Now that: i) a majority of states allow same-sex marriage, and ii) a majority of people live in a state which allows same-sex marriage, I thought it would be interesting to take a step back and look at some of the lesser-known financial aspects of marriage for both same-sex and traditional couples.
Marriage Bonus/Penalty. Typically, a couple will benefit on their income taxes from getting married, this is the “marriage bonus.” However, if the spouses’ incomes are nearly the same, there may be a “marriage penalty,” rather than the typical marriage bonus.
Related-Party Rules. A couple who is married cannot harvest a loss by having one spouse sell the asset to the other spouse. The related-party rules will deny the loss. However, if the couple is unmarried, then a transaction will be respected. This may be useful to harvest losses and yet keep the assets in the economic unit of the couple.
GRIT. An unmarried couple cannot utilize the marital gift tax deduction, but they may utilize a non-QPRT GRIT. A GRIT is a Grantor Retained Income Trust and may be useful to pass assets from one partner to another.
Medicaid. When qualifying for Medicaid, the assets of both the applicant and the spouse are considered. An unmarried applicant would not have their unmarried partner’s assets considered. This could be a distinct advantage.
Of course, the financial aspects of marriage are only a minor part of the couple’s decision. They must consider the legal ease of marriage as well as the social, societal, and religious benefits which may accrue. Finally, the couple must weigh the impact the marriage might have on their relationship itself.
Outside of the probate process, is there a way to seek redress in a situation where an intended beneficiary loses an inheritance because of the acts of a third party? For instance, what happens when a relative induces Dad to revoke his Will, leaving his son with only an intestate share of Dad’s estate, rather than the much larger inheritance he would have enjoyed had the Will remained in effect?
There’s a trend toward recognizing a claim for tortious interferencewith inheritance in situations like this, but the requirements for making a valid claim are pretty restrictive.
The plaintiff must show that an actual expectancy of an inheritance existed sufficient to warrant the court’s protection.
The expectancy may be impeded by conduct altering the execution, alteration or revocation of a Will.
The plaintiff must prove that the defendant’s interference with the expectancy was intentional and tortious.
If the interference was only negligent and not intentional, the plaintiff does not have a valid claim.
The plaintiff is required to show by a “high degree of probability” that, but for the defendant’s intentional act, the plaintiff would have received the expected inheritance.
The plaintiff has to show that the defendant’s tortious conduct caused injury. Ordinarily, the measure of damages in a tortious interference claim is the value of the property that plaintiff would have inherited absent the tort.
What about the timing of a claim? In some states, a plaintiff is permitted under certain circumstances to make a claim during the testator’s lifetime, while in others, the plaintiff must not only wait until after the testator’s death, but also exhaust any remedies available through the probate process before making a tort claim. Nationwide, there’s a growing trend toward recognizing the tort, but a number of states, including Arkansas and Tennessee, have declined to do so.
What do you think? Should states recognize tortious interference with an inheritance?
The answer to that big question is a composite of your responses to a range of smaller questions. Mull over the following questions, and if the answers or implications are not clear, or if they trouble you, make a note of it – a real note, not just a mental one. You will then have a list of issues on which to focus, and the simple act of writing things down is invaluable in clarifying the thought process. Many people, who have been uneasy for years thinking about this, find it improves their peace of mind just to make themselves spell out exactly what bothers them.
Look over this list. Of course, not all questions will be pertinent to everyone.
Would there be mistrust, uncertainty, and bickering among your survivors in deciding how to handle your property and wrap up your affairs? Is there anybody who, if not prevented, might actually take your property or funds without authority?
Do you have a will that reflects your current wishes? If so, is all your property actually subject to probate court and the terms of the will – or is it instead set up to pass another way at death – e.g., through a beneficiary designation form, as with a 401(k) account, or to a co-owner, as with a joint bank account?
If you do have property subject to probate (e.g., furniture; a house, or an account in your name alone), but do not have a will, what does your state’s law of intestacy say about who takes property after a person’s death?
What are the needs, abilities, and weaknesses of your survivors, especially your spouse and children, if any?
Are your survivors responsible individuals, capable of managing and using an inheritance wisely if they receive it outright? Or will they need protection from their own youth, financial inexperience, or bad habits? What about the influence of others? Would your bequest to a child need protection from his or her spouse?
If your current spouse is not the parent of your children, how – and when – would your estate be divided among them?
What kinds of property do you own, e.g., real estate, mutual funds, a family business, etc.? Can your property get along without your active management, at least for a while? How much of it could easily and quickly be converted to cash, if necessary, at reasonably good prices?
Is the net worth of all your property more than the amount at which the federal estate tax begins to bite, and tax planning is called for?
What are your responsibilities to your survivors? Would you be leaving young children and the surviving parent, for example, with sufficient assets to maintain the family’s standard of living? Or, in contrast, do you have grown children, with good jobs, and a spouse with his or her own adequate retirement plan account?
If your children are under age eighteen, have you found a suitable guardian for them in case their other parent also dies?
Do you have a disabled child or family member who must be provided for separately, for life?
If you have an IRA or retirement plan account, have you selected the appropriate beneficiary and distribution options?
What Would You Want To Happen, If You Died Tomorrow?
If you have made a troubling realization or two after considering the above questions, the more immediate issue might be what you do not want to happen. The top priority is probably the potential situation you have identified, and how to correct it. Frequently, an easy solution will suggest itself, simply as a result of thinking through the problem. (If not, be smart and see an attorney experienced in estate planning. He or she has most likely dealt with many situations much like yours.)
Some peoples’ values, wishes and survivors’ needs, however, really are very simple. So, too, should be their estate plans – perhaps just a two page will saying, for example, “Everything to my three children, in equal shares.” Other people have various contingencies to plan for. Some form of charitable contribution – during life or at death – might be part of their plans. There might be a need for life insurance. Many want to keep one or more “strings attached” to payments made to their chosen beneficiaries. These “strings” come in infinite varieties, but almost always, keeping strings attached requires a trust. (Trusts are examined in detail in other tutorials.)
A trust document can be drafted to set forth a personalized combination of specific instructions, with or without discretionary judgments allowed to your trustee, so that money is given to whom you want, when, and for the purposes you specify. This cannot be done with a will alone. A practical example of this point is the use of a trust by parents, in case they both die prematurely, to avoid the immediate distribution of assets to their kids, upon turning eighteen.
Choosing The Right Executor and Trustee
Choosing a personal representative may be the most important estate planning decision of all to maximize the likelihood that your wishes are followed.
Personal representative is a generic term, referring to an executor or a trustee, who is named in a trust to carry out its terms.
An administrator is also a personal representative, and is court-appointed to perform the executor’s duties, when a decedent has no will. Unfortunately, the person appointed might be a family member whom the decedent would not have wanted. Alternatively, the court might find it appropriate to choose a neutral third party – usually a lawyer – to serve as administrator. In the latter case, the estate is responsible for paying the administrator an hourly fee for all services performed.
Any of these personal representative roles can be filled by an institution, such as a bank, as well as by an individual. Obviously, however, whoever serves should be capable of doing the job, and this is a matter that often deserves much more thought than it is given. In many cases, relations among the surviving family are harmonious, there is little to be done, and everything works smoothly – no matter who is running the show.
When disputes arise or there is bickering, however, family diplomacy might be called for. Remember that some of us are better at this than others. Occasionally, on the other hand, someone must be ready, willing – and authorized – to “lay down the law,” and get things done. The selection of this person (or institution) should not be left to chance; he or she should be named by the decedent in a will or trust.
Your personal representative, in most cases, is going to have – by necessity -extensive, if not total, access to your property. Very bluntly, a trustee, executor, or administrator is in a position to rob you (or your heirs) blind, or to ruin your plan through inaction, if somebody else acts improperly. Indeed, misconduct is probably the most common factor in estate and probate horror stories.
Of course, objections or complaints can be filed in court. But these can be difficult moves, and they are made after the damage is at least partially done. There is no close court supervision to prevent the misconduct. Therefore, you should not move forward with any plan, unless you feel comfortable with the person or institution you have chosen.
What’s the true value of an estate planning attorney? I’ve been reading about the latest lawsuit against LegalZoom. This one is a class action filed in California by a woman who is the niece and executor of the estate of LegalZoom client Anthony J. Ferrantino. Mr. Ferrantino, in the last months of his life, used LegalZoom to draw up a will and a living trust. It turns out that the trust couldn’t be funded because Mr. Ferrantino’s financial institutions would not accept the LegalZoom documents.
Naturally, upon finding this out, Mr. Ferrantino and his niece, Katherine Webster, asked LegalZoom for help – to no avail. After Mr. Ferrantino passed away with his trust still unfunded, it turned out that his will was also invalid because it had not been properly executed. Ms. Webster’s lawsuit is based on LegalZoom’s alleged deceptive business practices and unlicensed practice of law.
So, the trust documents were flawed. Giving LegalZoom the benefit of the doubt, you could make the valid argument that even attorneys have been known to make mistakes in the drafting of estate planning documents. It’s less likely that a lawyer would let a will go out the door improperly executed. In my mind, though, these aren’t the real issues.
The problem is that when consumers use “services” like LegalZoom, they’re on their own. Even after fatal flaws were found in the trust documents, LegalZoom did nothing to remedy the situation. Would this have happened if someone had been unable to fund a trust that I had created? Nope.
The value that I as an estate planning attorneys offer to clients is not just the documents… although well-drafted and effective documents are intrinsically valuable. Instead, the value I offer is my role as knowledgeable and trusted counselors… my relationship with my clients. When clients come to me for an estate plan, I’m not just filling in the blanks on their behalf. I’m listening intently to their stories and their questions, and often reading between the lines, to help them discern their true needs. And I’m there for my clients as issues emerge and their needs evolve.
So, in the end, I’m not competing in the same market as LegalZoom and other companies of its ilk. I’m not providing a simple commodity – and my clients and prospective clients deserve to know this.
What You Will Need To Do At The Grantor’s Incapacity And Death
If you have been named as a trustee or successor trustee for someone’s trust, you may be wondering what you are supposed to do. Successor trustees can relax a bit, because you don’t do anything right now. You will only begin to act when the person becomes unable to manage his or her financial affairs due to incapacity, or when he or she dies. If you have been named as a trustee, you may already be acting in that capacity.
In either case, it is important that you understand your duties and responsibilities.
What is a trust? A trust is a legal entity that can “own” assets. The document looks much like a will. And, like a will, a trust includes instructions for whom you want to handle your final affairs and whom you want to receive your assets after you die. There are different kinds of trusts: testamentary (created in a will after someone dies); irrevocable (usually cannot be changed); and revocable living trusts.
Today, many people use a revocable living trust instead of a will in their estate plan because it avoids court interference at death (probate) and at incapacity. It is also flexible. As long as you are alive and competent, you can change the trust document, add or remove assets, even cancel it.
How does a living trust work? For a living trust to work properly, you must transfer your assets into it. Titles must be changed from your “individual” name to the name of your trust. Because your name is no longer on the titles, there is no reason for the court to get involved if you become incapacitated or when you die. This makes it very easy for someone (a trustee or successor trustee) to step in and manage your financial affairs.
Who are the people involved with a living trust? The grantor (also called settlor, trustor, creator or trustmaker) is the person whose trust it is. Married couples who set up one trust together are co-grantors of their trust. Only the grantor(s) can make changes to his or her trust.
The trustee manages the assets that are in the trust. Many people choose to be their own trustee and continue to manage their affairs for as long as they are able. Married couples are often co-trustees, so that when one dies or becomes incapacitated, the surviving spouse can continue to handle their finances with no other actions or steps required, including court interference.
A successor trustee is named to step in and manage the trust when the trustee is no longer able to continue (usually due to incapacity or death). Typically, several are named in succession in case one or more cannot act. Sometimes two or more adult children are named to act together. Sometimes a corporate trustee (bank or trust company) is named. Sometimes it is a combination of the two.
The beneficiaries are the persons or organizations who will receive the trust assets after the grantor dies.
What do I need to know now? The grantor should make you familiar with the trust and its provisions. You need to know where the trust document, trust assets, insurance policies (medical, life, disability, long term care) and other important papers are located. However, don’t be offended if the grantor does not want to show you values of the trust assets; some people are very private about their finances. This would be a good time to make sure appropriate titles and beneficiary designations have been changed to the trust. (Some assets, like annuities and IRAs, may list the trust as a contingent beneficiary.)
You also need to know who the trustees are, who successor trustees are, the order in which you are slated to act, and if you will be acting alone or with someone else.
What responsibilities will I have as a trustee? The most important thing to remember when you step in as trustee is that these are not your assets. You are safeguarding them for others: for the grantor (if living) and for the beneficiaries, who will receive them after the grantor dies.
As a trustee, you have certain responsibilities. For example:
You must follow the instructions in the trust document.
You cannot mix trust assets with your own. You must keep separate checking accounts and investments.
You cannot use trust assets for your own benefit (unless the trust authorizes it).
You must treat trust beneficiaries the same; you cannot favor one over another (unless the trust says you can).
Trust assets must be invested in a prudent (conservative) manner, in a way that will result in reasonable growth with minimum risk.
You are responsible for keeping accurate records, filing tax returns and reporting to the beneficiaries as the trust requires.
Do I have to do all of this myself? No, of course not. You can have professionals help you, especially with the accounting and investing. You will also probably need to consult with an attorney from time to time. However, as trustee, you are ultimately responsible to the beneficiaries for prudent management of the trust assets.
How will I know if the grantor is incapacitated? Usually the trust document contains instructions for determining the grantor’s incapacity. The trust may require one or more doctors to certify the grantor is not physically or mentally able to handle his or her financial affairs.
What do I do if the grantor is incapacitated? If all assets have been transferred to the trust, you will be able to step in as trustee and manage the grantor’s financial affairs quickly and easily, with no court interference.
First, make sure the grantor is receiving quality care in a supportive environment. Give copies of health care documents (medical power of attorney, living will, etc.) to the physician. If someone has been appointed to make health care decisions, make sure he or she has been notified. Offer to help notify the grantor’s employer, friends and relatives.
Next, find and review the trust document. (Hopefully, you already know where it is.) Notify any co-trustees as soon as possible. Also, notify the attorney who prepared the trust document; he or she can be very helpful if you have questions. You may want to meet with the attorney to review the trust and your responsibilities. The attorney can also prepare a certificate of trust, a shortened version of the trust that also proves you have legal authority to act.
You will want to become familiar with the grantor’s insurance (medical and long term care, if any) and understand the benefits and limitations. Assuming the insurance will cover a certain procedure or facility could be a costly mistake.
Have the doctor(s) document the incapacity as required in the trust document. Banks and others may ask to see this and a certificate of trust before they let you transact business.
If there are minors or other dependents, you will need to look after their care. The trust may have specific instructions. If the grantor’s incapacity is expected to be lengthy, a guardian (of the person, not assets) may need to be appointed by the court. The attorney can help you with this.
Become familiar with the finances. You need to know what the assets are, where they are located and their current values. You also need to know where the income comes from, how much it is and when it is paid, as well as regular ongoing expenses. You may need to put together a budget.
If you cannot readily find this information, others (family members, banker, employer, accountant) may be able to help you. Last year’s tax returns may be helpful. Also, if you discover any assets that were left out of the trust, the attorney can help you determine if they need to be put into the trust and can assist you.
Apply for disability benefits through the grantor’s employer, social security, private insurance and veteran’s services. Notify the bank and other professionals that you are now the trustee for this person. Put together a team of professionals (attorney, accountant, banker, insurance and financial advisors) to help you. Be sure to consult with them before you sell any assets.
Now you can start to transact any necessary business. You can receive and deposit funds, pay bills and, in general, use the person’s assets to take care of him or her and any dependents until recovery or death. You’ll need to keep careful records of medical expenses and file claims promptly. Keep a ledger of income received and bills paid. An accountant can show you how to set up these records properly. The trust may require you to send accountings to the beneficiaries. Also, don’t forget income taxes (due April 15) and property taxes.
What happens if the grantor recovers? You go back to being a co-trustee or successor trustee and the grantor resumes taking care of his or her own financial affairs. It’s very easy, and there is no court involvement.
What do I do when the grantor dies? You will have essentially the same duties as an executor named in a will would have. But if all titles and beneficiary designations have been changed to the grantor’s trust, the probate court will not be involved. That means you will be able to act on your schedule instead of the court’s.
The trustee is responsible for seeing that everything is done properly and in a timely manner. You may be able to do much of this yourself, but an attorney, corporate trustee and/or accountant can give you valuable guidance and assistance. Here’s an overview of what needs to be done.
Inform the family of your position and offer to assist with the funeral. Read the trust document and look for specific instructions. Notify a co-trustee as soon as possible.
Make an appointment with me to go over the trust document, trust assets and your responsibilities as soon as possible. Do not sell or distribute any assets before you meet with the attorney.
Before the meeting, make a preliminary list of the assets and their estimated values. You’ll need exact values later, but this will help the attorney know if an estate tax return will need to be filed (due no later than nine months after the grantor’s death). If there is a surviving spouse or if the trust has a tax planning provision, the attorney may need to do some tax planning right away. The trust may also need its own tax identification number.
Collect all death benefits (social security, life insurance, retirement plans, associations) and put them in an interest bearing account until assets are distributed. If the surviving spouse or other beneficiary needs money to live on, you can probably make some partial distributions. But do not make any distributions until after you have determined there is enough money to pay all expenses, including taxes.
Notify the bank, brokerage firm and others of the grantor’s death and that you are now trustee. They will probably want to see a certified death certificate (order at least 12), a certificate of trust and your personal identification.
To finalize the list of assets, you will need exact values as of the date of the grantor’s death. Some assets will need to be appraised. An estate sale may need to be held to dispose of household goods and personal effects.
Keep careful records of final medical and funeral expenses, and file medical claims promptly. Keep a ledger of bills and income received. Contact an accountant and attorney to prepare final income and estate tax returns, if required. Verify and pay all bills and taxes. Make a final accounting of assets and bills paid, and give it to the beneficiaries.
If the assets are to be fully distributed, you will divide the cash and transfer titles according to the instructions in the trust. That’s it…you’re finished and the trust is dissolved.
If the assets are to stay in a trust (for minors, for a surviving spouse, for tax purposes or if the beneficiaries will receive their inheritances in installments), each trust will need a new tax identification number, and proper bookkeeping and reporting procedures will need to be established.
Should I be paid for all this work? Yes, trustees are entitled to reasonable compensation for their services. The trust document should give guidelines.
What if the responsibilities are too much for me? Consider hiring me, bookkeeper, accountant or corporate trustee to help you. (A corporate trustee can manage the investments and do the recordkeeping.) If you feel you cannot handle any of the responsibilities due to work, family demands or any other reason, you can resign and let the next successor trustee step in. If no other successor trustee has been named, or none is willing or able to serve, a corporate trustee can usually be named.
What A Trustee Does
At Incapacity Oversees care of ill person Understands insurance benefits and limitations Looks after care of any minors and dependents Applies for disability benefits Puts together team of advisors Notifies bank and others Transacts necessary business Keeps accurate records and accounting At Death Contacts attorney to review trust and process Keeps beneficiaries informed Puts together team of advisors Inventories assets, determines current values Makes partial distributions if needed Collects benefits, keeps records, files tax returns Pays bills, does final accounting Distributes assets to beneficiaries as trust directs
Trusts may be categorized in many ways. One useful way to differentiate between trusts is intervivos and testamentary. An intervivos trust is simply a trust which is created during life. Another name for an intervivos trust is a living trust. A trust need not have intervivos or living in its title. A trust, intervivos or testamentary, may be named whatever is desired by the client, as long as it is not misleading or in violation of copyright, for example.
Conversely, a testamentary trust is one created at death. A testamentary trust is, by its nature, not revocable by its grantor. Of course, the document creating the testamentary trust might be revoked prior to the death of the grantor. For example, a Will could create a testamentary trust. The Will could be revoked during the life of the testator/grantor and a new Will could be drafted which has different terms for the testamentary trust.
An intervivos trust might be income taxed to its grantor. A testamentary trust is not income taxed to the grantor.
Intervivos trusts may be either revocable or irrevocable. In some states, if a trust does not specify whether or not it is revocable, it is revocable. In other states, a trust is irrevocable unless specified otherwise. Therefore, it is always prudent to specify whether a trust is revocable or irrevocable.
A revocable trust means that it may be modified or revoked by the grantor during life while the grantor has capacity. A revocable trust may also be restated. A restatement leaves the shell of the trust but guts the substantive provisions and replaces them with the new ones. When a trust is created, assets are retitled into the name of the trust. If one simply does a new trust, the assets would need to be retitled into the new trust. A restatement obviates the necessity of retitling the assets into a new trust because the old trust still exists, only its terms have changed. Typically, a restatement is more convenient than amendments which require referencing back to the original trust and may be cumbersome. Also, when amending a trust, the drafting attorney risks being liable for any errors in the drafting of the underlying document. This is fine if the drafting attorney’s firm drafted the underlying document and has that liability anyway. However, if someone else drafted the underlying document, then a restatement is typically the best route to go.
Otherwise, it is necessary to go through the original document with a fine-tooth comb to ensure there are no drafting errors in its language. If you are doing a restatement, errors in the language of the original document become irrelevant as the underlying document has been replaced in its entirety. Only the shell has been retained and the restatement document has added all new substantive provisions. As a result, restating a trust is often far more efficient and less time-consuming than amending a trust.
An irrevocable trust is a trust which may not be revoked, restated, or amended by the grantor. Once it has been drafted, it is etched in stone. This does not mean the trust cannot have flexibility.
At Elizabeth Edwards’ funeral, Glenn Bergenfield, a close family friend who presented a eulogy, said that in her final days, as he looked around the Edwards household for any guidance she had regarding funeral arrangements, he found none. Since she was such a detailed planner, he thought surely she would have left copious notes. Bergenfield said, “As the week has worn on I have begun to think she saw the sad and beautiful metaphor: We must go on ourselves.”
Edwards did make plans for her children’s Christmas, but not her own funeral. At least the family knew she wanted to be buried next to her son Wade and have the funeral in the same Methodist church where his funeral was held. Some people don’t even express that extent of their plans or wishes.
The funerals of U.S. presidents are now fully pre-planned by the Naval District of Washington, D.C., but it wasn’t always that way.
Jessica Mitford, author of the landmark book, The American Way of Death, published in 1963, told the story of President Franklin D. Roosevelt’s unheeded last wishes. Roosevelt had written down instructions, but kept the document in his private safe and apparently did not tell Eleanor.
Roosevelt wanted a simple, dark wood casket; no embalming; no hermetically sealed coffin; no grave lining; transportation by gun carriage, not by hearse; and no lying in state anywhere. The document was discovered a few days after his burial. Unfortunately, the only instruction followed was that he did not lie in state.
While conducting research for my new book, A Good Goodbye: Funeral Planning for Those Who Don’t Plan to Die, my husband and I met with a mortuary to preplan funeral arrangements for my father-in-law, Norman. We were surprised at how much information was needed that we did not have on hand.
We were glad to have the luxury of time and Norm’s availability to provide more details, which he did gladly. We were also dismayed by my mother-in-law Myra’s “see-no-evil/hear-no-evil/speak-no-evil” denial. She refused to discuss the topic.
That was three years before Norm actually died. After his death, at the end of an exhausting seven weeks of hospitalization, finalizing the funeral arrangements was quick and relatively easy. After the arrangement meeting, Myra told me, “I really didn’t like it back when you were pre-planning, but now, when we needed it, I’m glad it was done.”
Here’s a thought to consider. With a wedding, you have weeks, months, even years to plan, purchase, and implement all the aspects: clergy, location, communications to family and friends, flowers, clothing, music, food, transportation, and so on. With a funeral, you have only an average of three to five days to make similar arrangements, while also dealing with the emotional impact of the loss of a loved one.
Planning a funeral right after a family member dies is probably the last thing you want to do. Hence, funeral directors are the equivalent of wedding planners for the last step in the life cycle, handling all those details for you. You still need to have basic facts about the deceased to process death certificates, and it would be comforting to know you are handling the disposal of the body the way that person would have wanted.
As columnist Ellen Goodman commented, “How many families actually have ‘the talk,’ something as dreaded as ‘the talk’ about sex? How many tiptoe around the questions that surround death, parents not wanting to upset children, children not wanting to upset parents? As if we were not in it together.”
We are all in this together, and we will all be making an exit at some time. Elizabeth Edwards helped her family and society at large start thinking about how to make a graceful exit. Today is a good day to have a conversation about what a graceful exit and a good goodbye would mean to you.
People think trusts are all about probate avoidance. Sure, a living trust allows the grantor to avoid probate. That may or may not be a big deal, but in Illinois it is and then again depending on the jurisdiction. Certainly, if the grantor owns real estate in multiple jurisdictions, a trust is the way for them to go to avoid multiple ancillary probates.
Whether a will or a trust is used as the primary estate planning vehicle, thought should be given as to how the assets should be left to beneficiaries. A trust is like a tube of toothpaste. The tube can provide many protections which are not available once the toothpaste is squeezed out of the tube.
Trusts can be drafted to be excluded from the beneficiary’s taxable estate. This can be great for a beneficiary who will have an estate which would be taxable, either by the state or federal government, when including the assets to be inherited. Of course, the beneficiary could even be the trustee of such a trust, as long as an “ascertainable standard” is utilized, such as health, education, maintenance, and support.
Trusts can be drafted to keep the assets free of claims from the beneficiary’s creditors. A fully discretionary trust is free from almost all creditors in most states. The beneficiary would not be the trustee of such a trust.
Trusts can be drafted to allow the assets to be available for the beneficiary’s “special needs,” yet allow the beneficiary to qualify for Medicaid. If a beneficiary has disabilities and may need Medicaid or Social Security in the future, a special needs trust should be considered.
Trusts enable someone other than the beneficiary to manage the funds for the beneficiary’s benefit, if appropriate. This is particularly useful if the beneficiary has not attained sufficient maturity or discretion, even if they have attained the legal age of majority.
There are many good reasons to use trusts. Probate avoidance is but one. Continuing trusts are appropriate in a wide array of circumstances. Part of my job is to educate you on the value of estate planning and the many protections it provides. Upon learning of the protections available with trusts, many of my clients who initially express a desire for outright distributions to their children or other beneficiaries opt for distributions in trust.
Remember, once the toothpaste is out of the tube, it may be difficult or impossible to get it back in the tube, i.e., to get those protections in another manner.
There are many reasons to use a trust. Here are a few:
Probate avoidance. This is not the most important reason, but it is the reason most attorneys think of first. At death, the assets titled in the name of the individual must go through a process to retitle the assets to the appropriate people who’ve inherited them. In some states this process may be rather simple, while in other states it may be cumbersome. There may be substantial legal and court costs associated with the probate process, as well.
Privacy. A trust is a private document. A will, on the other hand, must be filed in the probate court before it is determined to be valid. This process called probate is a public process (except in very rare circumstances). Thus, everyone who wishes may know the contents of the will and the assets which were part of the probate estate. So, for example, they would know about the child born out of wedlock who received an inheritance or the child who was disinherited because of a family dispute. The nosy neighbor would know the dirty laundry and could spread the gossip. Also, predators would know how much money beneficiaries are inheriting. For example, they might know that a weak-willed beneficiary is inheriting $200,000 and could be approached for money. So, if a client is at all concerned about privacy, a trust will serve their needs better than a will.
Incapacity planning. A will does nothing to help with incapacity planning. As is often said, a will only “speaks” at death. So, if the testator is not dead, the will does not control anything, even if the testator is incapacitated. Conversely, a trust can provide for the management of the assets upon the grantor’s incapacity. This is one of the great benefits of a trust compared to a will. The trust can have whatever standard is desired to determine incapacity. For example, it could require the certification of one or two physicians.
Management. A trust can provide a vehicle for the management of assets during life and after death. Often, even if a grantor of a trust has capacity, they may reach a time in their life when they no longer wish to manage their assets. A trust provides a simple mechanism for this to happen. The grantor, who typically serves as the initial trustee, simply resigns and the person who was named as the successor trustee is notified and takes on the management responsibilities.
In addition to the benefits which revocable trusts have which wills do not, the trust has other capabilities which wills can also achieve. For example, trusts and wills both can save estate taxes, spawn trusts for beneficiaries at the death of the grantor/testator, etc.
What should you say when a client wants to leave everything in joint tenancy with their kids? To the layperson, this can seem like the perfect quick fix. Mom adds her children to all her assets in joint tenancy, the kids get rights of survivorship, probate is circumvented, and everyone is happy – right?
Joint tenancy only keeps assets out of probate as long as there’s a surviving owner left to inherit the property. At the death of the last surviving owner, where does an asset usually end up? In probate.
Joint tenancy can also open the door to more troubling consequences, like:
Financial Worries. Joint tenants have rights to the entire asset in question. When a parent adds a child to a financial account, the child has access to the entire account balance. Money trouble for the child can turn into a disappearing bank balance for the parent.
Legal Woes. Joint tenants share more than just property rights – they can also share legal worries. If the child gets divorced, is named in a lawsuit, or otherwise has his assets jeopardized in a court action, property owned in joint tenancy becomes vulnerable. Even if a parent’s interest in the property is not subject to the child’s legal claims, sorting out who owns what – and how claims should be paid – can be a lengthy and expensive process.
Loss of Control. What happens if mom adds her son to her property deed, then later wants to sell or refinance? She has to get her son’s signature. If he won’t cooperate, she can’t do what she wants with her own property.
Uneven Distribution. Many clients don’t understand the interplay – or more accurately, lack thereof – between joint tenancy and estate planning documents like wills and trusts. Mom might add one child’s name to all the assets, but leave a will distributing everything equally among her three children. The problem is, she never realized assets owned in joint tenancy aren’t controlled by her will. Unless the child who got all mom’s assets as a co-owner is particularly benevolent, the remaining siblings are disinherited. Not only does this undermine mom’s intentions, it can lead to family discord and litigation.
Joint tenancy can also create big problems for a client who needs to qualify for Medicaid. To discuss alternatives to joint tenancy, please call me at 630-215-3676.
