Estate Planning

Over the years, many prospective clients have contacted me claiming that they needed a trust.  After an initial planning meeting, many of those clients decided to include a trust in their estate plan, but some ultimately determined that they could accomplish their goals without a trust.  Trusts have several uses that can be beneficial to clients and their families, but you might be asking “Do I need a trust?”

WHAT IS A TRUST?

A trust is a fiduciary agreement created by an individual (known as the “settlor” or “grantor”) that spells out how fiduciary (the “trustee”) is required to hold and administer assets for the benefit of people or charities (the “beneficiaries”).  Some trusts hold assets during the settlor’s lifetime, while others receive assets upon the settlor’s death.  Some trusts, typically those that are used in estate tax or asset protection planning situations, are irrevocable.  This means that once they are signed they cannot be changed.  Most trusts, however, are revocable and can be changed or terminated by the settlor at any time. 

USING TRUSTS FOR YOUNG BENEFICIARIES

One important reason to have a trust is to provide for younger beneficiaries in a way that will not impair their development to becoming mature and responsible adults.  If assets are left directly to young beneficiaries, they are typically able to have complete control over those assets once they attain age 18.  Most people think this is too young for a beneficiary to have complete control over a significant inheritance.  With a trust, however, a settlor can prevent a young beneficiary from having complete control over the inheritance until some point in the future, usually measured by the beneficiary attaining a specified age.  Until that future date, however, the trustee typically has the discretion to pay the living expenses of the beneficiary, including health care and education expenses.  In short, a trust can prevent a young adult from making unreasonable purchases or squandering an inheritance.

USING TRUSTS FOR CREDITOR PROTECTION

Creditor protection for beneficiaries is another important use of a trust.  By placing certain restrictions on a beneficiary’s rights with respect to trust assets, those assets can be shielded from creditors in the event of creditor claims.  If a trust beneficiary is in a profession that could lead to lawsuits or claims by creditors, trusts can prevent the beneficiary’s interest in the trust from being subjected to the claims of creditors.  A trust can also prevent a beneficiary’s inheritance from being reached by a beneficiary’s ex-spouse in the event of a divorce and with proper planning could alleviate the need for a premarital agreement. 

USING TRUSTS FOR DISABLED BENEFICIARIES

Another important use for a trust is to provide for a disabled beneficiary in a way that will not jeopardize her eligibility for governmental benefits.  If a disabled beneficiary who is receiving governmental benefits inherits assets, it is possible that the inherited assets could disqualify the beneficiary from receiving the governmental benefits.  Carefully drafted trusts, however, can enable a beneficiary to benefit from the trust assets without cutting off the governmental benefits.

USING TRUSTS FOR TAX AVOIDANCE

Trusts can be used to shelter assets from transfer tax in the future.  Typically, assets left for a beneficiary would be included in that beneficiary’s taxable estate at her death, but a trust can be drafted to “shelter” those assets (and their appreciation) from transfer tax at a beneficiary’s death.  This type of plan works really well if the inherited assets would be subjected to estate tax in the beneficiary’s estate and the goal is to reduce taxes in the future.

USING TRUSTS FOR PROBATE AVOIDANCE

Another common use for a trust is for probate avoidance.  In recent blogs, I have written about probate (see “What is Probate?”) and probate avoidance (see “Why You Should Avoid Probate”).  For many people avoiding probate is a major goal when implementing an estate plan.  With a trust and properly-structured beneficiary designations, probate and the negatives associated with probate can be avoided.

I CAN HELP

Trusts are not for everyone or every situation, but for a little more cost up front, a trust can be a valuable and instrumental piece of your estate plan.  If you would like to learn more about trusts or whether you need a trust, please do not hesitate to contact me.

Probate is the legal process of administering a decedent’s probate estate upon death. A decedent’s probate estate consists of assets that a decedent owned at death (1) in her individual name or as a tenant in common with another person and (2) that did not have a designated beneficiary. Property that has a designated beneficiary or that is owned jointly with one or more individuals is excluded from a decedent’s probate estate and, as a result, passes outside of probate.

A decedent’s probate estate is administered in a probate court in the county in which the decedent resided at death. If a decedent also owned property in another state, it is possible that an ancillary probate estate will need to be opened in that state also.

Steps of Probate

Probate typically involves the following steps: (1) filing by the executor or administrator of an application for authority to administer the estate and admit the will to probate (if there was a will); (2) appointment of the executor or administrator; (3) collecting assets and obtaining appraisals; (4) filing an inventory of assets of the probate estate; (5) settling claims of creditors; (6) filing estate and income tax returns and paying taxes, if applicable; (7) distributing the net proceeds of the estate to beneficiaries in accordance with the decedent’s will, or if there was no will, state law; (8) filing of accounts with probate court setting forth the receipts and disbursements of the probate estate; and (9) closing the estate. Estates that have less than $35,000 (or less than $100,000 if the surviving spouse is entitled to all the estate assets) can be relieved from some of these steps.

Time Involved

Creditors can make claims against a decedent up to six months from a decedent’s date of death. As a result, probate usually lasts a minimum of six months, but some probate estates can last much longer. Estates with sophisticated assets or that involve litigation might need to remain open for several years.

I Can Help

If you have any questions about probate or need assistance administering a probate estate, please do not hesitate to contact me.

Most people establish an estate plan with the hope that it will “do the job” for many years to come. In fact, a good estate plan will be drafted in a manner to provide flexibility to account for foreseeable future life events. To that point, a good plan should take into consideration the births of future children and grandchildren and the acquisition of additional assets. However, some future events cannot be anticipated and for many clients it begs the question, “How often should I review my estate plan?”

I typically advise clients to review their estate plans every three to five years and when major life events occur. When reviewing your estate plan, you should, at a minimum, make sure (1) that the people you have named for particular roles are the people you still want to serve in those roles if the time comes; (2) that your assets, whether specific assets or your assets in general, will pass to the beneficiaries you want to receive them; and (3) that the timing in which the beneficiaries receive those assets is still appropriate.

Other than the typical review every three to five years, it is advisable to review your estate plan when major life events occur. For example, a meaningful change in your financial situation can have an impact on your estate plan and a review of the plan would be prudent to make sure that your assets are passing to the intended beneficiaries in a tax-efficient manner. If you recently got married or divorced, a revision to your estate plan will likely be necessary. Also, if you recently lost a loved one who was named in your estate plan, a review of your plan would help you understand the impact such a loss could have on your plan. If something changes with one of your beneficiaries (e.g., they suffer from a disability or other issue that might prevent them from managing their own assets), you should review your will or trust to determine whether the original disposition to the beneficiary remains appropriate. These are just a few examples that should trigger an immediate review and may require an update of your estate plan.

If you have any questions about your estate plan or would like to review your plan with an experienced estate planning attorney, please do not hesitate to contact me.