UNDERSTANDING YOUR ESTATE PLANNING OPTIONS
While everyone, even those with relatively small estates, can benefit from a Will, certain individuals can benefit greatly from establishing a trust. First, it is important to understand exactly what a trust is, as well as what they can and cannot do.
What Is a Trust?
Generally speaking, a trust is an agreement that allows a designated individual (called the trustee) to maintain ownership of certain assets on behalf of a single beneficiary or multiple beneficiaries. The trustee can be the same person as the trustor (the person who created the trust) or a third-party. The beneficiaries can be family members, loved ones, or any person or entity the trustor decides. Once assets have been placed into a trust, the trustee holds them for the beneficiaries until a certain time, typically once the trustor has died.
What Trusts Can & Cannot Do
Trusts are highly varied and, as such, can do many things. Depending on your particular goals, you may wish to establish a trust for a specific purpose or as a way to achieve multiple estate planning goals. What you can and cannot do with a trust depends somewhat on the type of trust you choose, though there are certain advantages that most trusts offer.
Generally speaking, a trust can be used to:
- Protect Beneficiaries: If you are concerned about the possibility of a lawsuit challenging your estate plan after you die, a trust can help you ensure that your designated beneficiaries are protected. This is because trusts are typically more difficult to challenge than Wills. This may be applicable if you have family members (especially heirs) that do not get along with one another.
- Provide for Individuals with Special Needs: If you have a child or loved one with special needs, a trust can help you make sure that they are properly cared for after you are gone. With a traditional Will, a special needs person risks losing access to Medicare and other means-tested benefits. A properly drafted SNT can be used to ensure that this does not happen.
- Designate How and When Assets Will Be Distributed: If you are concerned that a child or another beneficiary will not be able to properly manage the assets you leave to them, you may use a trust to specify the amount they will receive over a certain period of time and even place other restrictions on them with a spendthrift trust. This can be useful if you have minor children or beneficiaries with unique needs.
- Provide for Future Generations: You may establish a generation-skipping trust to provide for grandchildren or great-grandchildren to ensure that your family’s legacy is protected.You can also use a trust to protect future generations of your family in the event of divorce and/or remarriage.
- Eliminate Tax Penalties, in Certain Circumstances: Depending on your unique circumstances, including the type of trust you choose, you may be able to help your beneficiaries avoid inheritance and gift taxes. This is typically only applicable for high-value estates,though an attorney will be able to discuss your specific situation in greater detail with you.
Avoid Probate for Certain Assets: Any assets that are not
covered in a Will or trust must pass through probate upon the owner’s death. Even when there is a Will in place, most estates must still go through probate, though the process is not as complex as it would otherwise be. A trust can potentially help your beneficiaries avoid probate for certain assets placed in the trust.
- Appoint a Successor Trustee: Most people name themselves as the trustee until a point at which they are incapacitated or pass away. As part of your estate plan, you can name a successor trustee to take over the trust when you are no longer able to manage it yourself. This can save your family and loved ones a great deal of stress, especially in the event of an emergency.
These are some of the primary benefits of most trusts; however, there are also certain things revocable living trusts (the most common type of trust) cannot do. They cannot be used to protect assets from individuals who have a legal claim to them, including creditors. Additionally, any assets not included in a trust or those included in a “pour-over” will (or will that is supplemental to the trust) may still have to pass through probate.
Different Types of Trusts
There are several different types of trusts, each of which can be used to accomplish a specific goal or goals. As with virtually all estate planning matters, your unique circumstances will determine which option is the best choice for you.
Some of the most common types of trusts include:
- Revocable Living Trust: As the name implies, a revocable living trust can be altered or revoked entirely at any time. Typically, trustors appoint themselves as the trustee of a revocable living trust (also known as an inter vivos trust), allowing them to make changes as necessary throughout the duration of their life.Upon the trustee’s death or at another designated time, the assets contained in a revocable living trust pass to the designated beneficiaries without having to go through probate.
- Irrevocable Living Trusts: This type of trust cannot be altered or revoked. In other words, once the trustor has given away certain assets, they become the permanent property of the designated beneficiary/beneficiaries. Irrevocable living trusts are typically only appropriate for ultra high net worth estates.
- AB or Marital Trusts: An AB trust, also known as a marital or QTIP trust, allows one spouse to transfer assets to another spouse without subjecting them to the federal estate tax. Texas does not have a state estate tax, but estates valued at over $11 million for an unmarried person are still subject to the federal estate tax. A traditional living trust will not protect assets from this federal estate tax.
There are many other types of trusts. An attorney at our firm can help you understand all of your legal options and determine which solution is right for you and your family. With over 60 years of combined legal experience, we are prepared to walk you through the entire process.
Reach out to our legal team at (713) 336-7200 to discuss your estate planning needs with one of our Houston attorneys.