Estate planning doesn't have to be complicated – just effective. One of the greatest estate planning tools are Trusts. Experienced attorneys can help design a Trust to make a plan for how your estate (your assets) will be distributed after you die and take steps now to make carrying out your plans as simple as possible. Trusts can also incorporate planning for other important matters, such as who will care for your health and manage your finances if you become incapacitated or the details around supporting a guardian for minor children, and even pets. Below is a primer on some of the benefits and different types of Trusts available for planning. While the list may seem overwhelming and leave you feeling unsure what is best for your estate plan, we welcome the opportunity to help you get clarity about your specific goals and create an estate plan to protect what is important to you in your life, as well as for your business.
A Trust is similar to a Will, as both legal tools can direct how assets will be distributed, name a guardian for minor children, and create continuing support for children and other loved ones. However, there are key differences between them. While a Will provides instructions for distributing an estate, it does not avoid probate, which is the legal process where a court supervises the administration of an estate. With a Will, most assets are frozen and must go through months of a court probate process before they can be distributed to any beneficiaries. A Trust acts to avoid the probate process, which typically adds expenses to an estate since there are court costs, attorneys’ fees, and even appraisal fees associated with probating a Will.
In addition to saving probate administration costs by utilizing a Trust, a Trust document is private, while a Will and the probate court proceedings are public record. There are multiple types of Trusts which can allow for financial advantages and planning that aren’t always available with a Will.
Another key difference between a Will and a Trust is that while a Will only takes effect at death, a Trust can continue for long after death and are designed to be used during the lifetime of the Trustor, which is why Trusts are sometimes referred to as a “Living” Trusts. A Trust is like a treasure chest that you can add to while you’re alive and continues to function if you become incapacitated, as well as after you die. With proper legal planning, assets can remain in a Trust until your children and loved ones reach a certain age or achieve a certain benchmark such as graduation from college, an apprenticeship program, or even only receive an inheritance upon completion of a financial coaching course. Using Trusts to accomplish contingency planning can be advantageous for children with special needs, to combat fears of irresponsible spending, addiction issues, combat claims from creditors, or quash potential issues from prior spouses. A Trust also allows you to protect the use of your assets when you no longer are able to do so and provide for future generations, a charity that is important to you, or incorporate business succession planning.
A Trust is a legal entity, which essentially exists to protect the assets in your estate. A Trust is funded by transferring ownership of assets from an individual to the Trust and the Trust becomes the legal owner of the asset. Additionally, the Trust can be named as beneficiary of accounts and other assets so when the owner dies, the assets flow into the Trust and are owned by the Trust. Since the Trust owns the assets and not the individual, when the individual dies, the assets are distributed outside of probate. With a Trust, the person creating the Trust (the “Trustor”) names a Trustee. The Trustee is responsible for administering the Trust according to the Trust document and any instructions in the document. The Trustor can be the initial Trustee and then a secondary Trustee takes over if the Trustor dies or becomes incapacitated, or the Trustor can name another person as Trustee from the moment the Trust is created. The Trustee makes distributions of Trust property to the beneficiaries according to the rules created by the Trustor when creating the Trust.
There are many different kinds of Trusts, structured uniquely to achieve specific benefits for the Trustor and beneficiaries. First, Trusts can be revocable or irrevocable. A Revocable Trust can be changed whenever desired, while the Trustor is living. An Irrevocable Trust can never be changed or revoked. Some common types of Trusts include a Living Trust, Testamentary Trust, Irrevocable Life Insurance Trust, Charitable Remainder Trust, Qualified Domestic Trust, Special Needs Trust, Medicaid Trust, and Retirement Trust.
A Living Trust is typically created by the Trustor during their lifetime and the Trustor retains the power to amend or revoke the trust. After the Trustor dies, this Trust typically becomes irrevocable and can’t be amended. Living Trusts usually do not usually provide protection over assets from creditors, because the Trustor is still considered the owner of the asset since the Trust can be revoked during their life. However, there are a multitude of asset protection strategies that may be incorporated along with a Living Trust estate plan to address potential creditor issues and create a legal battle plan. Additionally, a tax professional should be consulted as part of your estate planning team to confirm the tax implications. For example, any income earned in this type of Trust is traditionally taxed to the Trustor’s personal tax return, rather than a separate return for the Trust. Conversely, a Testamentary Trust is a Trust established by a Trustor’s Will, after they die and the tax process is separate through an estate’s tax return.
An Irrevocable Life Insurance Trust (“ILIT”) can be used as part of an individual or family’s wealth planning strategy. An ILIT is funded with a life insurance policy with the Trust established as both the owner and beneficiary of the policy. Then, the proceeds can flow out to the beneficiaries of the Trust, usually with the bonus of tax savings. A Charitable Remainder Trust (“CRT”) is another estate planning tool that can allow for tax savings if funded with appreciated assets. These Trusts are irrevocable and typically first allow for income to the Trust beneficiaries and then to a designated charity (or charities) after a specified period of time or the death of all beneficiaries. A Qualified Domestic Trust (“QDT”) is a Trust that allows non-citizen spouses to benefit from the marital deduction spouses are entitled to. A surviving spouse is typically eligible for a 100% marital deduction on estate taxes owed, but if the surviving spouse is not a U.S. citizen, the deduction is not allowed without a Qualified Domestic Trust.
A Special Needs Trust (“SNT”) is a Trust established to provide for the care of a beneficiary living with a disability, as well as addiction issues or other health issues while ensuring the beneficiary still remains eligible for federal and state benefits. The SNT will protect and manage the funds in the Trust and ensure they are used for proper purposes, mainly to enrich the quality of life of the beneficiary with a disability. A major benefit of an SNT is that it allows for a beneficiary to be prepared for the future financially without disqualifying the individual from receiving public benefits. If the individual receives a large sum of money, which would otherwise disqualify them from these benefits, the funds can be directed to the Trust, and the beneficiary’s Medicaid and SSI benefits will not be jeopardized. A SNT is also a vehicle to incorporate guidance to facilitate the care a person is used to, such as preferred living arrangements, extracurricular or education activities, and even guidance about what to happen if the person recovers or gains more capacity than currently anticipated or the reverse.
A Medicaid Trust is often used as a planning strategy for individuals expecting to need Medicaid long-term care. Medicaid eligibility includes an asset limit, and when an individual has excess assets, those assets can be transferred to the Trust. Since The trust owns the assets, they are not counted as part of a Medicaid applicant’s assets for eligibility purposes. If a Medicaid Trust isn’t used and the applicant’s assets exceed a state’s financial limits, the applicant will need to “spend down” income or assets until the applicant meets the financial requirement. Medicaid eligibility rules also include a “look back period” of 5 years, and any transfer of assets (including to a Medicaid Trust) within that timeframe are reviewed and a penalty period may be established if a transfer is found to have been made in an attempt to meet the asset limit. The existence of the look-back rule makes it beneficial for any Medicaid planning to be taken care of well in advance, to avoid any potential violations and incur a penalty period. If an individual needs Medicaid immediately or in the short term, a Medicaid Trust is likely not the best plan, and other strategies should be considered.
Retirement Trusts allow for an individual to keep the taxes advantages of an IRA while maintaining control of the IRA funds over time. These Trusts are an even more information part of a tax-savvy estate plan since the passage of the SECURE Act in 2019, which made major changes to the rules regarding IRA beneficiaries. The previous rules allowed the beneficiary of an Inherited IRA to implement a “Stretch IRA,” allowing the beneficiary to “stretch” out distributions from the IRA over a longer period of time, which allowed for tax advantages. However, the SECURE Act changed the rules regarding Stretch IRAs and generally requires non-spouse beneficiaries to withdraw all funds from the Inherited IRA within 10 years of the original owner's death, which may result in income to the beneficiaries with hefty taxes. A new strategy in the wake of the SECURE Act is to utilize Retirement Trusts. If a Retirement Trust is named as beneficiary of the IRA, the funds must still be withdrawn within 10 years, but then the Trust can hold on to those funds for as long as described in the Trust. This still allows distributions to the ultimate beneficiaries to be stretched out past 10 years. However, due to the high income tax rates for Trusts, it’s important to consult with an estate planning attorney to ensure that the Trust is established in the most effective and tax-efficient manner. Additionally, individuals that created Retirement Trusts or named a Trust as a beneficiary of an IRA prior to passage of the SECURE Act should work with an estate planning attorney to update plans, as necessary. The changes made by the SECURE Act could result in problems for Trusts established based on old, outdated rules. If this could apply to you, please consider reaching out to us to review your existing Trust.
Utilizing an Inheritance Trust or Inheritance Trust provisions in a larger Trust allows a Trustor to ensure family assets stay within the family and aren’t distributed to in-law family members in the event of a divorce or a child’s death. If an Inheritance Trust is utilized, then the Inheritance Trust will be named the beneficiary of a Trustor’s Revocable Trust and any insurance policies. When the Trustor dies, the assets flow into the Inheritance Trust and typically the child serves as Trustee of the Inheritance Trust and has full access to the principal and income of the Trust. Additionally, the Trust can provide that when the child dies, the Trust will benefit the Trustor’s grandchildren, rather than the child’s surviving spouse. Since the Trustor established the Inheritance Trust and likely specified terms for the use of Trust funds, it’s easier for the Trust assets to stay in the family and avoid becoming joint assets with a spouse, without the child having to have potentially uncomfortable conversations with a spouse.
Trusts are also an effective tool to address and incorporate the fluidity of life for divorced parents, blended families, unmarried, and other less traditional family arrangements. In addition to providing details of future beneficiaries and specifying conditions, Trusts can be used as a tool to reference parenting agreements, divorce agreements, and even incorporate holiday schedules or summer vacations with each respective family to maintain consistency. Also, Trusts can include provisions to carve out assets for children of a prior marriage, and operate to protect a portion of your assets for the benefit of your joint minor children should a spouse or partner remarry or reside with another adult after you die. Overall Trusts are a perfect way for parents to protect and/or direct finances, but also to preserve family traditions should anything unfortunate occur to either parent, albeit divorced, or not married, in the best interest of the children. Our experienced attorneys in family law and estate planning offer a collaborative approach with practical considerations and contingency planning. Our goal is to reduce the stress on children should anything unfortunate occur. We are experienced in utilizing trusts as a legal tool to simplify and clarify the dynamics in families that may just be more complicated than others.
An often-overlooked area of estate planning is caring for pets. Individuals spend a lot of time thinking about who will take care of a surviving spouse, children, and other loved ones, but don’t always consider what will happen to any pets upon an owner’s passing. Pet owners may create a “Pet Trust” to care for a pet upon their death or incapacity – temporary or permanent. The Trust will establish who will be the pet’s caretaker and how funds from the trust should be spent (i.e., preferred food, medication, location of veterinary care, suggested housing, pet daycare, and activities, including number of walks per day, details about visiting the pet owner and/or other friends and family who love your pet so the relationship may continue, and even guidance about treats and toys). The Trust can also specify matters surrounding the standard of pet care, such as which food brand to use and how often the pet should go to the vet for checkups. In lieu of a Trust, a Power of Attorney can also authorize another person to care for the pet upon the incapacity of the pet owner, as well as to spend funds for the care of the pet.
An experienced estate planning attorney can help you prepare and guide you through the process of protecting your wealth and possessions and also provide strategies to leverage your chosen legacy and your values during your lifetime. Estate planning attorneys at General Counsel, P.C. can guarantee that you’ll feel more confident about your future after you’ve made your estate plan or updated your existing plan. We would welcome the opportunity to help you navigate the estate planning process. Contact us today at 703-556-0411, email intake@gcpc.com, or if you’re ready to commit to protecting yourself and your loved ones, simply contact us to schedule an appointment, to have a conversation about how we can help!
The Virginia Supreme Court recently held in Boyle v. Anderson, that a Trust is not a contract. Therefore, the Trustee could not enforce the arbitration clause against the Trust’s beneficiaries. For background, the Grantor, Strother R. Anderson, created an Irrevocable Trust to be divided among three (3) surviving family members upon his death. The Trust...
