The use of trusts as an estate planning tool has become more prevalent over the last few years. There are, however, still many misconceptions about the use of trusts. Many believe that trusts should only be used if taxpayers have a taxable estate, which is $5.34 million in 2014 ($10.68 million with a married couple).
Others believe that married couples should have joint trusts if the marital estate is less than $10.68 million. However, there are numerous other reasons to use trusts, including separate trusts, with estates that are not taxable and which have nothing to do with estate tax protections. These protections are not available to you with wills and many of them are not available with joint trusts. We will cover a number of these protections for children, spouses and other beneficiaries.
My children or other beneficiaries are minors or otherwise too young to manage a bequest; when do they get control of their inheritance?
Outright distributions to minors through a will are generally supervised by the probate court in a conservatorship until the minors 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 college, 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, such as 30. Until that time, they can be provided for by the bequest which would be managed by a third party trustee.
I have a trust; will my trust avoid probate?
Your trust will only avoid probate if you have funded your trust. Funding your trust is: 1) the proper titling of all your assets such as bank or investment accounts and real estate, in the name of your trust or individual names; 2) the proper naming of your trust and/or individuals as primary or contingent beneficiaries of all of your life insurance, annuities, IRAs retirement plans and similar assets; and 3) the proper naming of your trust and/or individuals as additional insureds on your liability insurance policies. If you do not fund your trust during your lifetime, it will be funded after your death through the probate court process, but only if you do not have joint accounts or individually named beneficiaries on assets and have a will that distributes your estate to your trust.
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 and not commingled with marital assets, they generally would not be subject to claims by a predatory or divorcing spouse in a property settlement. In addition, even if your child never divorces, with lifetime trusts, those assets are also protected from your children’s creditors. Even though your children have full access to trust assets for their needs, their creditors cannot touch what you left your children in trust.
I have a child or other beneficiary who has a drug or alcohol dependency; can I protect my assets for/from him?
You can put provisions in your trust which allow for an independent trustee to manage those assets for him until such time that he is no longer addicted. The trust may include provisions such as paying for rehabilitation and giving the beneficiary a certain period of time, such as four years, to beat the addiction. If he does not beat the addiction within that time, you can have provisions that the bequest then goes to your next level of beneficiaries.
I have a special needs child; is there a way to leave an inheritance to her without disqualifying her from SSI and Medicaid?
You can set up a special needs trust for expenses that are not covered by the governmental benefits. This trust will not disqualify her from income or asset based governmental benefits, such as SSI or Medicaid, yet still provide her with funds to improve the quality of her life.
I have a real lazy child or other beneficiary; is there any way I can provide for him without giving away my assets outright?
You can set up an incentive trust in which the trustee distributes nothing to your beneficiary unless the beneficiary works. The beneficiary then provides a W-2 or CPA prepared tax return or other proof of income to the trustee. The trustee then could have the discretion to match the beneficiary’s income. If the beneficiary does not work, the beneficiary receives no distributions from your trust. If the beneficiary works, the beneficiary can double his income.
My spouse may remarry after I am gone; how can I protect my assets for our children?
You can put remarriage protection in your trust. This is a provision that after you are gone, if your spouse remarries Thor, her Swedish personal trainer or Bambi, his aerobics instructor, distributions out of your trust stop unless Thor or Bambi signs a pre-nuptial agreement. In this agreement, Thor or Bambi 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 your loved ones and is available if you and your spouse do not have a joint trust but have separate trusts.
I have family cottage or homestead that I want to keep in the family; what can I do?
You can set aside a certain sum of money, enough to pay taxes, insurance, utilities, repairs and maintenance for a period of time, along with the family cottage or homestead in a cottage or homestead trust. Your loved ones could 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 have dogs and cats or other pets; how can I make sure that they 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 or nieces’ and nephews’ education; can I do that?
You can set up an educational trust that pays the educational expenses of your grandchildren or nieces and nephews. You can put any requirements or stipulations on those funds that you want. For example, the funds can only be used for tuition or the funds can only be used for reimbursement of education expenses if the beneficiary receives a certain grade. This way, your loved one’s could graduate from college with smaller or no student loans.
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.
Can I protect assets from my spouse’s creditors after I am gone?
If you and your spouse have separate trusts and split the marital estate between your trusts, you can set up lifetime trusts for each other. After the first death, the surviving spouse would have the use and access to the assets in the deceased’s spouse’s trust for his or her lifetime needs. As long as those assets are kept in trust, those assets are protected from the surviving spouse’s creditors. Even though the surviving spouse has full access to the deceased’s spouse’s trust assets for his or her needs, the surviving spouse’s creditors cannot touch the deceased’s spouse’s trust assets. This protection is not available with a joint trust.
Trusts are useful estate planning tools that meet many persons’ needs beyond taxes.
By: Matthew Wallace, CPA, JD
Published edited July 6, 2014 in The Times Herald newspaper, Port Huron, Michigan as: Put your trust in your trust