One of the most common and most versatile estate planning tools is the humble trust. Though many of us have heard of trusts, we may not know exactly what they are, what types of trusts are available, and how to set one up.
Let’s consider the Jackson family. Kevin and Angela Jackson have two adult children and a minor child with cerebral palsy. Together, they run a family-owned business. When Kevin and Angela sat down with their estate planning attorney, they had many concerns about the modest wealth they had worked so hard to build. Luckily for them, their lawyer was able to suggest some great options.
What Are Your Goals?
Many people come to an estate planning session with one goal in mind: providing for their loved ones after they are gone.
But estate planning is much more than that.
Estate planning strategies may help with other financial goals, some of which people don’t even realize exist. Meeting with an experienced estate planning attorney can be an eye opening experience!
For now, let’s look at some common estate planning goals:
It may seem odd, but people do need to protect their hard-earned property. Some common situations where asset protection is needed include:
- Creditor claims,
- Civil judgments, and
- Bankruptcy proceedings.
Certain types of trusts can provide this protection not only for the trust makers, but also for their beneficiaries.
Minimizing Tax Burdens.
The federal estate tax exemption limit is currently a little over $11 million for individuals and even more for married couples. If the value of your estate stays under $11 million, it is unlikely your estate will pay federal estate taxes.
Sometimes income taxes can be reduced by transferring assets to a trust. Or trusts may be set up to reduce a beneficiary’s tax bill that might be arise from the distributions they receive from the trust.
When a Will is probated, it becomes a public record that anyone can read. Trusts, however, do not become public record. By funneling money through a trust, the settlor can keep details of their estates from public eye.
Providing for a Loved One with Special Needs.
When someone has special needs, they often need long-term assistance. Parents of special needs children may be concerned about paying for their child’s needs after they are gone. Fortunately, a special needs trust may be able to cover the costs of long-term care without affecting the child’s eligibility for public benefits.
Protecting Beneficiaries from Themselves.
It’s a hard realization to come to, but not all of your heirs will be able to responsibly handle their inheritance.
Fortunately, there are estate planning strategies that may protect your beneficiaries’ inheritance from being squandered. Two common trusts – spendthrift and discretionary – may be an option when beneficiaries are their own worst enemies.
Which Trust is Right?
After reviewing their goals, the Jackson family decide that trusts might help them achieve some of their goals.
Which trust you use may depend on your goals and the size of your estate. Smaller estates may need different strategies than larger estates. However, if a trust is right for your situation, you have several to choose from:
- For some estates, probate can be lengthy and expensive. Transferring assets to a revocable living trust, also known as a living trust, may help your heirs avoid probate. Most if not all of your trust assets will pass directly to the beneficiaries named in the trust.
- An irrevocable trust can be very difficult to change. In fact, sometimes it may be impossible to alter the trust once after it has been established. The person who created the trust usually gives up control of the assets used to fund the trust. However, these trusts may be useful in situations where the settlor needs to qualify for public benefits. Asset protection trusts are usually irrevocable.
- When a loved one needs extra care, especially for the rest of their life, you may need a special needs trust. Disbursements from the trust may supplement support already provided. There are several types of special needs trusts.
- A spendthrift trust prevents most creditors and civil judgments from chipping away at your loved one’s inheritance. Funds in the trust are not vulnerable to claims – until they actually hit your beneficiary’s bank account.
- A discretionary trust is similar to a spendthrift trust. Funds cannot be assigned to or attacked by a beneficiary’s creditor because the beneficiary does not control the money. In this trust, however, the trustee has the power (or discretion) to make or withhold payments to the beneficiary. Instead, the trustee may make
- Charitable remainder trusts usually pay a benefit or annuity to the trust maker until the term of the trust ends or the trust maker dies. The remainder of the trust assets passes to the charity named in the trust document.
- Generation skipping trusts are typically used for estates worth more than $5 million. Not only are the trust assets passed from generation to generation, but there may be significant tax breaks.
- Qualified Personal Residence Trust is an irrevocable trust. Here, a homeowner transfers his or her personal residence to the trust. The homeowner may receive tax relief while still continuing to live in the home.
The Jackson family felt they just needed a simple living trust and a special needs trust. Now, they need to create and sign trust documents. It’s possible to find forms online, but they may not get the big picture advice that an experienced attorney can offer. They choose to have their estate planning attorney draw up the trusts and sign them.
But this is not the last step in establishing a trust.
Funding the Trust
When a trust document is signed, it’s just a piece of paper setting up an empty trust. At this point, there are no assets in the trust. The final step in establishing a trust is to “fund” it. But most people will not know what that means.
“Funding” a trust means moving assets to the trust. Some trusts, like living trusts, contain a provision assigning all personal property to the trust. Property may include electronics, jewelry, collections, and even clothing.
Other property must be transferred differently.
For example, a deed should be prepared showing that real property is being transferred to a trust. After preparing the deed, it must be recorded with the County Recorder.
If bank accounts will become part of the trust, the account should be retitled in the name of the trust. For example, if Kevin Jackson is trustee of the Kevin and Angela Jackson Living Trust, he would open a bank account as Kevin Jackson, Trustee of the Kevin and Angela Jackson Living Trust. Banks typically require documents to show the trust exists. A signed copy of your trust agreement may be enough, or the financial institution may require you to complete their forms.
Retirement accounts, annuities, investment accounts, and life insurance may become part of a trust also. The account holder may be able to simply name the trust as a beneficiary. The funds would transfer to the trust upon the account holder’s death.
Automobiles, RVs, and mobile homes may be retitled. Arizona residents can do this through the Motor Vehicle Division.
Find Out Whether a Trust Is the Way to Go.
The Jackson Family learned about their estate planning options from their attorney. After careful consideration, they decided to set up two trusts that met their current needs. They also understood, though, that their plans should be reviewed every so often. At some point in the future, they may want to consider adding additional trusts.
The attorneys at the Keystone Law Firm assist clients every day set up customized estate planning. Call us at (480) 418-8448 to set up an appointment. You may also want to check out our free videos at keystonelawfirm.com. Although located in Chandler, we also work with clients in the surrounding communities like Sun Lakes, Gilbert, Mesa, and Tempe.