you want to make the trust a designated beneficiary of a retirement account. This is because very specific and complex rules may limit the ability to “stretch” the distributions from the account.
Using a trust instead of a will-based plan is growing in popularity, but it should never be an automatic decision. An estate planning attorney will be able to explain the pros and cons of each strategy and help you and your family decide which is better for you and what advanced directives are required.
Reference: The Houston Chronicle (Feb. 15, 2019) “Elder Law: Which should I have—A Living trust or a will?”
3.giving up complete control of assets.
How Does an Irrevocable Trust Work? There are pros and cons to using a revocable trust, which allows the grantor to make changes or even shut down the trust if they want to, and an irrevocable trust, which doesn’t allow any changes to be made from the creator of the trust once it’s set up, says kake.com in the article “How an Irrevocable Life Insurance Trust (ILIT) Works.”
Revocable trusts tend to be used more often, since they allow for flexibility as life brings changes to the person who created the trust. However, an irrevocable life insurance trust may be a good idea in certain situations. Your estate planning attorney will help you determine which one is best suited for you.
This is how an irrevocable trust works. A grantor sets up and funds the trust, while they are living. If there are any gifts or transfers made to the trust, they are permanent and cannot be changed. The trustee—not the grantor—manages the trust and handles how distributions are made to the beneficiaries.
Despite their inflexibilities, there are some good reasons to use an irrevocable trust.
With an Irrevocable life insurance trust, the death benefits of life insurance may not be part of the gross estate, so they are not subject to state or federal estate taxes. They can be used to cover estate tax costs and other debts, as long as the estate is the purchaser and not the grantor. Just bear in mind that the beneficiaries’ estate may be impacted by the inheritance.
Minors may not be prepared to receive large assets. If there is an irrevocable trust, the death proceeds may be placed directly into a trust, so that beneficiaries must reach a certain age or other milestone, before they have access to the assets.
If there are concerns about legal proceedings where assets may be claimed by a creditor, for example, an irrevocable trust may work to protect the family. A high-liability business that faces claims whether you are living or have passed, can add considerable stress to the family. Place assets in the irrevocable trust to protect them from creditors.
The IRS notes that life insurance payouts are typically not included among your gross assets, and in most instances, they do not have to be reported. However, there are exceptions. If interest has been earned, that is taxable. And if a life insurance policy was transferred to you by another person in exchange for a sum of money, only the sum of money is excluded from taxes.
An Irrevocable life insurance trust (ILIT) should shield a life insurance payout and beneficiaries from any legal action against the grantor. The ILIT is not owned by the beneficiary, nor is it owned by the grantor. It makes it tough for courts to label them as assets, and next to impossible for creditors to access the funds.
However, there are some quirks about ILITs that may make them unsuitable. For one thing, some of the tax benefits only kick in, if you live three or more years after transferring your life insurance policy to the trust. Otherwise, the proceeds will be included in your estate for tax purposes.
Giving the trust money for the policy may make you subject to gift taxes. However, if you send beneficiaries a letter after each transfer notifying them of their right to claim the gifted funds for a certain period of time (e.g., 30 days), there won’t be gift taxes.
The most glaring irritant about an ILIT is that it is truly irrevocable, so the person who creates the trust must give up control of assets and can’t dissolve the trust.
Speak with your estate planning attorney to learn if an ILIT is suitable for you. It may not be—but your estate planning attorney will know what tools are available to reach your goals and to protect your family.
Reference: kake.com (July 19, 2019) “How an Irrevocable Life Insurance Trust (ILIT) Works”