Trusts Aren’t Just for Billionaires: Reasons for a Trust

Occasionally clients are hesitant to utilize trusts in their estate plan because they “just have a simple estate” or believe they need substantial assets to warrant a trust.   In fact, trusts are for everyone and solve a variety of purposes in estate planning.  According to an article entitled “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller” from Market Watch, trusts give great flexibility in how assets are divided after your death, no matter how modest or massive the size of your estate. Using trusts in your estate plan is a smart move, for many reasons.

There are two basic types of trust. A Revocable Trust is flexible and can be changed at any time by the person who creates the trust.  This person is known by many different names based upon the convention of where the trust is established, but is often known as the “grantor” or “trustor” or something similar.   These are commonly used because they allow a high degree of control while you are living, especially if your goal is to avoid probate while being able to revise your plan in the future.  The idea is that if your trust is the owner of an asset or properly receives the assets at your death, there will be no need for a Will to be probated through the court system.

Once the trust is created, homes, bank and investment accounts and any other asset you want to be owned by the trust are retitled in the name of the trust or directed to it upon death, depending on the type of asset and what your goals are. This is a step that sometimes gets forgotten, with terrible consequences. Once that’s done, then any documents that need to be signed regarding the trust are signed by you as the trustee, not as yourself. You can continue to sell or manage the assets as you did before they were moved into the trust.

See here for a more robust discussion of how a trust works versus a will.  https://galligan-law.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

There are many kinds of trusts for particular situations. A Special Needs Trust, or “SNT,” is used to help a disabled person, without making them ineligible for government benefits. A Charitable Trust is used to leave money to a favorite charity, while providing income to a family member during their lifetime.

Assets that are placed in trusts do not go through the probate process and can control how your assets are distributed to heirs, both in timing and conditions.

An Irrevocable Trust is permanent and once created, cannot be changed subject to a few caveats. This type of trust is often used to save on estate taxes, by taking the asset out of your taxable estate. Funds you want to take out of your estate and bequeath to grandchildren are often placed in an irrevocable trust.  These types of trust are becoming more and more useful as the estate tax exemption is expected to go down leaving more and more clients exposed to potential estate taxes.

If you have relationships, properties or goals that are not straightforward, talk with your estate planning attorney about how trusts might benefit you and your family. Here’s a few reasons for a trust and why this makes sense:

Reducing estate taxes. While the federal exemption is $11.58 million in 2020 and $11.7 million in 2021, state estate tax exemptions are far lower. New York excludes $6 million, Massachusetts exempts $1 million, Texas has none at all.  Some states are even more complicated in having inheritance tax (taxes are applied against the exact amount transferred).  Further, it is widely accepted that the federal estate tax exemption will be lowered as well.  An estate planning attorney in your state will know what your state’s estate taxes are, and how trusts can be used to protect your assets.  You can also see here for a recent article I wrote on life insurance trusts as a good example of a common trust used to reduce estate tax exposure.  https://galligan-law.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/ 

If you own property in a second or third state, your heirs will face a second or third round of probate and estate taxes. If the properties are placed in a trust, there’s less management, paperwork and costs to settling your estate.

Avoiding family battles. Families are a bit more complicated now than in the past. There are second and third marriages, children born to parents who don’t feel the need to marry and long-term relationships that serve couples without being married. Trusts can be established for estate planning goals in a way that traditional wills do not. For instance, stepchildren do not enjoy any legal protection when it comes to estate law. If you die when your children are young, a trust can be set up so your children will receive income and/or principal at whatever age you determine. Otherwise, with a will, the child will receive their full inheritance when they reach the legal age set by the state. An 18- or 21-year-old is rarely mature enough to manage a sudden influx of money. You can control how the money is distributed.

Protect your assets while you are living. Having a trust in place prepares you and your family for the changes that often accompany aging, like Alzheimer’s disease. A trust also protects aging adults from predators who seek to take advantage of them. Elder financial abuse is an enormous problem, when trusting adults give money to unscrupulous people—even family members.

Talk with an estate planning attorney about your wishes and your worries. They will be able to create an estate plan and trusts that will protect you, your family and your legacy.

Reference: Market Watch (Dec. 4, 2020) “3 Reasons a trust may make sense for your family even though your name isn’t Trump, Gates or Rockefeller”

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How to Pick a Trustee

Clients frequently choose to use trusts in their estate plans, and once they and their estate planning attorney have made that decision, they’ll need to decide who to name as trustee or trustees. Picking a trustee is not always an easy process, explains Kiplinger in the article “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate.”

Serving as a trustee creates many duties under state law, including acting as a fiduciary to the trust. That means the trustee must be impartial about their own interests, put the beneficiary’s interests and well-being first and be prudent with how they invest funds. Law prohibits a trustee from self-dealing, although depending on the scenario, the trustee might also be the beneficiary.

Here are a long series of questions that will help to assess a person’s ability to serve as a trustee:

  • Will the person be able to separate their personal feelings and interests from those of the beneficiaries?
  • Will all parties be treated fairly, especially if your children are not also your spouse’s children?
  • Can your trustee manage finances and investments?
  • Is there any risk that your trustee will be tempted to take a risk to obtain money at the expense of beneficiaries, including their own money problems or addiction?
  • Are there concerns about the health, age or capacity of the person?
  • Will a child who is a trustee be fair to the other siblings, even if they are step siblings?
  • Will a child be able to stand up to the other siblings?
  • Will the person who is managing work and family have the time to take on the responsibilities of the trustee when they will likely be needed to do so?
  • Does the person understand the family dynamics?
  • Has the person served as a trustee before?

Another common problem is people are unsure of who to ask in their family or where to look for back-up trustees, especially where they might not feel comfortable with those closest to them.  With that in mind, here are some potential people to consider, although their suitability will vary greatly in different circumstances:

  • Spouse
  • Parents
  • Children, step children, and grandchildren
  • Siblings and step siblings, nieces and nephews, cousins
  • Spouses of children, step children, siblings or other close family
  • Friends
  • Neighbors
  • Members of social groups, fraternal organizations, religious communities or other similar groups
  • Financial Professionals (not necessarily financial planners who likely aren’t permitted to, but CPAs or some attorneys for example)
  • Professional Trustees (e.g. a bank or other similar trustee)

I should note as well that I’m focusing on trustees in this article, but many of these same considerations apply to other fiduciary roles.  See here for more information on the other roles to consider.  https://galligan-law.com/the-difference-between-an-executor-a-trustee-and-other-fiduciaries/

There is no one size fits all approach to picking a trustee, but hopefully this will provide guidance on who is right for you.

Reference: Kiplinger (Sep. 8, 2020) “Guidance on Choosing the Right Trustee (or Trustees) for Your Estate”

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Locking in a Deceased Spouse’s Unused Federal Estate Tax Exemption

Preserving a deceased spouse’s unused federal estate tax exemption may protect the survivor’s estate from huge taxes if the exemption lowers.

Coping with the death of a spouse is one of life’s biggest challenges.  In addition to the emotional toll, there are many small details that need to be addressed with accounts, finances, taxes and other matters.  One thing that should be considered is locking in the deceased spouse’s unused federal estate tax exemption, says a recent article from Forbes titled “4 Things You Should Know About The Death Tax Exemption.”

The deceased spouse unused exemption (DSUE) is the amount of federal estate tax exemption the spouse’s estate did not use when they passed away. When a person dies, a federal estate tax, known also as the “death” tax, is imposed on any assets over a certain amount. The estate tax exemption amount covers the assets that fall below that amount.  If you properly elect to us it, the DSUE amount can be used by the surviving spouse in their own estate along with their own personal tax exemption.  If you want a longer primer on the estate tax for reading this article, see here:  https://galligan-law.com/what-exactly-is-the-estate-tax/

The threshold has changed over the years. It is at a historically high level of $11,580,000 in 2020 and is indexed to inflation, so it goes up slightly each year.  However, the current law will sunset in 2026, when it will drop to $5 million (adjusted for inflation), and as the federal government needs to pay for COVID-related costs, it is likely to drop sooner and possibly lower.

The DSUE is locked in when you file your deceased spouses’ estate tax return timely.  It is due nine (9) months after the date of death, but may be extended in some cases for up to two (2) years after death. If a spouse died in 2020 with the current exemption of $11,580,000 in place and used up $6,580,000 of the exemption amount, the surviving spouse will be able to add $5,000,000 to their exemption amount by filing the estate tax return appropriately.

The surviving spouse would then have their own $11,580,000 exemption (or whatever is appropriate in the year they pass), plus the $5,000,000 from the deceased spouse’s exemptions. As the current tax rate is 40% for amounts over the exemption, this is an exceptional tax benefit for high networth families, especially if the tax exemption plummets in future years.

I’ve said this a few times but it bears repeating: even if a spouse leaves all of their assets to their spouse and no federal estate taxes are due, an estate tax return still needs to be filed, if the surviving spouse is to lock in the DSUE. If the surviving spouse does not file an estate tax return in a timely fashion, the DSUE will be lost. The estate tax savings to the heirs could be in the millions.

If the estate tax exemption drops to prior levels, such as $3,500,000 which has been proposed in recent years, the family will still be able to claim the DSUE when the second spouse dies. This could be a big help for heirs in reducing or eliminating taxes on the second spouse’s estate. Many people may not have an estate worth $11 million, but by adding up the value of a home, retirement accounts, life insurance and other assets, a $5 million level of assets is not unheard of, and may be over the future exemption amount.

Your estate planning attorney will be able to analyze the federal estate taxes to achieve the best possible outcome for you and your spouse.

Reference: Forbes (Aug. 17, 2020) “4 Things You Should Know About The Death Tax Exemption”

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