The use of Trusts as an estate planning tool has become more prevalent over the last few years. There are however, still some misconceptions about the use of trusts. Many still believe that trusts should only be used if taxpayers have a taxable estate.
It is certainly true that with properly drafted trusts, a married couple can pass up to $4 million estate tax free to their heirs in 2008. A single person or a married couple without properly drafted trusts, generally can only pass $2 million estate tax free to their heirs in 2008. In addition to the tax protections, you can have numerous other protections in trusts that are not available in wills. We will cover a number of these protections for children, spouses and other beneficiaries.
What if my children are minors or otherwise to young to manage a bequest?
Outright distributions to minor children through a will, are generally supervised by the probate court until the children reach age 18, when they miraculously gain all the wisdom and insight of adulthood and are entitled to their entire bequest. Many 18 year olds who receive large bequests end up going to the University of Corvette. You can put provisions in your trust so that your children do not have access to the bequest until a certain age. Until that time, they can be provided for by the bequest which would be managed by a third party trustee.
I have an evil son-in-law or a gold digging daughter-in-law; can I protect my children’s bequests from these predators?
You can set up lifetime trusts for each of your children so that they have the use and access to those funds for their needs during their lifetimes. As long as those assets are kept in trust, they would be kept separate from all marital assets and generally would not be subject to claims by a predatory or divorcing spouse in a property settlement. In addition, with lifetime trusts, those assets are also protected from your children’s creditors.
I have a child who has a drug or alcohol dependency; can I protect my assets for/from them?
You can put provisions in your trust which allow for an independent trustee to manage those assets for the beneficiary until such time that the beneficiary is no longer addicted. The trust may include provisions such as paying for rehabilitation and giving the child a certain period of time, such as four years, to beat the addiction. If he or she does not beat the addiction, you can have provisions that the bequest then goes to your next level of beneficiaries.
I have a real lazy child; is there any way I can provide for them without giving them my assets outright?
You can set up an incentive trust in which the trustee distributes nothing to your child unless the child works. The child then provides a W-2 or other proof of income to the trustee. The trustee then could have the discretion to match the child’s income. If the child does not work, the child receives no distributions from your trust. If the child works, the child can double his or her income.
After I am gone if my spouse remarries, how can I protect my assets for our children?
You can put remarriage protection in your trust. This is a provision that if your spouse remarries Thor or Bambi after you are gone, distributions out of your trust stop unless the new spouse signs a pre-nuptial agreement. In this agreement, the new spouse would release all claims against your surviving spouse’s property in the event of your surviving spouse’s death. So if Thor or Bambi is going to marry your surviving spouse and Thor or Bambi wants to live in the manner to which he or she wants to become accustomed, he or she must sign the pre-nuptial agreement. This protects the entire marital estate for the children.
I have family cottage that I want to provide for the family; what can I do?
You can set aside a certain sum of money, enough to pay taxes, insurance, utilities, repairs and maintenance, along with the family cottage in a cottage trust. Your family members would be able to use the cottage at no cost to them. This trust could hold the cottage for successive generations without being a financial burden on the family.
I want to make sure that my dogs or cats are taken care of after I am gone.
You can set up a pet trust in which a certain sum of money is set aside for the care, comfort and feeding of your pets. This way, you will be assured that your pets will be taken care of after you are gone.
I want to provide for my grandchildren’s education; how can I do that?
You can set up an educational trust that pays the educational expenses of your grandchildren. You can put any requirements or stipulations on those funds that you want such as the funds can only be used for tuition or that the funds can only be used for reimbursement of education expenses if the grandchild receives a certain grade.
I am charitably minded; can I provide for my charities in my trust?
You can set up charitable contributions directly to charitable beneficiaries through your trust. You could
also set up charitable trusts that benefit both a charity and you or your family. Your trust could also set up a private foundation in which your trustee oversees the charitable purpose such as a scholarship program for disadvantaged youth, a prescription drug program for needy seniors or to provide youth activities at your church.
Trusts are useful estate planning tools that meet many persons’ needs beyond taxes.
By: Matthew M. Wallace CPA, JD
Published edited November 23, 2008 in The Times Herald newspaper, Port Huron, Michigan as: Use tricks and tools to avoid trust trouble