HOW A TRUST CAN HELP ACCOMPLISH YOUR ESTATE PLANNING GOALS? Understand What Trusts Are and Why Trusts Have Become a Common Estate Planning Component
LAW OFFICES OF BARTON P. LEVINE www.bartonlevine.com
Just a century ago the average person would likely not have considered creating a trust as part of their overall estate plan. Historically, trusts were a legal tool used most often by wealthy families as a way to pass down the family wealth from one generation to the next. Times have certainly changed over the last 100 years and trusts have changed right along with them. While a Last Will and Testament remains the foundation of any comprehensive estate plan, trusts have become a common addition to the average estate plan. In order to better understand why trusts have become such a common estate planning component it helps to have a better understanding of trusts in general.
TRUST ELEMENTS A trust is a legal arrangement in which one or more persons hold property subject to certain duties to use and protect it for the benefit of others. A trust requires a few basic elements to create regardless of the type of trust you ultimately plan to create. For starters, a trust needs a grantor (also referred to as a trustor or maker). The grantor is the person who createsand funds the trust. Next, a trustee must be appointed to oversee the administration of the trust. The trustee can be a person or a company. In many trusts the grantor may also be the trustee. A trust also requires the designation of one or more beneficiaries who will receive the benefits of the trust. A beneficiary can be
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a person, an organization, or even a pet. Just as the grantor may be the trustee in some trusts the grantor can also be a beneficiary in some trusts. Trust terms must also be created to govern the trust and the distribution of the trust assets. As long as they are not illegal or unconscionable the grantor can include just about any trust term he or she chooses to include. Finally, assets must be transferred into the trust to fund the trust. Assets used to fund a trust could include cash, real property, securities, or even life insurance proceeds.
TESTAMENTARY VS. LIVING A trust can be a testamentary trust or an inter vivos, or living, trust. A testamentary trust is a trust that does not become effective until the death of the grantor. For example, if you want assets to be held in a trust for your minor children in the event that you die prior to your children reaching the age of majority you might create a testamentary trust that activates when you die. A living trust, on the other hand, becomes effective once all of the requirements for creation of the trust are met and assets have been transferred to the trust to fund the trust.
REVOCABLE VS. IRREVOCABLE Along with being divided into testamentary and living, trusts are also categorized as revocable or irrevocable. Just as it sounds, an irrevocable trust is a trust that cannot be modified, changed or terminated by the grantor once it becomes effective. This is important to understand becauseit means that you cannot add or delete a beneficiary, withdraw or add assets, or replace the trustee once the trust if formed. A revocable
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trust, on the other hand, can be modified or terminated at any time by the grantor. By their nature, a testamentary trust is irrevocable since the grantor is no longer alive when the trust becomes effective. Living trusts though can be revocable or irrevocable. Which type of trust you create will depend on your objectives in creating the trust. ●
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A trust is a legal arrangement in which one or more persons hold property subject to certain duties to use and protect it for the benefit of others. A trust requires a few basic elements to create regardless of the type of trust you ultimately plan to create. For starters, a trust needs a grantor (also referred to as a trustor or maker). ●
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TAX AND PROBATE AVOIDANCE Among the many reasons why trusts have gained in popularity over the past several decades is the fact that a well drafted trust offers both tax and probate avoidance. Most estates are required to go through the legal process of probate upon the death of the estate’s owner. Probate can be a lengthy and expensive process, causing many people to include probate avoidance strategies in their estate plan. The larger and more valuable your estate at the time of your death the longer and more costly the probate process will be as a general rule. Because only assets owned by you
at the time of your death are required to go through probate, many people choose to transfer assets into a trust prior to death. This removes those assets from their estate, thereby reducing the size and value of the estate for probatepurposes. This, in turn, typically reduces the amount of time it takes to probate an estate as well.
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A trust can also significantly reduce your estate’s gift and estate tax liability when used in conjunction with other estate planning tools and strategies. A simple example of how a trust can help lower your tax bill requires the creation of an irrevocable trust that is funded by yearly contributions using the annual exclusion. By doing this you can make tax-free contributions that are also not counted toward your gift and estate tax lifetime exemption limit. Not only does this shelter a significant amount of assets from gift and estate tax but it also makes those assets immediately available to the beneficiaries.
TRUSTS AND INCAPACITY PLANNING A trust can serve almost any imaginable purpose; however, a common purpose is incapacity planning. Any comprehensive estate plan should include an incapacity plan. A tragedy could result in your physical and/or mental incapacity at any time. While there is no way to prevent all tragedies you can be prepared with an incapacity plan. If you do become incapacitated who will control your assets? Creating a revocable living trust allows you to decide now who will have access to your assets should you one day become incapacitated. You can appoint yourself as trustee and then appoint a spouse, adult child, orother trusted individual as the successor trustee who will take over in the event of your death or
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incapacity. You then transfer assets into the trust creating a scenario wherein the successor steps in upon your incapacity and immediately has control over the assets held by the trust.
TRUSTS AND SPECIAL NEEDS PLANNING If you have a special needs child or loved one you likely want to provide financial support for the child for years to come. Unfortunately, simply gifting assets to the child/adult can cause a special needs individual to lose eligibility for important federal benefit programs such as Medicaid or SSI. A special needs trust, or supplemental needs trust, is a specific purpose trust that permits you to provide benefits to a special needs individual without the beneficiary losing his or her eligibility for much needed federal and state assistance programs.
CHARITABLE TRUSTS Charitable remainder and charitable lead trusts allow you to continue gifting to a charity or organization that has special meaning to you and provide benefits to a non-charitable beneficiary in the sametrust. You can provide distributions to the charity first and then leave the remainder to the non-charitable beneficiary or structure the trust to provide benefits to a non-charitable beneficiary first
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with the remainder going to a charity. Because you are including a gift to a charity there may be significant tax advantages to creating a charitable lead or charitable remainder trust as well. With a better understanding of how a trust works and the wide array of benefits that a trust can offer you may now wish to consider adding one ormore trusts to your estate plan. Consult with your estate planning attorney to determine what type of trust(s) will complement your estate plan now and in the future.
REFERENCES American Bar Association, Trusts U.S. Trust, Trust Basics Living Trust Network, Types of Trusts Investopedia, Introduction to Trusts
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About the Author Barton P Levine For more than 30 years, Bart Levine has been the principal member of the Law Offices of Barton P. Levine. Mr. Levine specializes in estate planning, probate and estate administration, bankruptcy representation, special needs planning, medicaid planning, guardianship representation, elder law representations and real estate representation. Mr. Levine presents free educational seminars to the public throughout the greater New York City metropolitan area. These seminars are intended to educate the public about the importance of proper estate planning. Seminar topics include Basic Estate Planning, Asset Protection, Special Needs Planning, Medicaid Planning, Estate Planning for the GLBT Community, IRA Planning and many others. Mr. Levine also presents continuing education courses to the professional community. Experience Mr. Levine has been a member of the New York Bar since 1973. Mr. Levine is also admitted to practice law before the federal courts of the Southern and Eastern Districts of New York. Mr. Levine is a member of the American Academy of Estate Planning Attorneys (AAEPA) and the New York State Bar Association, Trusts & Estates Division Law Offices of Barton P. Levine Main Office: 260 Madison Avenue, 17th Floor New York, NY 10016 Toll Free: (888) 268-4425 Fax: (212) 268-6267 Email: blevine@bartonlevine.com Website: www.bartonlevine.com
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