Trusts - Estate Planning
What is a trust?
A trust is an arrangement concerning property. It allows an individual to appoint someone to control property, but the property benefits a third person.
Example: Mr. Wilson wants to leave a sizeable sum of money to Dennis the Menace. Mr. Wilson worries Dennis will spend the money all on candy. To protect Dennis from himself, Mr. Wilson leaves the money to Dennis in trust in his will. Mr. Wilson puts restrictions on how Dennis can spend the money, and appoints Mrs. Wilson to oversee the money is spent according to the trust’s terms.
Do I need a trust?
There are many, many types of trusts. For most people, the need for a trust occurs when:
- The individual(s) have minor children.
- Solution: Contingent trust;
- Solution: Special needs trust.
- Solution: “Living trust.”
Contingent Trusts –
A trust to protect children
Contingent trusts serve their purpose in the event both parents pass at the same time. If that happens, two compelling benefits to having a contingent trust are:
- Avoiding a costly and burdensome guardianship proceeding; and
- Allowing young adults to mature before they receive sums of wealth
If both parents die simultaneously and have left everything to their children, the children will inherit property. This creates issues. In Texas, a minor child (a child under 18 years of age) is considered “incapacitated” and cannot hold property. Therefore, a guardianship proceeding in court becomes necessary to establish a guardian for the ward. Guardianships are costly and burdensome with reporting requirements. Further, the minor child gains capacity upon turning 18 and gains access to the funds or property.
The next advantage of the contingent trust is keeping sums of money out of the hands of young adults. The funds in a contingent trust are controlled by the terms of the trust and overseen by the trustee. Distributions can be made for the health, education, maintenance, and support of the beneficiary. Funds are then disbursed to the beneficiary when the beneficiary attains the age designated by the individuals parents.
Special Needs Trust
Protecting loved one’s benefits
Leaving property to an individual receiving Social Security and Medicaid benefits can result in the loss of benefits. The Federal Government sets strict limits on the amount of property one can own while receiving benefits.
Example: You leave $15,000.00 to someone receiving SSI and Medicaid benefits
The law: An individual cannot qualify for SSI / Medicaid if s/he has more than $2,000.00 of “countable assets.”
Result: The beneficiary loses his/her benefits until s/he falls back below $2,000.00 in countable assets. This means the person has to burn through their inheritance until they become eligible for benefits again.
Solution: The Special Needs Trust
The special needs trust allows beneficiaries to enjoy their inheritance without jeopardizing their government benefits. The trustee can distribute funds according to trust terms while generally avoiding expenditures on “countable assets.”
Living Trust –
Living trusts or “intervivos” trusts are used to avoid probate among other purposes. Click here to read about whether avoiding probate is necessary. Generally, in Texas an independent executor has all the necessary powers to administer an estate, making probate fairly efficient.
A living trust is created during an individual’s lifetime. The settlor (the person creating the trust) deeds assets to the trust. Generally, the settlor remains trustee for the duration of his/her life. Once the settlor passes, the next name trustee oversees the administration of the trust.
- More privacy
- Avoid probate
- Can be used to avoid guardianships
- Estate tax planning options
- Reduced ability for beneficiaries to challenge the trust (as opposed to a Will).
- A living will costs more to create.
- The person still needs a pour over will for assets that may not be deeded to the trust.
- Administrative burdens in transferring title (property) to the trust.
Everyone’s situation is different. If you think you may need a living trust, contact me.