The term "Trust Fund Babies" conjures up what has become a stereotypical image of non-working super rich folks living large on their family's wealth. For that reason alone, many folks may think that trusts are only for the wealthy. It is true there is some cost involved in setting up a trust, and that most trusts are established by the wealthy for different reasons. However, there are some instances where trusts should be established by anyone to either save on estate taxes or to make provisions for care of a loved one.
What is a trust? Simply put, it is a legal document (think of it as a contract) established to appoint another person (Trustee) to act on your behalf to manage certain sums for a specific purpose and carry out your stated wishes. A trust prepared in advance substitutes for times when you may not be able to manage your own affairs, such as during incapacity or after death. Conditions of trusts are very flexible and should be unique to you and your family’s dynamic. They can be detailed with specific instructions as to whom and how the Trustee is to give money to, over what time period, and what amounts. Conversely, they may give the Trustee full power to use his/her judgment to carry out your general wishes. One of the beauties of trusts lies in the fact that they are private documents; Wills are made public when probated, but the provisions of trusts are private.
There are a few situations where a trust would make sense for everyone, so it is important to become a little familiar with just how a trust works. Consider a situation where someone is in your care, and think about what might happen to that person if you were to die or become unable to manage your affairs. Think of the trust, then, as a substitute for you in those instances.
Here are just a few of the typical kinds of trusts that might be useful for everyone:
- Minors Trust. This trust can be established in your Will to name specific minors or groups of minors and at what ages they are to receive your assets after your death. Even those without minor children should consider adding a minor's trust in their Wills just in case a minor were to somehow inherit. Why do this? Because, without it, the State will take and manage a minor's assets until they reach majority, making those assets unavailable to the parent or guardian.
- Credit Shelter Trust (CST). The purpose of a CST, which is established in the Will for married persons, is to preserve the estate tax credit of the first spouse to die. Otherwise, that credit is lost. Now that the federal estate tax credit is over $5 million, there is less of a need for most folks from a federal estate tax perspective.
- Special Needs Trust. If you care for a disabled child or adult that is also receiving Social Security income or other benefits, what would happen if you die? Inheriting assets directly from you might disqualify them from receiving certain benefits. A special needs trust is designed to only augment and not substitute for the other benefits. So you can rest assured that your loved one's needs will continue to be met.
- Charitable Trusts can be established to achieve multiple purposes, such as (1) current income tax deduction, (2) providing a stream of income, like an annuity, for your lifetime, and (3) gift to the charity at your death. Your charity or educational institution will be only too happy to set up this trust for you.
Most trusts, such as those established in Wills and take effect after you die, are irrevocable. This means that although you can make changes in your Will and the terms of trusts in the Will during your lifetime, after you die, the trust you established in the Will and the terms cannot be changed.
Here is one popular trust that is effective during one's lifetime and that can be changed by you at any time:
- Revocable Living Trust. These trusts are recommended by professionals and established many times without a clear understanding of their purpose. Essentially, you are the Trustee of this trust until you cannot manage your affairs. Then someone else (your Trustee) seamlessly steps right in. These trusts might serve well under a few circumstances, such as:
- Current illness, when you want to be sure someone will manage your affairs immediately. (A Power of Attorney might also serve this purpose.)
- Privacy. Remember that trusts are not public documents. Those with cantankerous family members might also include language in this trust as to what happens to their assets after death. If so, then their Will would essentially say: "See Trust", thereby never disclosing to the troublemakers who got what or how much.
Keep in mind that a trust that is part of a Will does not generally get established until after death when the Will is formally probated. At that time, the Executor transfers assets to the Trustee as instructed, and the Trustee sets up bank or brokerage accounts in the name of the trust. The trust "document" in this case is the Will itself.
Sometimes a trust can serve the dual purpose of saving taxes and providing the peace of mind of knowing that things will be taken care of in your absence. Just learning whether a trust might be appropriate for you is the first step. The next step would be to consult a good estate-planning attorney to explore the details and prepare the appropriate document.
Contact Sallen Law, LLC to create a custom-made estate plan for you and your family. Sallen Law, LLC services Philadelphia, Montgomery County and the Main Line in Pennsylvania and New Jersey. Click here to make an appointment.