WEALTH MANAGEMENT SPOTLIGHT: ESTATE PLANNING BASICS
We are all planning to live to be at least 100, right? Regardless of your genetics or your age, if you die without a Will, the laws of the state where you reside will determine how your assets will be distributed to your descendants. Everyone over the age of 18 who has any sort of savings, investments, property, or dependents should have a Will.
The basic documents everyone should have include:
Trusts & Wills
Trusts are typically recommended for anyone who has more than $200,000 in assets, including homeowners; anyone who has minor or special needs children; and anyone who has children of any age from a previous marriage. A Will allows you to name beneficiaries for the distribution of assets you own individually, but the distributions require court approval the court, a process called Probate. This process generally takes about 9 to 12 months and can incur fees of 3%-5% depending upon the complexity of the assets and any contests of the Will.
What is a Trust?
A Trust is form of property ownership created by a legal document, which establishes a legal entity that holds title to assets for the benefit of its Beneficiaries. We like to describe it like a “bucket” that holds assets for the Beneficiaries. A Trust can hold virtually any kind of asset, including cash, stocks, bonds, mutual funds, bank accounts, insurance policies, real estate, business entities, and tangible personal property.
The individual who creates a Trust is the “Grantor.” The Grantor’s Trust Agreement designates the Beneficiaries, who could include the Grantor during his or her lifetime, and then family members, following the Grantor’s death. Beneficiaries can also include other individuals (friends and business associates) or charities, or even other Trusts. Trust assets can be distributed entirely to Beneficiaries at the time of a Grantor’s death, or the Trust can continue after the Grantor’s death and distribute income and/or principal to Beneficiaries over time.
Revocable Trusts
These Trusts (also called Living Trusts) are created by the Grantor for his or her own benefit prior to death, and then for the Remainder Beneficiaries. The Trust Agreement will generally appoint the Grantor as the initial Trustee. The Trustee technically owns the Trust assets but must use and distribute the assets in accordance with the terms of the Trust Agreement. If the Grantor/Trustee becomes disabled, or upon his or her death, the Trust Agreement designates a Successor Trustee, often a professional firm such as The Trust Company, to continue carrying out the terms of the Trust.
Since the Trust assets are owned by the Trust, and not the Grantor individually, the Grantor’s Trust Agreement controls the distribution of the Trust assets, not the Grantor’s Will. That’s why no Probate proceeding is required for the administration and distribution of the Trust assets. A well-written Revocable Trust and well-organized estate plan can often be settled and distributed within 3 to 6 months following the Grantor’s death, while also avoiding court costs and significant attorney fees.
With a Revocable Trust, you maintain control. The Grantor can amend the Trust or even revoke it, as long as he or she is mentally competent. Revocable trusts are also private. Unlike a Will, a Living Trust is not part of the public record. No one can review details of the trust documents unless you allow it.
Revocable Trusts also facilitate the management and distribution of the Trust assets if the Grantor becomes incapacitated. The Successor Trustee steps in and has a duty to administer the Trust assets in accordance with the Trust Agreement and the best interests of the Grantor. In the absence of a Trust, a court-appointed Conservator would manage your property.
Please note that assets in a Revocable Trust are not protected from creditors, and the Grantor is subject to income taxes on income earned by the Trust assets.
Irrevocable Trusts
There are two types of Irrevocable Trusts:
Upon the Grantor’s death, Trust assets are most often distributed immediately to the Remainder Beneficiaries. These Beneficiaries often include the surviving spouse, children, other family members, or can include friends and charities. But under this first type of Irrevocable Trust, the assets are retained in trust for the Beneficiaries for some period or their lifetimes. Again, the Successor Trustee is responsible for administering the Irrevocable Trust, managing its assets, and distributing income and/or principal according to the terms of the Trust Agreement.
Unlike a Revocable Trust, this second type of Irrevocable Trust can't be amended or revoked once it has been created by Grantor. The Grantor generally can't remove assets, change Beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust can be a valuable estate planning tool, particularly for tax-planning purposes.
Provided that you have given up control of the property, all the assets in the Irrevocable Trust, plus all future appreciation on the property, is out of your estate for purposes of Federal Estate Taxes. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your Beneficiaries through an Irrevocable Trust will also avoid probate. As a bonus, property in an irrevocable trust will generally be protected from your creditors.
There are many types of Irrevocable Trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an Irrevocable Trust to generate income for you.
A Testamentary Trust can be established by your Will for ongoing management of assets from your Probate Estate; however, they don’t come into existence until the Probate process has been completed. From that point on, Testamentary Trusts work very much like other trusts, except that they are subject to ongoing supervision by the Probate Court. Our firm and most estate planning attorneys generally discourage the use of Testamentary Trusts in favor of Revocable Trusts because they are faster, simpler, and less expensive to settle, and they are private!
REASONS TO HAVE AN IRREVOCABLE TRUST
Reasons to establish an Irrevocable Trust
To utilize the estate tax exemption and remove taxable assets from the estate.
To prevent beneficiaries from misusing assets – often used for beneficiaries who are spendthrifts; have alcohol or drug dependency issues; have a spouse of concern to the grantor – these trusts allow the grantor to set conditions for distribution.
To gift assets to the estate while still retaining the income from the assets.
To minimize family disputes, specifically with subsequent marriages or children from multiple relationships.
To deplete one's property to ensure eligibility for government benefits, such as Social Security income and Medicaid (for nursing home care). Such trusts can also be used to help secure benefits and care for a special needs child by preventing disqualification of eligibility.
To donate appreciated assets to a charitable organization(s) to benefit the charity upon the grantor’s death, while providing income and tax benefits to the grantor during their lifetime.
To remove appreciable assets from the estate while still providing beneficiaries with a step-up basis in valuing the assets for tax purposes.
To gift a principal residence to children under more favorable tax rules.
To hold a life insurance policy that would effectively remove the death proceeds from the estate.
WHY NAME THE TRUST COMPANY AS TRUSTEE?
Experience – We have been in business as a corporate trustee for more than 30 years. We are often a first call for attorneys and the courts when they need someone to serve as trustee because we are knowledgeable, efficient, objective, and reasonably priced.
Proactive Planning – When we know about your appointment of our firm as Trustee or Successor Trustee, we can proactively ensure the terms in your trust coincide with your goals, help to organize your financial life, and reduce potential future conflict.
Recordkeeping – We use principal and income accounting software to keep track of assets and allocate receipts and expenses appropriately, follow state trust laws, and prepare and file trust tax returns.
Investment Management – We abide by and are committed to the Prudent Investor Rule - considering the needs of the trust's beneficiaries, the benefits of diversification, provisions regarding timing and amount of income and principal distributions, and preservation of trust assets.
Trust Administration – We balance the needs of beneficiaries with the terms of the trust, determining when to approve, deny or customize distributions.
Objectivity – We provide objectivity and neutrality in the ongoing management of or settlement of a trust to follow its terms and minimize beneficiary disputes.
Our advisors are passionate about helping people achieve financial peace of mind. Contact us today to get the conversation started.
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