Revocable Living Trusts Irrevocable Trusts, Irrevocable Life Insurance Trusts, Testamentary Trusts, Special Needs Trusts, IPUG Trusts, Etc.
Trusts come in many “flavors,” they can be simple or complex, and serve a variety of legal, personal, investment or tax planning purposes. At the most basic level, a trust is a legal entity with at least three parties involved: the trust-maker, the trustee (trust manager), and the trust beneficiary. Oftentimes, all three parties are represented by one person or a married couple. In the case of a revocable living trust, for example, a person may create a trust (the trust-maker) and name themselves the current trustees (trust managers) who manage the trust assets for their own benefit (trust beneficiary).
Depending on the situation, there may be many advantages to establishing a trust, including avoiding probate court. In most cases, assets owned in a revocable living trust will pass to the trust beneficiaries (or heirs) immediately upon the death of the trust-maker(s) with no probate required. Certain trusts also may result in tax advantages both for the trust-maker and the beneficiary. Or they may be used to protect property from creditors, or simply to provide for someone else to manage and invest property for the trust-maker(s) and the named beneficiaries. If well drafted, another advantage of trusts is their continuing effectiveness even if the trust-maker dies or becomes incapacitated.
What are Trusts and are they needed for you?
WHAT IS A TRUST?
A Trust is an agreement under which money or other assets are held and managed by one person for the benefit of another. Different types of trusts may be created to accomplish specific goals. Each kind may vary in the degree of flexibility and control it offers.
The common benefits that trust arrangements offer include:
WHAT IS A LIVING TRUST?
A revocable inter vivos trust (living trust) is created for the purpose of holding ownership to an individual’s assets during the person’s lifetime, and for distributing those assets after death.
The individual who creates the trust (the grantor) names a person who will serve as trustee and will follow the trust’s terms after the grantor dies. While alive, the grantor usually may serve as a trustee and control the assets even though they belong to the trust.
WHY IS IT CALLED A LIVING TRUST?
It is called a living trust because it is created during the grantor’s lifetime, and takes effect during the grantor’s lifetime. By contrast, a will does not take effect until after death.
DOES A LIVING TRUST AVOID PROBATE?
Perhaps the biggest advantage of a living trust is that it does not have to go through probate, as does a will. However, there are other estate planning devices which avoid probate, such as a joint tenancy, a life insurance policy, and in-trust-for bank account (also known as a Totten Trust), and individual retirement, pension or Keogh accounts.
WHAT IS A “POUR-OVER” WILL?
A “pour-over” will is necessary to distribute any property that is acquired in the name of the grantor after the living trust was established, or any property that was not transferred into the trust in the first place.
The use of “pour-over,” together with a living trust ensures that assets not held in trust will be distributed in accordance with the wishes of the deceased, and not by the laws of intestacy.
A “pour-over” will, like any other will, must go through probate if the decedent dies owning assets which must pass through the will.
DOES A LIVING TRUST AVOID THE IMPOSITION OF ESTATE TAXES?
With proper training, a living trust can be a valuable estate and tax planning device. However, there is no inherent estate tax advantage to using a living trust. While a trust may contain provisions taking effect at death which do save on taxes, the identical tax savings can be contained in the grantor’s will instead of a living trust. This is done with the use of a Testamentary Trust (a trust that is included in the will). The cost of a Living Trust and a Testamentary Trust is about the same.
DOES A TRUST AVOID INCOME TAXES?
There are no substantive income tax advantages in the use of a living trust. The grantor is treated as the owner of the trust for income tax purposes, and must report all trust income on his or her personal return under the “grantor trust” income tax rules.
IS THERE A LIVING TRUST MORE PRIVATE THAN A WILL?
A will becomes a matter of public record during the probate process, and a copy can be obtained upon request to the Surrogate’s Court. A living trust is a private document that is not subject to public scrutiny.
However, a “pour-over” becomes a matter of public record when it is submitted for probate, and the “pour-over” often incorporates the living trust by reference. In addition, when title to real property is transferred into a living trust as part of the funding process, the consent of the mortgagee is required. Before giving consent to the transfer of mortgaged property, the mortgagee typically requires that the living trust document be recorded, with the deed, at the office of the county clerk. The living trust can then become part of the publicly-accessible records.
CAN A LIVING TRUST BE CONTESTED?
Yes. A trust can be contested in a special proceeding. There is no blanket rule that a living trust cannot be contested. However, it is harder to contest a Living Trust and a no contest clause can be added to the Living Trust.
WILL THE USE OF A LIVING TRUST INSTEAD OF A WILL SAVE LEGAL FEES?
The legal fee for representing an estate would most likely be the same, whether the assets pass in trust or by will. The legal costs saved by using a living trust are the costs incurred in a probate proceeding.
Reasons for Doing a Living Trust
1) Privacy: Living Trusts are not on Public Record
2) Disinheriting Sons-in-Laws and Daughters-in-Laws: With divorce rate so high, it is quite possible that your hard earned money will go to fund the in-laws life style rather than to your children and grandchildren.
3) Saving on certain Estate Taxes and or Probate Expenses: Accomplished by preserving the exemption for both spouses and avoiding probate taxes and recordings.
4) Stretching out Inheritances to Children (Not a Lump Sum): Money can be doled out every year, every five years, etc.
5) Making Transfer of Property Easier for Heirs: Avoids the trouble of probating and switching property over to heirs. When you die the assets in the trust switch automatically to the heirs with new trustees (often the same people).
6) You Want One: Sometimes people feel better with trusts because of past experiences with them.
WHAT ARE SPECIAL NEEDS TRUSTS?
Have you been told that your son or daughter, who has a disability, is not allowed to inherit money? It’s true, an inheritance will interrupt his or her SSI and Medicaid. Therefore, someone who is disabled cannot inherit more than $2,000 because it will interrupt his or her government benefits.
There is an easy way around this problem. You can leave money for your son or daughter, without interfering with the public benefits. Just ask your attorney for a Special Needs Trust.
The most commonly used special needs trust is a family-type trust, which is set up by the parents. The parents provide the money for the trust, often by will, and sometimes by purchasing life insurance. The money can be used by the trustees to visit the child who is being provided for. The money can be used to pay for funeral and burial costs. It can pay for a lot of things, but it doesn’t have to pay for anything unless the trustee thinks it is a good idea.
If you set up a special needs trust of this type, the trustee can buy many of the things your son or daughter will need. The trust can pay for an advocate to make sure your loved one gets the services he or she needs when you aren’t there to help out. The trust can pay for vacations, social events, and sporting goods.
If Medicaid won’t pay for certain medical care or treatments, the trust can step in and provide those. Occasionally, people with mental disabilities are targeted by the police and wrongly accused of crimes; if your son or daughter has a special needs trust, the trust can pay for a good legal defense.
The trust can buy a house for your child to live in (however, the child will be required to pay some kind of rent to the trust). It can pay for an advocate to insist that your loved one be granted services by the government, as required by law. For people who are not especially wealthy, a special needs trust is still a good idea in order to provide for the disabled loved one. It can be funded with a life insurance policy if need be.
WHAT ARE IRREVOCABLE TRUSTS?
Trusts that generally cannot be changed once it has been set up.
WHAT ARE ILITS (IRREVOCABLE LIFE INSURANCE TRUSTS)?
Trusts used to hold a life insurance policy to help the heirs in inheritance and/or estate taxes.
WHAT ARE TESTAMENTARY TRUSTS?
A trust created inside a will that comes into existence during the probate process.
WHAT ARE IPUGS?
A special kind of Irrevocable Trust that is used for both Estate Planning and Tax Planning.