FAQS ADVANCED ESTATE PLANNING & TRUSTS
Advanced estate planning is tailored to address specific concerns that may not apply to all of our clients and usually involves the drafting of trusts. Many of the questions we hear frequently are answered below.
A will is an instrument that must go through the court’s probate system before its terms are effectuated. Any assets titled in your name or controlled by your will must go through the court’s probate process before they can be distributed to your heirs. The process can become expensive with legal fees, executor fees, and court costs. It can also take anywhere from nine months to two years or longer. Most probate files are open to the public and excluded heirs may apply to seek a share of your estate. In short, the court system, not your family, controls the process.
Jointly-owned property and assets for which you name a beneficiary (for example, life insurance, IRAs, 401(k)s, annuities, etc.) are not controlled by your will and usually will transfer to the new owner or beneficiary without probate. But there are many problems with joint ownership, and avoidance of probate is not guaranteed. For example, if a valid beneficiary is not named, the assets will go through the court’s probate process and will be distributed along with the rest of your estate. If you name a minor as a beneficiary, the court will probably appoint a guardian to manage the funds until the child becomes an adult.
A living trust is a valuable addition to, or even an alternative to, a will. If all of your assets are assigned to the trust prior to death, then you can avoid the court’s probate system entirely. You can also prevent court control of assets when you become incapacitated. You can place all of your assets, even those with beneficiary designations, together into one plan. A living trust provides maximum privacy, is valid regardless of whether you move to another state, and you can amend it at any time.
A living trust can continue to operate after your death. Assets can stay in your living trust, managed by the trustee you selected, until your beneficiaries reach the age you want them to inherit. Even after your death, your living trust can operate to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, divorces, and irresponsible spending.
A living trust is more expensive than a simple will. But considering it can avoid guardianship and probate court proceedings, many people consider it to be a bargain. An Austin estate planning attorney at Willi Law Firm, P.C., can evaluate your situation and advise you on the best way to proceed for your estate.
An Irrevocable Living Trust cannot be changed or dissolved once it has been created. You generally cannot remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an Irrevocable Living Trust is a valuable estate planning tool. First, you transfer assets into the trust--assets you do not mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer.
Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an Irrevocable Living Trust will also avoid probate. As a bonus, property in an Irrevocable Living Trust may be protected from your creditors.
There are many different kinds of Irrevocable Living Trusts. Many have special provisions and are used for special purposes. Some Irrevocable Living Trusts hold life insurance policies or personal residences. You can even set up an Irrevocable Living Trust to generate income for you.
A Revocable Living Trust is a legal entity that you create while you are alive to own property such as your house, a boat, or mutual funds. Property that passes through a living trust is not subject to probate -- it does not get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. You can change the trust or even dissolve it for as long as you live. Revocable Living Trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it.
Revocable Living Trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property.
Despite these benefits, Revocable Living Trusts have some drawbacks. Assets are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a Revocable Living Trust.
A Testamentary Trust is established by your will. These trusts do not come into existence until your will is probated, which is why we do not refer to them as “Living” trusts. At that point, certain assets passing through your will can "pour over" into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs.
A Special Purpose Trust is drafted to attain a particular result to meet the particular needs of a party. Special Purpose Trusts include spendthrift trusts, trusts for those whose jobs carry a high financial risk, special needs trusts, trusts for beneficiaries suffering from mental, health or physical disabilities or as simple as instructing the Trustee to sell the trust property to pay off the debts of the Settlor or the beneficiary.
An NFA Gun Trust is an example of a Special Purpose Trust. An NFA Gun Trust or Firearms Trust is designed to deal specifically with the possession and distribution firearms governed by the National Firearms Act.
A Special Needs Trust allows you to create a trust for your loved ones without causing them to lose governmental benefits.
Income placed in a Miller Trust can be disregarded for eligibility purposes for Medicaid. By utilizing this trust, an applicant’s income can be reduced to a level to qualify them for Medicaid coverage. However, upon the death of the applicant, all funds remaining in the trust may be used to reimburse the state for the cost of care.
The transfer of assets to charities has long been used by the rich to reduce their income and estate taxes. Those advantages are now available to individuals and families of more modest means.
Charitable Remainder Trusts and Charitable Annuities are excellent options for those who wish to make gifts to charities, but who also want to create a stream of income, at rates often above those offered by financial institutions, for themselves or their families. Both Charitable Remainder Trusts and Charitable Annuities have the following tax advantages:
(1) They reduce the donor’s estate for death tax purposes;
(2) They create an immediate charitable deduction for income tax purposes--which is based upon the amount of income to be paid to the recipient and the recipient’s age; and
(3) If low-basis assets are contributed to a charity, the donor avoids paying capital gains tax on the appreciation of the contributed asset.
For individuals looking to make substantial gifts with no need for income, a private foundation is an excellent vehicle for not only generating an immediate tax deduction, but for also providing parents with an opportunity to include their children in family decisions as to which charities will be benefited in the future, and to create a charitable legacy for future generations.
A Crummey Trust allows a parent to make lifetime gifts to his or her children, free from gift or estate taxes as long as the amount is equal to or less than the permitted amount (currently $13,000 per year), while protecting the money in a trust. The trust allows a gift to be placed into a trust that gives the beneficiary access to the gift for 30 days, thereby giving the beneficiary a present interest in the gift. When the beneficiary refuses to withdraw the gift after having notice, the gift then goes into the trust until the child reaches a certain age in the future. The Crummey Trust was named after Clifford Crummey who successfully defended this investment technique against the Internal Revenue Service.
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