Trust me (I’m a lawyer)
Since the appearance of my last two columns, I’ve been asked about Trusts. What is a Trust? Do I need one?
Trusts can protect and manage assets for all people, not just the very rich. I’ve mentioned that placing property in joint ownership may not always be advisable, due to federal gift tax issues, transfer taxes, and, if no agreement is in place, the inability to regain ownership of the property if a relationship ends. Trusts may be the better way for same-sex couples to plan and provide for each other. Trusts are particularly useful where one partner holds significantly more assets, partners have other family and beneficiaries in mind, or one partner has financial or medical issues. In Delaware, a Trust can be used to avoid probate costs. Also, Wills are a matter of public record after you die, all can see your assets and beneficiaries. Trusts are private!
However, Trusts are not for everyone. Trusts are not necessary if you have little or no assets because of the legal cost to set up. But Trusts can be great planning tools for many situations.
How Trusts Are Created
“Testamentary” Trusts are created under your Will by language that creates Trusts after your death. A lifetime (inter vivos) Trust is created by an Agreement or other document you execute during your lifetime. The primary difference between a Testamentary Trust and a lifetime Trust is that estate assets going to Trusts under your Will have to go through probate.
Types of Trusts
Revocable Trusts, also called Living Trusts. These can be used to protect and manage assets, keep your assets and beneficiaries private, and avoid probate costs. With a Revocable Trust you keep control over the Trust during your lifetime. You can amend it from time to time, change the beneficiaries, and organize assets. But to avoid probate, all of your assets must be titled in your Trust’s name before you die.
Spendthrift Trusts. For a beneficiary who can’t handle money, this Trust is a good solution. Creditors can’t attach the principal. Spendthrift Trusts can limit regular payments to the beneficiary over his or her lifetime, or limit distributions to the beneficiary’s needs (tuition, rent, medical costs, etc.).
“Special Needs” Trusts. Same-sex couples should really consider this type of Trust if one partner has a debilitating condition. Such a Trust can pay for things that are not covered by Medicaid or other public benefits. Giving assets to a seriously ill person may disqualify the ill person for Medicaid and other public benefits. If you have a disability and create such a Trust for yourself, it will be a “Medicaid Payback Trust” because if there are assets remaining after you die, the Trust must pay back an amount equal to the public benefits paid for your care. A Special Needs Trust created for the benefit of your partner, however, can provide benefits without any payback obligation.
Charitable Trusts are irrevocable trusts created during your lifetime or after your death. Charitable Remainder Trusts distribute property to charities after you or your beneficiary receives distributions for life or a term of years. Charitable Lead Trusts make distributions to charities for a “lead” period. Then the property returns to your designated beneficiaries. Charitable trusts are used to reduce significant estate taxes. And significant can mean really significant. The federal estate tax is in limbo this year. In 2011 estate taxes could go back to 2009 rates—a flat 45% of taxable estates over $3.5 million, or estate taxes could go back to 2001 rates—rates from 41% to 60% of taxable estates over $1 million. Your taxable estate includes almost anything you own or control, starting with your net worth, plus life insurance, joint property, etc.
Irrevocable Life Insurance Trusts are created to own insurance policies so that the proceeds are not subject to estate taxes when the insured partner dies. Qualified Personal Residence Trusts (QPRTs) are another estate tax planning trust. You can transfer valuable real property to a QPRT that will give the property to your partner at a much reduced value for estate tax purposes, if you survive the QPRT’s term. A QPRT is irrevocable, so creating a QPRT is a very serious decision you can’t “take back.”
Finally, Pet Trusts can ensure your little fluffy ones stay pampered.
These are just some of the types of trusts you can create when planning. Our community has unique issues that can require creative planning to protect ourselves, our property, and our families. Trust me!
Renna Van Oot, Esquire practices at the Old Capital Law Firm in New Castle, Delaware. www.oldcapitallaw.com.
This column is distributed with the understanding that the author, Old Capital Law Firm, and publisher are not rendering legal, accounting, or other professional advice or opinions on specific facts or matters, and accordingly, assume no liability whatsoever in connection with its use.