Talking About Life Insurance Trusts

Introduction. People are often surprised to find out that their life insurance proceeds will be part of their taxable estate at death -- even if the proceeds are payable to others, such as a spouse, children or other loved ones. 

What about the Estate Tax Exemption?  Every person has an exemption from Federal estate tax, so it’s only if the total estate (including the life insurance proceeds) exceeds the exemption that Federal estate tax is a concern.  Currently that exemption is the largest it has ever been, at $5,340,000 (or over $10 million for a married couple combined).  But that doesn’t necessarily solve all tax problems.  First of all, there is a risk that Congress will shrink the exemption in the future (it was $1 million only a few years ago).  Second, affluent professionals with young families may carry large amounts of insurance – and the insurance together with their other assets may put them over the taxable threshold.  In addition, there are cases where substantial insurance is purchased either to provide directly for children or other relatives at death or for other reasons (for example, to furnish liquidity to pay estate tax at death), and the estate planning benefit depends on the insurance not being part of the taxable estate.  Finally, some states (including NY) still impose an estate tax at $1 million, which must be addressed in the planning process as well.

What about the Marital Deduction? A person can leave property to his or her spouse free of estate tax under the so-called “marital deduction” (subject to special rules if the spouse is not a U.S. citizen).  However, the marital deduction merely postpones the estate tax until the death of the surviving spouse, it does not eliminate the tax.   Moreover, obviously, not all persons who purchase life insurance are married.

Is there a way to get life insurance proceeds out of the taxable estate? Yes, the solution is to transfer the insurance policy during lifetime (and at least 3 years prior to death) to an irrevocable life insurance trust, also known as an “ILIT.”

What is an ILIT?  As the name implies an ILIT is an irrevocable trust designed to hold a life insurance policy.  The person who creates the trust is called the “grantor,” there is a trustee  who is in charge of managing the trust property, and the trust is for the benefit of family members (spouse, children, etc.) and/or other loved ones, who are called the beneficiaries.  Irrevocable means the grantor cannot change the trust after it is created –this is necessary to keep the insurance proceeds out of the taxable estate. 

Who can be the Trustee of an ILIT? Generally, anyone other than the grantor can be the trustee of the ILIT.  For example, if the ILIT holds an insurance policy on the life of a husband, generally his wife can be the Trustee.  It is usually good to also have an independent trustee (who could be close friend or even a family member, such as a parent, who is not a beneficiary of the trust) or at least a mechanism to appoint one.  The trustee should agree not to receive any compensation for acing as trustee of the ILIT, at least during the grantor’s lifetime, because the ILIT will probably not be worth much until after the grantor dies when the insurance proceeds are received.

What happens to the property in the ILIT?  Usually the ILIT says that as long as the grantor is alive, the trust property will be held in a trust for all of the beneficiaries.  For example, a typical ILIT for a married person might say that during the grantor’s lifetime, the trust is for the grantor’s spouse and all descendants of the grantor.  After the grantor dies, many different things could happen to the property – it could continue to be held in trust for all the beneficiaries, it could be divided into separate trusts for different beneficiaries, or it could be paid out to the beneficiaries.   That is something the grantor would decide in consultation with his or her estate planning attorney at the time the ILIT is created. Remember that the ILIT usually will not be worth much until the insurance proceeds are received after the grantor’s death.

How does the grantor transfer the insurance to the ILIT? The grantor transfers the insurance to the ILIT by filling out a change of ownership form and delivering it to the insurance company.  As the new owner the trustee of the ILIT must then fill out the appropriate insurance company form naming the ILIT as the beneficiary of the life insurance.  Sometimes both those steps can be taken on a single form.

What if you are thinking about getting insurance but haven’t yet applied?   In that case it’s better to set up the ILIT first, and then let the ILIT apply for, purchase and own the insurance from the start.  That way, you are not subject to the 3 year waiting period. 

Who pays the premiums on the insurance after the insurance is transferred to the ILIT? Usually the grantor continues to pay the premiums after the transfer to the ILIT.  Those payments are considered gifts to the ILIT, but they can be set up to fall under the $14,000 annual exclusion in most cases.  There are some special provisions (called “crummy withdrawal powers”) that have to be in the ILIT, and there is some minor annual paperwork that is required in order to qualify for the annual exclusion.  This is the most common plan for premium payments and works well in most cases.  If it is not suitable, an estate planning attorney can recommend an alternative structure.

 Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.

Top 5 Tips for Effective Trust Drafting

Top 5 Tips for Effective Trust Drafting www.zeekbeek.com

1. Flexibility. The first rule of real estate?  Location, location, location.  The first rule of trust drafting? Flexibility, flexibility, flexibility.  Of course you can't always afford the perfect house in the perfect location, but you make the best choice you can under the circumstances - and it's the same with trust drafting.  Unfettered discretion can put a lot of pressure on the trustee (and on the trustee succession provisions), and sometimes it's just not warranted or even appropriate.  But one should strive to make every trust as flexible as possible consistent with the settlor's wishes and the practical realities of budget and family situation.  Creditor protection, tax planning, and positioning for unanticipated family circumstances are all enhanced by flexibility.  Just as an example, we have encountered a marital trust that permitted principal distributions only for a standard of support and health, which prevented a complete invasion and termination of the trust, even though that was desired by the family and would have facilitated overall estate planning. 

2.  Trustees.  A trust is only as good as the trustees.  Does this mean the trustee must be as good of an investor as Warren Buffet? No.  But if the trustee is not a savvy investor, the trustee has to be prudent enough to follow good investment advice -- for example, Warren Buffet's own advice to the trustees for his wife, to invest in an index fund! Beneficiaries who are adult and reasonable can be co-trustees and participate in investment decisions as well.  This can help them learn about money management.

 It's usually a good idea to have at least one non-beneficiary trustee (or a mechanism to appoint one) as it may be important for such a trustee to exercise certain powers, for example, to fully invade and terminate the trust.  Keep in mind that a trust can also be drafted so that different trustees are responsible for different functions (e.g., there can be a trustee responsible for making investments, and a trustee responsible for deciding about distributions).

Trustee compensation should be specified, keeping in mind that family members are often wiling to act as trustee without compensation.  Authority to resign, to name a successor, and to name co-trustees are also important to include in trust instruments.  Tax matters aside, a mechanism to remove and replace trustees is also advisable if the trust is going to last for awhile, such as for the life of a named person or persons. 

3.  Grantor Trust – or Not? In the case of a lifetime trust, one must always ask -- is this trust going to be a grantor trust for tax purposes, or is it going to be a separate taxpayer?  Of course a revocable (living) trust is always a grantor trust.  But in other cases the way the trust is drafted may control the income tax status.  There are wealth transfer benefits to grantor trust status, not to mention flexibility for subsequent transactions.  If grantor trust status is deliberately structured, however, it's important also to draft the trust with an "off switch" to terminate that status should it become preferable to do so in the future.

4.  Be Creative! The renowned 19th century British scholar F.W. Maitland thought trusts were the greatest achievement of English jurisprudence.  He may have exaggerated, but they are pretty great, and offer a chance for the estate planning attorney to be creative in tailoring a structure to suit each individual client's needs.  Powers of appointment, unitrust interests, ascertainable standards, and interests for life are only some of the many tools available in the trust drafting toolbox. 

5. Consider the Big Picture. Each trust, and indeed each estate planning document, is only one piece of the overall puzzle.  Maybe life insurance should be in a trust for kids from a prior marriage, while retirement benefits should go outright to the surviving spouse, and the Will should divide property between the wife and kids.  If a trust is used under a Will it may well have much different terms then one created during lifetime, even if for the same beneficiaries.  For example, the client may want to have some property in a discretionary trust as a protected nest egg, but have other property in a trust with an annual payout or an ascertainable standard demand power.  Thus, it's important to step back and consider the estate plan as a whole to see how the trust will fit in and contribute to achieving the client's goals. 

Disclaimer – Postings Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.   

How to dispose of Tangible Personal Property in your Will

How to dispose of Tangible Personal Property in your Will www.zeekbeek.com

Introduction.  Your clothing, jewelry, art work, photo albums, china, car, boat, furniture, and other physical possessions – these items are called your tangible personal property.  Whether or not these are the most economically valuable part of your estate, when it comes to emotional value they are priceless.  So how do you dispose of your tangible personal property under your Will?

In General.  Sometimes you want to leave everything you own to one person, or to a group of people.  For example, if you are leaving everything you own to your spouse, or everything to your children, or everything to your parents, then that includes your tangible personal property, so you probably don’t need a separate provision in your Will about your tangible personal property.  

Making a Specific Bequest of Tangible Personal Property.  But what if you want to single out certain items and leave them to certain people?  In that case, you do use a separate provision in your Will to make those bequests.  Let’s consider the following example, from the Will of a “Mr. Sherman Holmes”:  

If my daughter Joanne Holmes survives me, I give and bequeath to her my gold class ring, if owned by me at the time of my death.  If my brother Myron Holmes survives me, I give and bequeath to him all books written in the Latin language owned by me at the time of my death.  

Let’s analyze this provision:   

1. We have picked out certain items and given them to specific people, Joanne and Myron.
2. But only if that property is actually still owned by the Sherman at death.Why? Because Sherman might give away or sell that property between the time that he makes the Will and the time that he dies, and we don’t want that to lead to any type of confusion or even dispute between the person, say Myron, who was set to inherit the property under the Will, and the person Sherman gave or sold it to during Sherman’s lifetime.A Will is not effective until death, and a person retains every right to give away or sell their property during life regardless of what the Will says.
3. Also Joanne and Myron only get the property if they survive Sherman.Why? Because probably that’s what Sherman wanted.In other words, if Joanne has died, Sherman probably doesn’t want Joanne’s husband, or whoever else inherited Joanne’s estate, to inherit the ring. By way of comparison, consider this provision from the Will ofGrateful Dead musician Jerry Garcia:

GUITARS I give all my guitars made by DOUGLAS ERWIN, to DOUGLAS ERWIN, or to his estate if he predeceases me.

Here you can see Mr. Garcia did want Mr. Erwin’s heirs to receive the guitars if Mr. Erwin            had died before Mr. Garcia, and so the bequest of the guitars does not depend on Mr. Erwin       surviving,  unlike in our example with Joanne and Myron.

You may be wondering, what happens to the rest of the tangible personal property that is not given to Joanne or Myron? In this example it falls into the so-called “residue” or rest of the estate, and is disposed of along with all of the other estate property to spouse, children, siblings and/or whoever else is inheriting the general estate under the Will. 

Potential Problems with Tangible Personal Property.  If family relationships are good it may be quite practical for two people to informally share an item – for example, Mom can leave her engagement ring to both her daughters and they can take turns wearing it.   Alternately, by talking to family members ahead of time it is often possible for everyone to agree about the sentimental items each would most like to receive.  When family relationships are strained specifying which sentimental item each child will receive may prevent dispute, and if one item is worth much more than the others, a compensating cash bequest can be made.  But sometimes parents fear alienating one child by leaving certain items to the other(s).  In such a case formal procedures may be required.  One option is to direct the Executor to sell the tangibles and divide the proceeds, but allow family members to “purchase” (basically by exchanging the cash or other assets they would have received from the estate for the desired item).  Another option is to use a rotating selection process where children, for example, take turns choosing the items they wish in a series of rounds, with a different person getting to pick first in each round (who chooses first in the first round can be decided by drawing straws).  Any unselected items are sold and the proceeds divided equally without regard to the valuation of the objects selected.    

Personal Property Memorandum.  Some states – but not New York -- allow use a of personal property memorandum, which is separate from your Will but is mentioned in your Will.  In that case basically your Will would say that if you leave a separate signed writing disposing of some or all of your tangible personal property, your Executor should follow it.  The advantage is that you can simply make a list (as short or as detailed as you wish) of your personal property and who you wish to receive it, instead of having to spell all of that out in your Will.  You must sign the list, you should date it (to avoid confusion about which was the “final” list), you should label it “personal property memorandum,” you should keep it somewhere safe but accessible (preferably with your Will), and you should not contradict anything in your Will.  For example if you leave your piano to your son in your Will, you should not leave it to your daughter in your personal property memorandum.  As noted, some states do not allow personal property memorandums so you need to check that before using one. 

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

The #1 Estate Planning Mistake – It’s Probably not What You think

The #1 Estate Planning Mistake – www.zeekbeek.com

Expect the unexpected.  Nothing is certain but change.  How often have we heard these old sayings?  But the fact is they are true not only in life, but in estate planning.  As a result, experienced estate planners have learned to build maximum flexibility into the estate plan not only so that the plan will work in every situation they can anticipate,  but even more importantly so that the plan will work even in situations that they cannot now anticipate.

How?  One good way is to use a discretionary trust, that is, a trust where no distributions are mandated, but rather where the trustee has discretion about whether and when to make distributions to the beneficiary.  Let’s consider an example.

Abe dies survived by two children, Bebe and Cal.  He leaves ½ of his estate to Bebe and ½ to Cal.  A year later Bebe’s company is sold for $40 million, while Cal files for bankruptcy.  In such a case Bebe didn’t need the inheritance while Cal loses it to creditors. But what if Abe had left the property in a discretionary trust for Bebe and Cal?  In that case the property in the trust would have been protected from the claims of Cal’s creditors and  over time the trustee could have made more of the trust property available to Cal than to Bebe if Cal had more need for it.  In fact, such a trust can furnish benefits even if no distributions are made.  For example, the trustee can buy a home, hold it in the trust, pay the expenses out of the trust, and make it available to the beneficiary to live in.  Added flexibility can be achieved if spouses, defined as the person to whom the beneficiary is married from time to time, and issue are also beneficiaries.  For example, if Cal in our example is having creditor problems, then payments can be made to benefit Cal’s children or to Cal’s spouse directly, helping the family unit but avoiding distributions to Cal.   

  

Now there are valid concerns about complexity and also accountability when using discretionary trusts.  The rule of thumb is often that the greater the discretion, the more complex the trustee governance and succession provisions, and in truth every situation may not merit the full blown discretionary treatment.  Sometimes a discretionary trust might be advisable for part of the estate only.  Sometimes there are countervailing considerations, emotional or practical or both, that dictate a different disposition.  Like politics estate planning  is the art of the possible, and what makes sense in the abstract does not always work for a given client in the real world. But the key point is to recognize that our goal should always be to make the estate plan as flexible as possible under the circumstances, whatever they may be.

So for example, consider HEMS (health, education, maintenance and support) standards, fixed percentage allocations and mandated distributions at certain ages.  All can cause unanticipated headaches.   A HEMS standard may make it impossible to fully invade a trust and terminate it, even if that would be advantageous for tax purposes.  A fixed percentage allocation may preclude adjustments between beneficiaries to address changing circumstances.  Mandated distributions at certain ages may push property out of trust at precisely the wrong time, such as when a beneficiary is getting divorced, experiencing creditor problems, or struggling with personal challenges such as addiction or serious mental illness.  It’s not that one must never include such clauses (though it’s fair to say every trust should have the ability to be terminated by the trustee), but that one should recognize the tradeoff and carefully weigh the benefit against the cost in terms of lost flexibility.  Because the #1 estate planning mistake is --  drafting documents that are inflexible and come back to haunt you down the road.        

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.

An Introduction to Life Insurance

An Introduction to Life Insurance – at www.ZeekBeek.com

What is life insurance?

Life insurance is a special type of insurance that will make a payment to your loved ones when you die. 

Does everybody need life insurance?

Not necessarily.  Life insurance is important if you need to provide for loved ones after your death and don't have enough other assets to take care of them.  For example, a working person who is supporting a young family and doesn't have a lot of savings may need life insurance to provide for his or her spouse or minor children.  Sometimes people need life insurance for other special reasons, but this “wage replacement” is probably the most common reason.

How do I get life insurance?

Some people can get life insurance through their employer.  If not, then you need to apply to buy a life insurance policy from a life insurance company.   You should check to see if you are a member of a group (like a union or a veterans or professional association) because it may be cheaper to buy a life insurance policy as a group member.

How much will my loved ones receive when I die?

The life insurance policy will state the amount of the payment your loved ones will receive (called the "death benefit" or “proceeds”). 

How much will it cost?

That is a complicated question!  The payments you make to buy life insurance are called "premiums."  The amount of the premiums depends basically on three things: (i) the amount of the death benefit, (ii) your age and health, and (iii) the way the life insurance policy is structured.  Let's take these in turn.  First, as you would expect, insurance costs more if the death benefit is bigger--so it costs more to buy $1 million of insurance than $100,000.  Second, it also costs more to buy insurance when you are older than it does when you are younger, because your risk of death is statistically greater when you are older.  The same is of course also true if you are not in good health.  Finally, the structure of the life insurance policy plays a role in cost as well.  That can get technical, but for some more information, read on!

Are there different types of life insurance?

Insurance companies have many different names for their life insurance products, and many different types of policy structures.  But really there are only two basic types of life insurance: term and cash value.

What is term insurance?

Term insurance is insurance that just pays a death benefit if you die during the year.  You can buy term insurance that is automatically renewable, which means that as long as you pay the premium each year, the insurance cannot be cancelled –even if you become ill.  Term insurance is usually the cheapest type of life insurance.  But term insurance usually gets much too expensive to continue after you reach about the age of 72.   That is because the term insurance premium is directly tied to your statistical risk of death during each year, and that risk goes up as you get older. So if you want to buy insurance that you can continue beyond that age, then you will probably need to buy a cash value policy. 

What is a cash value policy?

A cash value policy is a policy that builds up cash value "inside" the policy and also pays a death benefit. So, actually, a cash value policy is really just a term policy plus a cash value fund.  It is important to understand that the cash value fund will be less than the amount of the premiums you pay, because part of those premiums must go to cover the risk of your death during the year-- essentially, that is the "term" part of the policy.  There are many different names for cash value policies: whole life, universal life, variable life, permanent life, etc.  That's because there are a lot of different ways to structure a cash value policy.

What is an example of one way to structure a cash value policy?

 A cash value policy could be set up so that if you pay the same premium amount every year for your life, your loved ones will be guaranteed to receive a certain death benefit, for example $100,000, when you die.   A lot of "whole life" or “permanent” insurance is set up that way.  That is probably the simplest and most common type of cash value policy.  Basically, the cash value fund that builds up inside the policy compensates for the increased risk of death as the years go by.  That makes it possible to keep the insurance going for your whole life without paying huge premiums as you get older, which is why it is often called "whole life!"

As noted, there are other ways to structure cash value policies – this is just one example.  It can be a technical and complicated area. 

Can I control the investment of the cash value fund inside the policy?

Under some types of insurance policies you can do that.  You will usually have a choice of a number of mutual (stock/bond) funds.  That type of policy is called "variable" because you can vary the investments.  Usually a variable policy is also universal, that is, it permits you to pay different amounts of premiums in different years, provided that you always pay a sufficient premium to keep the policy in force.   

Can I use the cash value fund inside the policy during my lifetime?

Yes, under some types of policies you can use the cash value fund during your lifetime.  Depending on how much cash value is built up, there may even some benefits to doing that.

What happens if I stop paying premiums?

If you stop paying premiums your policy will expire and you will no longer have life insurance, unless you have a cash value policy which has enough cash value built up inside the policy to continue the policy.

Is there income tax when my loved ones receive the death benefit?

No, the death benefit will not normally be subject to income tax. 

Is the life insurance part of my taxable estate?

Yes, if you own a life insurance policy on your own life the proceeds will be part of your taxable estate at death – even if those proceeds are payable to others, such as your children.  However, this should not be of concern unless you have a very large taxable estate (in excess of $1 million).  If it is a concern an estate planning attorney can help you take steps during your lifetime to prevent any estate tax problems – for example, by arranging for the transfer of the policy to a trust for the benefit of your loved ones.

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

Top Ten Tips for Effective Estate Planning

Top Ten Tips for Effective Estate Planning www.zeekbeek.com 

1.  A Will is good --but there is some property, called "non-probate" property, that does not pass under your Will and is therefore not controlled by the terms of your Will.  Some common types of non-probate property are: life insurance, IRAs and retirement benefits and bank accounts or homes that are owned jointly with another person with right of survivorship.  For example, if you make a Will leaving all your property to your husband, but you own a home jointly with your brother with right of survivorship, then when you die your brother gets the home, not your husband.  For life insurance and IRAs and retirement benefits the person who is named on the beneficiary designation form will receive the property when you die, again regardless of what your Will may say.  So make sure your designations are up to date and reflect your current wishes, and make sure you clearly understand what will happen to your property at death. 

2.  Avoid strife, name a guardian for your minor children-- and make sure you and your spouse or other co-parent both name the same person!  This is an emotional topic but it’s important to discuss it with your spouse or co-parent and also with the prospective guardian ahead of time. 

3.  If you have a child with special needs, a trust is a must!  There are a few different types of trusts that can be used, but the bottom line is that a properly drafted trust will protect your child and also permit your child to access all available benefits.       

4.  Trusts can also help with many other situations including caring for young children, protecting the inheritance of children from a prior marriage, and providing for children who have problems managing money, just to name a few.  Remember, trusts are not just for the elite few, but now come in styles to suit almost every need.

5. Don't forget about your digital assets -- Facebook, email accounts, etc.  It can be hard for loved ones to access those assets after death without some advance planning. 

6.  Plan for incapacity, both medically and financially, with a health care proxy and living Will (for medical matters) and a durable power of attorney (for financial matters).  Different states use different names for the health care proxy but the effect is the same, namely, to designate someone to make medical decisions for you in the event that you are unable to do so.  A Living Will is helpful to provide additional guidance to your health care agent and other family members, but it is not legally binding.  A durable power of attorney gives someone the power to make financial decisions for you in the event you become unable to do so.  For financial matters a revocable (living) trust can also be an option worth considering as it can be used to  manage property in the event of incapacity. 

7.  Mind the gap- the federal exemption is north of $5 million, but some states still impose state estate tax at $1 million, so you may need tax planning.  Most states seem to be phasing out the state estate tax, but that may not happen immediately.

8.  Make sure your documents are properly signed, witnessed and/or notarized as the law requires.  Remember, these are important legal documents that you are relying on and if you fail to follow these rules your documents may not be effective.

9.  Keep your documents in a safe place and make sure your loved ones know where they are – but never keep them in a safe deposit box!  They need to be secure but they also need to be immediately accessible by your loved ones in the event they are needed.

10.  The only certainty in life is change, so review your estate plan periodically to make sure it still reflects your wishes and provides properly for your loved ones.    


Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.  

Talking about Trusts

Talking about Trusts – to learn more, find an Estate Planning lawyer at www.ZeekBeek.com

What is a Trust? A trust is formed when a person, the settler (sometimes also called the “grantor” or the “creator”), transfers property to another person, the trustee (or trustees if more than one), to be held for the benefit of another person (or persons), the beneficiary (or beneficiaries).  For example, assume Abe transfers $100,000 cash to his uncle Bob and directs Bob to hold the money in trust for the benefit of Abe’s children.  In that case, Abe is the settler, Bob is the Trustee, and Abe’s children are the beneficiaries.   Working with a lawyer, the settlor will decide what trust terms he or she wants, and those terms will be set forth in a written document called the trust instrument, which will be signed by the settlor and the Trustee. 

How does a Trust work? The beneficiaries, as the name suggests, are the people who will actually benefit from the trust property, usually by receiving payments from the trust, which are referred to as distributions.  The Trustee is responsible for managing the trust property in the best interests of the beneficiaries, for example by investing the trust assets prudently, and taking care of administrative matters, like filing any necessary tax returns.  The Trustee can also be given authority (“discretion”) to decide, for example, whether it’s a good idea to make a distribution to any given beneficiary and, if so, how much to distribute.   The amount of discretion a Trustee will have over distributions is one of things that will be spelled out in the trust instrument.

What are Trusts used for? Trusts are widely used for a myriad of estate planning purposes.  One of the major advantages of a trust is that it permits a person to make property available to family members, for example a spouse or children,  but at the same time lets the person control the way in which the family members will be able to benefit from the property.   There are many situations where that kind of control is desirable.   Certainly if the beneficiaries are minors or are incompetent, they cannot have direct access to the property.  But those are not the only cases. 

For example, let’s say the settlor wants to leave money for his son who is a young adult. The settlor is concerned about giving a 21 year old a large sum of money – the son may squander the money, it may sap his initiative, he may be preyed upon by fortune hunters, etc.  In such a case the settlor could instead transfer the money to a trust for his son, and specify that his son will receive the income from the trust each year, and will receive ½ of the property from the trust at age 30 and the rest at age 35 (or whatever ages the settlor thinks advisable).   

Or perhaps the settlor is married for the second time, and has children from his first marriage.  If he leaves his property to his wife she may in turn leave it to someone else (perhaps even a subsequent husband), and his children may receive nothing.   Instead, the settlor can leave the property in a trust that provides for income to the surviving spouse for life, with the property passing to the children of the first marriage upon the surviving spouse’s death.

Trusts can also be used to provide for family members who are not good at or are not interested in managing money, or who are profligate spenders, or who have substance abuse or other issues that make it unwise for them to own property directly.  The Trustee can make the investment decisions, and can also be given discretion over making distributions if appropriate.  For example, a trust could provide that the beneficiary will not receive any distributions at all unless the Trustee decides it is advisable; sometimes that kind of restriction is actually in the best interests of the beneficiary. 

Trusts are also used extensively for tax planning (for example, to hold life insurance policies), for Medicaid planning, and to provide for the supplemental needs of disabled individuals.   

It is not possible to list all the possible ways that a trust can be set up—powers of appointment, rights of withdrawal, and/or payments for specified purposes like education, are just some of the possibilities.  That flexibility makes trusts an essential estate planning tool, but also necessitates consultation with an experienced lawyer to decide on the best terms to meet each person’s unique situation. 

Disclaimer – Blog Not Legal Advice

This blog is not legal advice and no attorney-client relationship is formed.  The information and materials on this blog are provided for general informational purposes only and are not intended to be legal advice.  The law changes frequently and varies from jurisdiction to jurisdiction.  Being general in nature the information and materials provided may not apply to any specific circumstances.  Nothing on this blog is intended to substitute for the advice of an attorney.  If you require legal advice, please consult with an attorney licensed to practice in your jurisdiction.