Money

Examining Trusts

One of the most common misconceptions is that estate planning is only for people who have “millions and millions of dollars,” says to attorney John Midgett, a 35-year veteran in the estate-planning business. 
“Estate planning really is for everybody.”

In addition to instruments, like advance medical directives, power of attorneys and last will and testaments, trusts are frequently utilized devices included in estate plans, according to Charles Robinson, president of the Hampton Roads Estate Planning Council, who says 95 percent of his clients opt for them. Midgett, too, says the majority of his clients create trusts, which he attributes to the asset protection they can provide from bankruptcy, divorce and lawsuits.

Steve Hartnett, associate director of education for the American Academy of Estate Planning Attorneys, says for many a trust’s primary benefit is avoidance of probate, the process through which a decedent’s assets are re-titled to heirs. Assets titled in a trust avoid this process, which Hartnett says can be a significant advantage depending on where a person owns property and/or lives at the time of their death. “In some jurisdictions, the probate process is quite simple; in other jurisdictions, like California, the probate process is very cumbersome and time-consuming and expensive,” he explains.

Trusts may not be necessary for everyone, though. Robinson recommends wills for estates less than $500,000 that involve simple distribution—i.e., in which most assets are left 
to a spouse or children from a single marriage. 
In his experience, a trust can help address potential familial discord, beneficiaries incapable of managing an inheritance outright and issues arising from blended family structures, but absent these considerations, a will might be sufficient.

Whether deciding on a trust or just a will, Robinson says at least minimal estate planning is important to avoid unintended results and expense.

Benefits of a Trust

Hartnett, Robinson and Midgett each cite avoidance of the probate process as a major benefit of trusts; assets titled to a trust do not need to be re-titled when the grantor dies, 
saving time and money.

Also achieved through the avoidance of probate is the benefit of privacy. Instruments that pass through probate become matters of public record, whereas the contents of a trust, such as beneficiaries and distribution of assets, remain private. Privacy is important if, for example, you were to leave something to one sibling or child, but not include another.

Harnett considers lifetime management another major benefit to trusts. Unlike a will, which Midgett explains “only speaks at death,” a trust can address the handling of an estate in the event of the grantor’s mental or physical incapacity by naming a successor trustee to act 
on his or her behalf. This avoids the cost and hassle associated with the appointment of 
a court-supervised guardianship.

A trust can also help protect inheritances to beneficiaries incapable of managing money and beneficiaries susceptible to creditors’ claims. “Asset protection is critical,” Midgett says, explaining that a spendthrift provision included in a trust can prevent a beneficiary from assigning their ownership interest to a creditor.

Types of Trusts Available

Trusts fall under two main categories: revocable and irrevocable. A revocable trust, also known as a “living” or “inter vivos” trust, can be amended, modified, or revoked entirely during the grantor’s lifetime, whereas, with very limited exception, an irrevocable trust cannot be changed once executed.

A revocable trust may be thought of as “borrowing” assets while an irrevocable trust “owns” them; since the irrevocable trust owns the assets, rather than the grantor, these assets are not included in the grantor’s taxable estate at death, which Robinson says is an important consideration for estates that exceed the federal estate tax exemption ($10.86 million for a married couple in 2015). “In those instances, 
we would typically use a special-purpose irrevocable trust to own assets,” he explains.

Gift-tax avoidance and asset protection are other reasons a grantor might choose an irrevocable trust, says Midgett. An irrevocable trust can serve as a wealth-transfer vehicle for assets not gifted during the grantor’s lifetime because of gift-tax limitations, and assets owned by an irrevocable trust are not susceptible to 
the grantor’s creditors.

What Goes inTo A Trust

Everything can go into a trust, with 
the exception of ownership of an IRA, 401K, 
or other qualified retirement plan,” says Midgett. For income-tax purposes, transferring such funds into a trust is treated as a complete withdrawal 
of the account. “Generally, one only makes a trust the beneficiary of retirement plans,” Midgett explains, the funds of which may then 
be distributed as set forth in the trust.

In addition to real estate, personal property, stocks, bonds, and other financial assets, intangible property such as rights to books or songs can be placed in a trust, Robinson says. Other items one might include in a trust include ownership of a business, licenses and patents, and partnership interests. As a matter of practicality, including dealing with insurance and title companies, Midgett advises against putting automobiles into trusts.

What to Look For (and Avoid) 
in an Executor

An executor cannot be a minor, a non-U.S. citizen, or a convicted felon. As fiduciaries, executors are bound by law to carry out the grantor’s wishes, so, at minimum, the role requires a person able to follow directions set forth in a will or trust, Midgett says. A grantor should seek someone honest, fair, and impartial, he advises, and someone who will be responsive and communicative with beneficiaries. Robinson adds that an executor should have “sufficient knowledge of business matters” to properly administer an estate.