Estate Planning for Beginners Part 2: Trusts
June 28, 2011
We’ve said it before on our blog and we’ll say it again: It doesn’t matter whether you’re a billionaire business executive or a teacher with a modest salary, it doesn’t matter whether you’re the patriarch of a large family or a stay-at-home mom of a newborn, a revocable living trust may be exactly what your family needs to protect family assets and their best interests. This is because a trust is probably the most comprehensive and versatile tool in your estate plan, and is a key part of helping you accomplish your goals.
There are two basic kinds of trusts—revocable and irrevocable. Revocable means that it can be revoked or changed so long as the grantor (the person who created the trust) is still living and is competent to do so. Logically enough, an irrevocable trust generally cannot be changed once it has been signed. The reason this question of revocability is so important is because a trust is not merely a set of instructions for how your wealth should be distributed, a trust actually owns the property placed within it, with the person or people serving as trustee (usually for a revocable trust this is the grantors themselves, while they are living) controlling the trust property within. It is for this very reason that trusts can be such a powerful and flexible tool for tax planning and estate planning.
The specifics of your trust will vary greatly depending on what you hope to accomplish. Parents of young children may wish to include a general trust for the benefit of all the children, with distributions made to their guardians as necessary. This general trust can be split into separate individual trusts when all of the children have reached a certain age or graduated from college. Parents (and often grandparents) may want to include education trusts under the umbrella of their revocable living trust. Many families feel it is important to include instructions for charitable giving in their estate plan, and may choose to set up a charitable trust with their children or grandchildren as trustees. Pet owners often create pet trusts to ensure that their animals will be well cared after the owner has died.
A trust, much more than a simple will, allows the grantor far greater control over his or her assets—and for a longer period of time—which is why trusts are particularly useful for anybody entering into a second or third marriage, or for any parent who worries about the choices a beneficiary might make once they come into their inheritance. Unlike a simple will, trusts are designed to withstand the test of time, allowing you to leave a legacy that can last for decades.
Do You Need A Will Or A Trust?
March 14, 2010
When it comes to estate planning there are two major vehicles for the distribution of property: A will and a trust. Both are very useful tools and can accomplish specific goals—but how do you know which one is best for your family? Which document you will need depends on a number of factors, some of which may seem completely irrelevant at first: the size of your estate, your goals for that estate, the age of your children, your marital status, your retirement account, and many, many more. But the first step to understanding which tool may be right for you is to understand what each document does.
A Will: A will is a formal declaration of your wishes. It is a document you create to declare the extent of your privately held property (it does not cover jointly owned property) and what your wishes are for the distribution of that property. You name an executor to carry out your wishes, and you can even include a nomination of guardian for young children in your will. A will does not go into effect until after you die; before then it is simply a piece of paper containing your private wishes. However, once you have passed away your will no longer remains private, it now becomes a matter of public record, available to anybody who would like to view it, and overseen by the court in a sometimes lengthy and expensive process called probate.
A Trust: A trust is a far more extensive tool than a will. In fact, there are many different kinds of trusts, each of which may be used for specific situations. Most trusts created for estate planning purposes are revocable living trusts (or RLTs.) An RLT is a document created not simply to distribute your property, but to own your property on your behalf, to be invested and spent for your benefit or the benefit of your named beneficiaries. As such, a trust takes effect as soon as you sign it and your property is protected by and subjected to the trust parameters as soon as you place them in the name of your trust. There is a lot of flexibility available with a trust, and yours can be created to fit your unique situation. Most RLTs name the trust creators as the initial trustees, nominating individuals or banks to take over as trustee when the creator becomes incapacitated or passes away. The benefit of a trust is that when the creator passes away, property is not merely distributed and that’s the end of it; the creator can instruct the trustee to distribute the money slowly and in any number of ways, even to the extent of creating new trusts for each beneficiary. Trusts can last for generations, as evidenced by the enduring Kennedy trusts.
Wills and trusts are necessary tools in estate planning, each one working in unique situations. Your attorney will be able to tell you which one is best for your family.
10 Tips for Potential (or Existing) Trustees
February 21, 2010
The creation of a trust and estate plan includes spending a certain amount of time choosing the people who will be your fiduciaries—the people who will carry out your wishes. One of the most important fiduciaries is your trustee, who is involved in just about every aspect of the administration of your trust. Most people choose someone close to them to serve as trustee: a best friend, son or daughter, brother or sister. Choosing someone who knows you and your family to serve in this role can be beneficial in many ways, but if that person doesn’t have a financial or legal background the responsibilities can be overwhelming!
If you want to give your trustee a head start (or if you’ve been nominated as a trustee and need a little help yourself) read more about “9 Do’s and 1 Don’t” of being a trustee. These suggestions will help a potential or new trustee better understand their responsibilities and the scope of the job to come. Advice such as #1, “Do read the trust document”; or #3, “Do keep the best interests of the beneficiaries in mind at all times” may seem obvious now, but it’s not always so clear when you’re beset by insistent and emotional relatives. The more technical tips such as #2, “Do create a checking account for the trust”; and #9, “Do file income tax returns for the trust” are invaluable starter-steps for someone who has never done this before.
But the most important tip to remember is the one don’t: #10, “Don’t fly solo. Get professional advice to make sure you are correctly fulfilling your role.” If you or the people you’ve chosen as your trustee are ever in doubt, please don’t hesitate to call our office for help.
What To Do When Your Kids Don’t Like Your Will
October 4, 2009
In an ideal world elderly parents and their adult children always get along, and when those parents pass away their children quietly and respectfully follow their wishes regarding the distribution of their estate. Unfortunately, we don’t always live in an ideal world, and inheritance and estate planning can often cause tension between parents and children before the parents have even reached retirement age!
What are your options when you know your kids won’t like what you’ve put in your will or trust? Many people choose to simply keep their wishes secreted away in a safety deposit box until they’ve passed away and then let everyone fight it out on their own; but this only puts off the bad feelings and can often cause lasting rifts among siblings. This strategy of secrecy also doesn’t address what happens if you become incapacitated and need one of your trustees or agents (in all likelihood one of your children) to take over your affairs.
A better option than secrecy may be to invite your children to your final meeting with your estate planning attorney. If the attorney is willing, and if you have good relationships with your children, this may be a good move. It could give you an opportunity to share your plans in the presence of a knowledgeable professional who is on your side; it also gives your children the opportunity to ask questions and get clear and immediate answers. More often than not tension about mom and dad’s estate plan stems from a lack of understanding, or a worry that mom or dad have been taken advantage of.
Such a meeting might be especially valuable where you have remarried and plan to provide for your new partner in your plan, before providing for children, either yours or your new spouse’s. A meeting might help explain your wishes. Ask your attorney for his or her view on this when you discuss your plan. While a family meeting is not for every familiy, still for many it can be reassuring, educational, and put everyone one the same page while moving into the future.
When Should I Update My Estate Plan?
May 23, 2009
You’re one of the smart ones: You already have an estate plan that you and your spouse created it back in 1996; it’s sitting snugly in a safety deposit box, gathering dust until the (hopefully) far-off day when it will be needed. You’re done, right?
Wrong.
Kudos to you if you’ve already created your estate plan, you are one step ahead of the rest of the pack; but people and families grow and change, and your estate plan should change as your life does. Your estate plan should be reviewed regularly (we recommend the tax season as a good time to review your plan), but listed here are some life changes that will definitely require you to update your estate plan:
The birth or death of a beneficiary or fiduciary. This includes the addition of new children or grandchildren, or the loss of a parent or sibling.
Your own marriage or divorce, or the marriage or divorce of one of your beneficiaries. If you named your daughter’s husband in your plan five years ago when they were happily married, you’ll want to be sure to remove him after they go through that messy divorce.
Moving to a new state. Tax, health care, and estate planning laws vary from state to state, and your estate plan will have to change accordingly. This is especially true if you are moving from a non-community property state to a community property state.
A significant change in your financial status, or the status of your business, (if you have one). For the most part, your estate plan is designed based on the size of your assets. Different strategies are more effective for large estates than are for small; and if your financial status changes significantly, so should your estate planning strategy.
The simple passage of time. This may sound like the least important reason to update your estate plan, but it is actually the most common. Naming your parents as trustees when your children are minors is fine, but after fifteen years you may want to give your parents (who are now entering their 80s) a break and name your 37 year old son as trustee instead. In addition, there are some documents that should be re-executed from time to time to avoid them being construed as ‘stale”, e.g. your Advance Health Care Directive, your Nomination of Conservator, and your Nomination of Guardain for Minor Children?
Changes in the Tax Law: changes in the tax law can really require another look at your existing plans. For example, couples who prepared “Living Trusts” back in the 1990′s often used “A–B” trust splits on the first death in order to minimize estate tax. With the increasing exemptions, those trust splits may now no longer be necessary for most couples’ estates, and may actually be a hindrance. See our Article “Review Your Living Trust: Older Ones May Need Revision”.
The Most Important Part of Your Estate Plan
April 7, 2009
What is the most important component of an estate plan? This is a question that comes up a lot in our practice, and as you might guess, different families will have different answers.
The Trust: Many families feel that this is the heart of the estate plan, and as such the most important part. As the document that outlines your wishes for distribution amounts, designates beneficiaries, nominates trustees, defines your incapacity and lists your assets—there is definitely reason to think the trust an important part of your plan.
Healthcare Directive: Some people are more concerned with how their end-of-life wishes are carried out than with the distribution of their estate. Those people consider the healthcare directive—the document that sets out your wishes for medical treatment, resuscitation, and healthcare agents—the most important component of an estate plan.
Guardianship Documents: Parents of young children are often more concerned with the guardianship portion of their estate plan than any other portion; they trust that as long as their children are in the hands of loving and responsible guardians all the rest is secondary.
The Will: Some believe the will to be the most important document. This is especially true of single people at the older or younger end of the spectrum, who feel they don’t have enough assets to require a trust.
Powers of Attorney: Very few people feel this document by itself is the “most important”, but most people understand that as the document that confers fiduciary powers on your chosen agents, the Power of Attorney has an importance of its own.
These components are all helpful and necessary pieces of an entire estate plan, but the most important part of your estate plan is something else entirely; something grantors and beneficiaries, rich and poor, young and old, attorneys and clients alike can all agree on—the most important part of your estate plan is creating it!
Choosing A Fiduciary: Some Special Thoughts
March 17, 2009
Choosing your fiduciaries can be one of the most difficult parts of creating your estate plan, especially choosing trustees for your trust, which, depending on the circumstances, you may hope will be in existence for quite a long time. Most people’s first instinct is to choose a family member, someone they know and trust, perhaps even the most responsible of their children; but this article from Elder Law Answers explains why that might not be the best course of action.
Many people, when choosing their trustees, don’t consider the whole picture. They are inclined to choose their trustees based on fear of being taken advantage of, which is why many people choose a trusted family member. But it’s also important to consider knowledge and expertise. A situation in which a fiduciary acts dishonestly and takes advantage of your beneficiaries is far less likely a scenario than one in which a fiduciary does your beneficiary a disservice out of ignorance and inexperience.
Choosing your fiduciaries is a critical step; it requires thought and consideration, and depending on your ultimate goal for your estate plan, it requires the advice or recommendation of an expert. When you go to visit your estate planning attorney bring with you a list of potential fiduciary candidates… but also an open mind.
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