When Creating a Trust, Timing is Everything: Measures to Consider As You Preserve Your Assets for the Next Generation
Trusts are no longer exclusive tools for large estates, as a greater number of families with various levels of income and wealth are using trusts to pass on their assets to the next generation. If you can answer “yes” to any of the following questions, it is time to review and update your current estate plan.
- Do you have an existing estate plan that was developed in 2011 or earlier?
- Do you own real estate in more than one state?
- Do you have beneficiaries under the age of 40?
- Do you have beneficiaries with a disability, addiction or other issue?
- Do you have a significant portion of your investments in a retirement plan?
Trust Advantages
A trust is an estate planning tool that can be used in a wide variety of circumstances to maximize the wealth passed on to beneficiaries, and also to set terms for how the funds can be used to address families’ unique circumstances.
Even if you already have a trust established or an estate plan, it is important that these plans be updated, as laws change often. For example, estate plans created prior to the large increase in the federal estate and gift tax exemption and the implementation of portability may result in a surviving spouse facing unnecessary financial restrictions and expense. Under the new federal tax laws, a married couple with an estate up to $10,900,000 in 2016 (or $5,450,000 for individuals) may create a simple joint revocable living trust that will:1) Avoid the unnecessary probate process; and 2) Guarantee tax-deferred distributions for non-spouse beneficiaries over the life expectancy of the ultimate trust beneficiaries, i.e. children, grandchildren.
Protecting and Gradually Handing Over Control to Young Beneficiaries
In the case of younger beneficiaries, a trust can be used to gradually transition control of assets, ensure the option of life expectancy tax-deferred distribution of retirement assets, and protect beneficiaries from the claims of creditors and spouses. Rather than use a one-size-fits-all, cookie-cutter approach, specific goals, personal preferences and personalities may be addressed when determining a plan that works for the family.
Overcoming Challenges of Creating a Trust for Beneficiaries with Disabilities
A Special or Supplemental Needs Trust (SNT) is a specific type of trust that can be created by a parent or guardian to benefit a person with a disability. When drafted correctly, a SNT allows a person with a disability to benefit from funds placed in the trust while still receiving public benefits.
A SNT may be created using assets of the beneficiary (the person with a disability) or funds from a family member transferred to the SNT following death through an estate plan. The trust funds may be used for treatment, education, and quality of life improvements for a person receiving public assistance. Rules and restrictions must be followed to allow the beneficiary of the trust to remain eligible for Social Security Income (SSI) and Medicaid by supplementing, rather than replacing, public benefits such as SSI and Medicaid.
SNT’s have a special status for Medicaid purposes. Trust funds are not considered a “resource” of the beneficiary that could disqualify the beneficiary from Medicaid benefits, provided that the trust is for the sole benefit of a person with a disability.
How to Plan for a Beneficiary Facing Addiction
Successfully covering an addiction issue in a trust requires sensitivity and an understanding of the disease of addiction. Naming a family member or corporate fiduciary is often not the best solution. Consider naming a person in recovery as trustee of a trust created for the benefit of the addicted beneficiary, as he or she may be in the best position to fully understand the issues faced by an addict. Once the trustee determination has been made, the next issue is creating the terms of the trust, which may include giving the trustee broad discretion for using trust assets and income for treatment, including the decision of where and when.
The current tax laws are such that for the vast majority of people, a plan that requires no lifetime restrictions and complete flexibility is available. A timely estate plan can preserve assets and address the unique challenges faced by many beneficiaries.