Your Complete Guide to Estate Planning – CHAPTER 3
In discussing essential documents in Chapter 1 of our Complete Guide to Estate Planning, we took a brief look at trusts and gave some basic information about how these arrangements can be confusing or problematic. There are a vast number of different types of trusts, and unfortunately, they are often marketed and sold to individuals who do not actually need them to accomplish their estate planning goals.
Today’s post digs a little deeper into what distinguishes a few of the different types of trusts from one another so you can begin to understand whether you might want to include a trust in your unique estate plan to account for a specific financial goal. One word of caution, however—setting up trusts is not something you should attempt without guidance from a seasoned estate planning attorney. Taking a DIY approach to estate planning, and especially to establishing trusts, will likely create problems for your loved ones later, and can also easily result in greater ongoing tax expenses for the rest of your life.
Living or Revocable Trusts
Unlike irrevocable trusts, living trusts can be “undone” or revoked by the creator. While they do occasionally make sense for people with particular financial situations, such as those who own a vacation property in another state, living trusts will add unnecessary expense, roadblocks, and complexity to estates that don’t actually require it.
As we covered in our previous blog post about why living trusts are not appropriate for most, it is crucial not to allow yourself to be talked into setting up these arrangements only because you fear probate. Living trusts can easily create beneficiary designation issues, among other pitfalls that will derail your estate plan.
Wait, is a living trust the same thing as a living will?
In a word, no—don’t let the similar naming of these different estate planning components fool you.
A living trust, as we have discussed, can accomplish specific asset protection outcomes in a small set of financial situations. To review, you likely do not need a living trust.
A living will is another name for an advance directive or healthcare power of attorney, which is essentially instructions for healthcare decision-making when a person is in a terminal condition and cannot express their wishes. Living wills are well worth considering for a wide variety of different estate planning situations.
Note: Do not confuse a living will with your last will and testament, either! Your last will is the foundational document of your estate plan that accounts for your property and assets. If you have no other documents in your estate plan, you must have a last will (or risk leaving your loved ones in legal limbo over your assets when you die).
Did you know that assets transferred into an irrevocable trust are no longer legally yours? Even if you have designated yourself as the trustee of the fund, you have a fiduciary relationship and duty to work solely in the beneficiary’s interest and must renounce any personal feelings of attachment to the assets. This can be difficult for many people to do, of course, but once an irrevocable trust is established, there is little you can do to undo it—hence the term “irrevocable.”
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The benefit of irrevocable trusts is the protection of assets from creditors and maximizing the amount of wealth transferred to heirs, though they are well-known to have unfavorable tax rates. This means they are not useful for the vast majority of estate plans. While irrevocable trusts can be used to achieve very specific goals, they are usually a tool that only the top 1% of taxpayers will want to consider seriously.
Special Needs Trust
This type of irrevocable trust is created to benefit disabled family members or minor children while preserving their eligibility for essential benefits like Social Security disability, Medicaid, and other government benefits. There are different ways special needs trusts can be set up and funded—such as through a personal injury settlement, for example—and these are rarely created without careful attorney assistance.
Charitable Lead and Charitable Remainder Trusts
For individuals or couples who want to regularly benefit a nonprofit charity, charitable trusts can achieve giving goals while potentially providing you with ongoing tax advantages and/or regular income.
Charitable lead trusts (CLTs) allow you to transfer assets into the trust and donate a stream of income from the assets to a charitable organization each year. You receive an annual gift tax deduction, and you can have money left over in the trust distributed to other beneficiaries at the end of a designated period (typically the end of your life). Charitable remainder trusts (CRTs) are similar, but pay you the stream of income and provide the remainder to the charitable organization.
While these arrangements may sound like a win-win, unfortunately, there are many pitfalls in their setup that could end up costing your heirs—such as CRTs being inadvertently disqualified for the estate tax charitable deduction. Additionally, you will have annual administration tasks with these trusts to satisfy taxing authorities. Don’t take your chances—get in touch with an experienced probate and estates attorney to discuss the right way to set up charitable trusts.
Feeling confused? Legal terminology can be extremely complex—that’s a running joke in our society because it’s true! If you have questions about wills and trusts, your best course of action is to get in touch with a reputable estate lawyer right away.
So, should I set up a trust or trusts as part of my estate plan?
As we’ve shown, there is much to weigh when considering trusts as part of your estate plan. The only foolproof way to decide if a trust is right for you is to consult with an experienced (emphasis on the word experienced) estate planning attorney for guidance. In Lancaster Country, PA, that means getting to know us here at May, May & Zimmerman. We have been guiding families like yours in planning for the proper handling of their estates, whether modest or vast, for generations. Contact us today for a free phone consultation.
This blog is being published for educational purposes only as well as to provide general information and a basic understanding of the law, not to provide specific legal advice. By entering this site you understand that there is no attorney client relationship between you and the publisher. This site should never be used as a substitute for competent legal advice from a licensed professional attorney in your state.
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