As many of you may know, administrations come and go, and when they do, it is prime time for law changes. Some of these changes do not or only minimally affect estate planning, but others, like the recently proposed federal estate and gift tax changes, have the potential to dramatically affect estate tax planning. This is one of the many reasons we have a client care program designed to take care of our families—so that when the law changes, your plan can change with it.
If you’ve done some reading on our blog already or have done your homework before reading this, you may already have a solid grasp on the benefits of comprehensive and quality estate planning. And at Family Estate Planning Law Group, we work to make sure each estate plan is customized to fit any given family’s needs. Sometimes, that involves specific types of trusts that fulfill certain functions.
For example, what if you or someone in your family has a dependent who needs persistent attention because of a physical, intellectual, or mental disability and they receive government assistance for income, health care, or housing? In that case, there needs to be a different legal mechanism to protect that assistance while also allowing them to receive estate assets. This takes the form of a special needs trust (SNT).
Parents of a child with special physical or developmental needs know that many of the simple, everyday functions we take for granted are more complicated for their children and come with associated costs to help them with their standard of living. This can be compounded by the child being unable to manage their own funds because of their condition.
Special needs trusts (SNTs) are a specific tool to be used in estate planning when parents have a child with physical, mental or developmental conditions that require persistent care and make it difficult for the child to support themselves. An SNT provides parents with a means to take care of their child after they are gone with the help of a trustee to manage the assets on their son or daughter’s behalf without jeopardizing any governmental benefits they are receiving now or may receive in the future.
If there is one overarching piece of advice across all estate planning, it’s ‘better sooner than later’ and this, too, applies to special needs trusts when they are applicable. But there are some timing considerations to keep in mind specifically with SNTs.
In my last blog, I explained why your will won’t get you where you want to go. If I have managed to convince you (or maybe even if you’re still up in the air), then let me explain to you how a trust can help get you there. A trust is like a bucket with instructions written on it about what to do with the stuff inside. When an attorney sets up a trust for you, they help you legally write the instructions for how to handle the stuff inside. During the process of asset alignment, (formerly known as funding) they should help you to make sure that all of your stuff gets in the bucket.
Now that everything is in the bucket, and you’ve hired an attorney to monitor the changes in your assets, the law and your circumstances, you can relax about your loved ones being taken care of when something happens to you. Here is how it works. The Trustees of the trust are holding the bucket, following the instructions, and making sure that everything happens as it should from day-to-day. In the case of a revocable trust, you will likely be the Trustee of your own trust (and still in control of your assets). When you die, instead of your stuff falling on the floor as would happen in probate, there are instructions on the bucket (in the trust) for another person’s hands to come on the bucket and take control (a successor Trustee). Because the trust does not die, none of the assets aligned with the trust have to go through probate, meaning your successor Trustee has immediate access to those assets and can use them as needed to care for your loved ones and handle your final expenses.
If your estate planning attorney and accountant have two very strongly diverging opinions about your trusts, it’s possible that your family trusts are no longer solving a problem, advises an article from Forbes, “Why You Might Need To Fix Your Family Trusts.” This happens for a few different reasons:
The last thing you want to do is leave a bureaucratic mess for your loved ones when you die. This will cause the family stress during a difficult time. That should be more than enough reason to get this done in advance!
US News & World Report’s recent article, “12 Documents to Prepare Now for Your Heirs,” says that when people don’t have their paperwork ready, it can be a huge headache for the family. A family can be left with all kinds of paperwork to sort out while dealing with grief. Even worse, heirs may forfeit life insurance proceeds and tax deductions or overlook accounts they don’t know exist. That’s why it’s critical to have important documents ready for loved ones, additionally, we at the Family Estate Planning firm have added an additional document (a revocable living trust), as many times this is the foundation of a sound estate plan to avoid probate and allow an orderly administration.
A corporate trustee will have a very different approach to managing a trust, and depending on your situation, may be a far better choice than a family member or friend. They’ll bring sound investment management skills and knowledge, minus the distractions of emotions.
The Dallas Business Journal’s recent article, “Fiduciary investment management and corporate trustees,”explains that one of the many benefits of appointing a corporate trustee, is that they are held to a fiduciary standard of care when managing a trust investment portfolio. That means that they’re legally required to place their client’s interests above their own when making investment decisions. While this may seem like a no-brainer, it’s not the rule for all financial professionals.
A trustee is a type of fiduciary who is in charge of the management of the assets and property in a trust; they can be an individual, institution, or combination of both according to an article from The Balance, “Types of Trustees and What They Do”.
If a trustmaker establishes a revocable living trust, then they serve as trustee themselves. Written into this trust should be a successor trustee who will take over management in the event the trustmaker dies or becomes mentally incompetent. On the other side, if an irrevocable trust is established, the grantor cannot name themselves as trustee. Instead, they must name an individual or institution to take control of the trust. Whether a person is a trustee of an irrevocable trust or a successor trustee of a revocable trust, they have the same duties.
In every movie or TV show where there are very wealthy characters, there is usually one or more who are “trust fund babies”, yet this is a popularized Hollywood definition. While this can be the case sometimes, it is not the main use of trusts. An article from The Balance, “Trust Fund Definition in Estate Planning”, helps break down the more common use of trust funds.
Trusts are a great estate planning tool, and “trust fund” in estate planning terms can mean “living trust”. This means the trust will function even after the grantor’s death. The grantor is the person is the one who forms the trust. Trusts are generally established in two ways: revocable and irrevocable. Irrevocable trusts are when the grantor establishes a trust and immediately the management is passed to the trustee. Irrevocable trusts that continue to operate after the death of the grantor are what are typically referred to as trust funds. The assets in this trust provide long-term financial support to the beneficiaries. With a revocable trust, the grantor is the trustee and manages the trust themselves during their lifetime. Most revocable trusts are settled once the grantor dies, and the property held by the trust is transferred to the beneficiaries, effectively dissolving it. When an outright distribution occurs however, the beneficiaries lose any protections the trust provides. Our firm will typically plan for the property to sit in a “Beneficiary Controlled Asset Protection Trust” (a “BCAPT”) to provide the beneficiary the option of protecting the assets from divorces, bankruptcies and lawsuits.
Living trusts have numerous advantages that many are failing to utilize. Not capitalizing on living trusts is one of the top estate planning mistakes according to Forbes in, “7 Big Estate Planning Mistakes – Not Making Full Use of A Living Trust”, the fourth in a series of articles. This mistake stems from misunderstanding what it means to have a living trust and its benefits. So, first, let’s clarify how it works.
A living trust, typically set up by you and your spouse, is what most of your assets are transferred into once you establish it. You and your spouse will serve as co-trustees. The main difference once your assets are placed in the living trust is your title. You are no longer an owner as an individual, but instead as a trustee, yet you still have full control over these assets and manage them as you did previously.
