Creating an Estate Plan With Trusts

When most people think of estate planning, the first idea that comes to mind is a will, but a trust is a useful tool that helps individuals plan for certain scenarios. These instruments can often be complex and confusing, but their use in a properly prepared estate plan has significant advantages. The biggest advantage of using trusts is the flexibility they provide. For example, they can be used to:

  • Avoid probate
  • Plan taxes
  • Care for a loved one’s special needs
  • Control assets after death, or
  • Give to charity

Don’t worry: Although trusts can seem daunting, they are fairly simple once you get the hang of the language and terminology. Let’s start with the basics.

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What Is the Definition of a Trust?

Simply put, a trust is an entity that holds property. The assets held by this entity are collectively called the principal or corpus of a trust. Typically, the trustee invests the principal for safe keeping for the benefit of a beneficiary. There are four parties to a trust: the grantor (also known as a settlor), the trustee, and the beneficiary.

  • The Grantor: This party creates the trust and funds it.
  • The Trustee: The trustee is usually appointed by the grantor and is charged with properly managing the principal and income of the trust for the benefit of the beneficiary.
  • The Successor Trustee:  This person or entity takes over the management of a trust and becomes responsible for administering and settling it in the case that the original trustee dies or becomes incapacitated.
  • The Beneficiary: The beneficiary is the party who receives the benefit of the assets held by the trust. The beneficiary almost always lacks control over how the assets are managed but does get to enjoy the use of the property.

Process of Creating a Trust

A trust is created when the grantor executes the trust document and moves assets into it. That can mean the grantor moves cash, vehicles, real estate, or other financial assets into the trust name.

Example: Nick and Ginger are married and they have three children under the age of 18. Nick and Ginger want to make sure that at their death, their assets go to Peggy to hold for the benefit of their children until they are old enough to manage those assets themselves. So they decide to create a trust within their will. At the surviving spouse’s death, their assets are placed in trust and Peggy is named the trustee. Peggy would then manage the assets for the children’s’ benefit until they turn a certain age, as determined by Nick and Ginger.

Managing a Trust

When a trust is created, the grantor places certain rules and guidelines on how the assets are to be used for the benefit of the beneficiaries that the trustee must follow. For example, the assets could be used for the beneficiary’s college expenses, medical bills, or to simply maintain the beneficiary’s standard of living. The trustee has a responsibility to the beneficiary to ensure that the assets are properly managed and are being used for the benefit of the beneficiary. This duty to the beneficiary is called a fiduciary duty. If the trustee violates this fiduciary duty he can be removed from his position.

Purposes

Generally, a trust serves one of the following purposes

Examples of Different Types of Trusts

There are numerous types of trusts for estate planning. The options you choose depend on a number of variables, including how you want to distribute the trust’s assets to your beneficiaries upon your death. Some of the most common trusts are:

  • Revocable Living Trust: Most of the time, a revocable living trust is created in order to avoid probate, ensure secrecy of your assets, and help plan for incapacity. Living trusts are often the best choice for estate planning, as you can adjust them as your needs evolve.
  • Irrevocable Trust: Irrevocable trusts differ from revocable trusts in that once they’re created, they cannot be adjusted or changed, even by the people who created them.
  • Trusts for Children: Because state law prohibits minors from inheriting any asset until they turn 18, a minor’s trust is created in an estate plan to make sure those assets are properly managed and to help avoid a guardianship.
  • Special Needs Trust: This is a type of trust that is created for individuals who usually have some sort of mental or physical disability. A trustee is appointed to manage the assets for the beneficiary’s lifetime. This trust also is used often to prevent the loss of any governmental assistance the beneficiary is receiving, such as Medicaid or Social Security Disability.
  • Asset Protection Trust: Asset protection trusts are generally designed to safeguard funds during significant financial changes, such as divorce or bankruptcy. Once established, the beneficiary is protected against most forms of credit collection and litigation.
  • Gun Trust: This trust can help an individual protect their Second Amendment rights by establishing a safe to keep their firearms from being taken or repossessed.
  • Community Property Trust (CPT): CPTs allow married couples to put anything they jointly own into a trust, ensuring they maintain 50/50 ownership even as they use the trust as necessary.
  • Tennessee Investment Service Trust (TIST): For Tennessee residents, TISTs are essential in protecting property and other assets from creditors. Based on the state’s laws, TISTs are some of the only legal ways to avoid certain taxes on assets.
  • Spousal Lifetime Access Trust (SLAT): A SLAT enables a person to establish a trust designed to benefit their spouse and children or descendants. This trust is separate from the grantor’s estate, making it non-taxable and potentially more lucrative for the beneficiaries.
  • Irrevocable Life Insurance Trust (ILIT): ILITs help someone establish and essentially act as the owner of one or more life insurance policies while they’re alive. As a type of irrevocable trust, an ILIT cannot be changed once established, but it can help beneficiaries avoid certain taxations when they inherit it.
  • Intentionally Defective Grantor Trust (IDGT): This type of trust is typically established to avoid certain estate taxes. IDGTs allow the trust’s owner to retain the assets while removing them from the estate for tax purposes.

To make the right choices for you and your loved ones, consider receiving trust legal services from experts who can ensure you make the most of your money.

Revocable Living Trust

When we begin to review of client’s estate plan we explain to the client that they generally have two ways to distribute their assets at their death: through a will or a revocable living trust.

A will is a document that states, in part, how you want the assets that you own in your name only to be distributed at your death.

By contrast, a revocable living trust, is an entity that is created during your lifetime. The trust typically states that as the creator of the entity, you are able to use all of its assets for your benefit. You act both at the trustee and the beneficiary during your life. After your death, the document appoints a successor trustee and that person is responsible for distributing your assets per your wishes as set forth in the trust document. After all assets are distributed, the revocable living trust is concluded and dissolved.

What Are the Advantages of a Trust?

There are four primary benefits that a revocable living trust provides when compared to a traditional will:

What Are the Disadvantages of a Trust?

A revocable living trust is not for everyone. When we meet with clients we lay out the pros and cons for these trusts and compare them to a traditional will. Here are some of the disadvantages that you should be aware of when you are planning your estate:

Trusts for Children

Some of the most common types of trusts are those created for children, especially minor children. In considering whether your children need a trust, consider the following factors:

  • How old are the children?
  • How mature are the children?
  • What do you want the children to do with the money?
  • How old do you want the children to be before giving them control over certain assets?
  • Are there any special needs for the children?

Your answers to these questions are a good starting point to determine whether a minor’s trust is needed and worth establishing.

Guardianships for Young Children

If you have children or grandchildren under the age of 18, it’s generally a good idea to consider creating a trust for them. If you leave them an inheritance valued over $20,000.00, they will not be able to receive it without a guardian being appointed. Under state law, minors cannot inherit. Depending on the size of the minor’s inheritance, a guardianship would have to be established in order for the minor to receive the benefit of the inheritance. A guardianship holds the assets for the benefit of the minor until they turn 18. Once they reach that age, the funds are dispersed to the beneficiary.

Guardianships have certain drawbacks:

  • The beneficiary receives the assets at 18, perhaps not the most mature age.
  • The court must establish a guardianship, meaning that there will be attorney fees and court costs
  • Often the funds must be held in a restrictive bank account or the guardian must be bonded
  • You do not get to name the person who would be appointed the guardian

Create a Trust to Avoid Guardianship

The best way to avoid establishing a guardianship is to create a trust for minors in your estate plan. When such a trust is created it allows the trustee to manage the money for the beneficiary without having to go to court. It also avoids additional attorney fees and court costs. Perhaps most importantly, creating a trust means that you have the ability to say who will be managing the assets.

One question you must answer is how old do you want your children to be before they can control the money you put in trust? Strongly consider making the over the assets until the children are at least a mature age. You know your children and grandchildren. At what age would you be comfortable with them managing their own assets?

Special Needs Trusts

A special needs trust is created to supplement the needs of a person with a disability. This type of trust allows that person to be eligible to receive governmental benefits such as SSI (Supplemental Security Income) or TennCare/Medicaid. Even if your loved one is not currently receiving governmental assistance, placing an inheritance in a special needs trust is critical to ensuring that they qualify for those benefits should they apply. One of the most critical aspects of a special needs trust is that it must state that the assets of the trust can only be used to supplement the beneficiary’s needs. The assets cannot be used for the beneficiary’s day-to-day living expenses.

Example of How a Special Needs Trust Works

Mitch and Abby are married and have one child together, Lamar, who has a mental disability. Lamar is 18 years old and due to his disability, he will never be able to care for himself. He will always need a caregiver. Lamar has qualified for SSI and Medicaid and his parents do not want Lamar to lose those benefits if they pass away and he receives a large inheritance. They want Lamar’s inheritance to be used to supplement those governmental benefits.

They then meet with an attorney to discuss their needs. That attorney designs a special needs trust that would allow the trustee to use the money for Lamar’s supplemental needs at the discretion of the trustee. What this means is that Lamar would have no control over how the assets are used. Further, the trust states specifically that the assets cannot be used in such a manner that would disqualify Lamar from receiving SSI and Medicaid. Mitch and Abby decide to name Mitch’s brother Ray as trustee of this trust. If Ray cannot serve, they have named a corporate successor trustee as the backup. At Lamar’s death, they decide the remaining assets will be conveyed to Vanderbilt Children’s Hospital.

Under this setup, the child will qualify for vital governmental programs and be able to have extra money if needed for in-home healthcare, medical devices, furniture, vacations, or other such supplemental needs.

Children With Behavioral Problems

In today’s society, it is not uncommon to see parents want to limit access to certain funds that they may leave their kids. Perhaps a son has a drug or alcohol problem or a daughter has a large amount of debt and has spending issues. Whatever the case may be, many parents do not feel comfortable giving children with these types of issues substantial amounts of money without some limits on how it may be used. Under those circumstances, a trust would be a viable solution to those issues. A parent could name a responsible party as trustee and direct the trustee that the money could only be used for the benefit of the child. The parent could limit the use of the money to education or healthcare, or even provide for housing. By limiting the use of the assets, it allows the trustee to preserve the balance of the trust but also provides a benefit to the child.

Appointing a Trustee

When considering who should be appointed trustee, it is important to consider someone fairly young. Chances are that if the beneficiary of the trust is a child then the administration of the trust could last for quite some time. You want someone in place that will be around for a while. Additionally, consider naming a corporate trustee who has experience in handling special needs trusts. Corporate trustees are important to bear in mind as they will likely be around for much longer than any individual person serving as trustee and can continue to look after the beneficiary in perpetuity.

Also, consider the physical and mental burden on the trustee to care for a disabled person. Before deciding on a trustee, be sure to speak with the proposed trustee to ensure they are willing to serve. Explain to them in detail the significant responsibility they are to have if they choose to serve as trustee.

Consider Making Distributions Unequal

If your estate plan has multiple beneficiaries and one of them requires a special needs trust, think about making the distributions unequal. Here’s why: A disabled person most likely will need greater resources than a healthy individual over the long run. As such, to guarantee that a beneficiary with a disability has enough assets over time, consider providing more to this beneficiary than the others. After all, you can always name the other healthy beneficiaries as the ultimate recipients of the special needs trust in the event that the disabled beneficiary passes away.

Use of the Assets of Special Needs Trust

So, if the assets cannot be used for day-to-day living expenses, what exactly can the funds be used for? This can be a tricky question, and you want to be sure that you consult with a special needs trust attorney if there is a question about how the trust assets should be spent. Below is a list of assets that can be used to supplement the needs of a beneficiary without costing them their government benefits:

  • The home of the disabled person — assuming that the individual lives in the home or intends to return home if in a nursing home
  • A vehicle
  • Utilities
  • Furniture and home furnishings
  • Personal items such as jewelry, heirlooms, or clothing
  • Education expenses
  • Travel expenses
  • Entertainment expenses

Do You Need a Trust Attorney?

It depends on your situation and the goal you are trying to accomplish. Consider the following questions:

  • Are you worried about taxation?
  • Are you in a second marriage and trying to find a way to plan for your spouse and children?
  • Do you have creditor issues?
  • Do you have a child with a physical or mental disability?

In many cases, a trust is a useful instrument in helping to manage some of these issues. But remember, your personal situation will largely dictate whether one would be a right fit for your estate plan. Speak with a law firm handling estate planning and trusts and let them advise you on whether a trust would be a right fit for your estate plan and the goals you wish to accomplish.

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