YOU NEED A TRUST FOR ESTATE PLANNING
So you finally decided you need a trust for estate planning, but you cannot decide what type. It is confusing and you have a lot of options to choose from. Let’s explore some of the basics!
Irrevocable vs. Revocable: Irrevocable trusts, as the name implies, cannot be revoked, while revocable trusts can. Being able to revoke a trust allows you to change your mind at any time (as long as you have good mental state). People generally prefer their trusts to be revocable and amendable. The more flexibility and control over the trust you have in your lifetime, the more like direct ownership holding your assets through a trust will feel.
But there are good reasons to make your trust irrevocable. For example, if we are setting up a special needs trust for a disabled person we will need it to be irrevocable so that the assets held in the trust are dedicated to that person. In addition, if we are trying to protect assets from being manipulated by someone if we lose capacity, the trust should be unamendable and irrevocable. After your death, your trust shall be unamendable unless you leave powers of direction or appointment in a particular person.
Joint Trust vs. His and Hers Trusts:Married couples tend to use joint ownership as their most common method for holding assets. A Joint Trust feels a lot like joint ownership. The spouses are typically co-trustees with the ability to make joint decisions. If one spouse becomes incapacitated or dies, the other may continue to control the assets for his or her remaining life.
In a two trust structure, each spouse has a trust. The assets need to be split between the spouses and in some ways this feels like they are going through a divorce. However, there are some distinct benefits to a two trust structure. First, in the event that the parties need their assets split, say to provide for children of different marriages, the trusts are in place. Second, after the first spouse dies, it is easier to account for the assets in his or her estate and to determine the step up in basis and use of estate tax exemption. In English, you might pay fewer taxes if you use a two trust structure. Third, if you wind up using Medicare to pay for a nursing home, a two trust structure can shelter assets of the spouse who is at home. Finally, in a two trust structure we can hammer out who can amend and in what circumstances. For example, if one spouse dies the other spouse can change his or her trust to accommodate a second marriage but cannot change the provisions of the deceased spouse’s trust to provide for the new spouse.
Testamentary vs. Inter Vivos (Living):
A Testamentary Trust is one that is created at death through the provisions of a will. An Inter Vivos or Living Trust is created during our lifetimes. With a testamentary trust, we will likely need to incur the expense of a probate court proceeding to enact the terms of the trust. The testamentary trust may be created through a single sentence in a will. For example, the will could provide that everything goes to the spouse, if the spouse survives, else to the children to be distributed to them at the age of 21. If the children have not attained the age of 21, to be held for their benefit in trust for them. One of the greatest detriments to the use of a Testamentary Trust are the costs of the probate proceeding. In addition, the Testamentary Trust does not help us plan for the lifetime of the settlor and thus makes it more likely that we will go through guardianship court. There are a few benefits to using a Testamentary Trust. Although we have the costs of going to court, we also have the protections of the venue. One of these is our ability to cut off creditors and to ensure an orderly transfer of assets if heirs are arguing.
An Inter Vivos or Living Trust is created at the signing of the document. Assets that are held in trust name (yes you must transfer assets to the trust) are held under the terms of the trust. So for example, the trust could be created by Joe, the settlor, with Joe also acting as trustee and holding assets for his own lifetime benefit. If Joe, becomes incapacitated, Mary, his successor trustee will step in without the need for a judicial proceeding to use assets for Joe’s benefit. At Joe’s death, Mary will transfer assets (or hold them) in accordance with the terms of the trust.
These are just a few of the choices you will make when creating the trust that is right for you.
Waltz, Palmer & Dawson, LLC is a full-service law firm with various areas of service to assist your business, including: Employment Law, Intellectual Property, Commercial Real Estate, Business Immigration, Litigation and general Business Law services. Individual services include Estate Planning, Wills and Trusts, Probate, Guardianship, Divorce and Family Law.
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