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You hear a lot about Trusts. There are those who say you’ve got to have one. Do you really? Maybe.
A Trust is a legal device that separates legal ownership of an asset from the “enjoyment” of that asset. A trustee owns the assets of a Trust, but the trustee is to manage the assets for the benefit of the beneficiaries. The beneficiaries are the ones who enjoy the benefits of property, such as the income it throws off.
A Trust is one of the estate planner’s tools. There are times when it makes sense to use the tool; there are times when it does not.
Where a Trust makes sense:
If you are married, and your assets are in excess of one federal estate tax exemption amount, a Trust may be useful. If you leave property equal to the exemption amount to a Trust for your spouse’s benefit, and if the Trust is properly structured, the property left to that trust will not be in the surviving spouse’s estate upon his or her death. If that property was left outright to the spouse under an “I love you” Will, that property would be added to your spouse’s property. You may have had less than one exemption amount of property, and so may your spouse, but when added together, the total may be in excess of the exemption amount, and now your Uncle Sam will want to be paid. While portability may be a way to avoid paying your uncle, using a Trust will also keep the assets from getting stacked up in the surviving spouse’s estate.
If you and your spouse are fortunate enough to have property in excess of two federal estate tax exemption amounts, then a Trust is very important to shelter the predeceasing spouse's exemption from the federal estate tax.
In a blended family situation, where it is a second marriage for one or both spouses and there are children from the previous marriage(s), a Trust can be an excellent tool to protect the children from the second spouse, and to protect the second spouse from the children, by allocating property to both.
If you are concerned about being able to manage your assets as you age, a Trust may make sense. You can establish a Trust and transfer all of your assets into the Trust. You and someone from a younger generation can be the trustees, so you will be managing your own assets for your own benefit. In the event of illness or disability, the co-trustee is able to manage the assets for your benefit, without the imposition of a guardian over your estate. Upon your death, the trustee will then distribute the assets to your beneficiaries as you have set up in the Trust. As the assets are owned by the Trust rather than you, the assets are not probate assets, and will pass outside the probate court’s jurisdiction. While the Trust is not set up for the sole purpose of avoiding probate, it can be an added benefit.
If you have children and are concerned about placing significant amounts in their hands at a young age, a Trust might make sense. Your estate plan may provide that you will leave everything to your spouse and vice versa, but if you both die prematurely, your property will go to your children. If the children are under 18, unless you have done anything else, the property will be held in a guardianship, and turned over to the children when they turn 18. If you wanted the property to be tied up to a later age such as 25, 30, or beyond, this can be done through a Trust. If a large portion of your wealth is in retirement plan accounts such as IRAs, a Retirement Trust can be used to provide for management of those assets until your beneficiary is of sufficient maturity.
One of your family members may have a disability and is receiving governmental benefits, such as Medicaid or SSI. Directly receiving a gift from an estate or through a trust could cost the loss of those benefits, which would be disasterous for the person you sought to benefit. Through the use of a Special Needs Trust, it is possible to make a gift to that disabled person, enhancing his or her quality of life, without disqualifying the beneficiary from those so valuable governmental benefits.
If you own real estate in another state and the property is solely in your own name, a Trust might make sense to hold the real estate, thereby avoiding a second probate administration in that other state.
In each of these situations, the Trust is being used to separate the ownership of the property from the enjoyment of the property. There are other circumstances where it may make sense to use a Trust. If you would like to explore if a Trust might be appropriate for your circumstances, please feel free to contact us.