Designing Our Future

Chapter 4

 

Trusts

 

 

 

  Lately trusts have become much more popular. A living trust is designed to do basically the same job a will does, but outside of the public eye. A will names an executor or executrix to carry out the creator’s wishes; a trust designates a trustee to do the same thing.

 

  Many professionals consider the trust one of the most versatile of all estate planning tools when it is used for the right reasons and in the appropriate manner. Insurance agents need to understand how they perform for two reasons: first, the agent may find trusts merge well with other estate planning strategies, and second, the agent will prevent him or herself from selling trusts ineffectively. Unfortunately, agents have been targeted to sell revocable trusts to everyone, regardless of whether or not it improves their financial status. When an agent is not personally educated on the uses of trusts, they may be persuaded to market them to valued clients only to discover the trust was useless.  Product salespeople sell to agents, just as agents sell to their own clients. Anyone who has a product or service to sell needs salespeople. As a result, professional agents must learn all they can about a product or service prior to presenting it. This would include the company offering it.

 

  There is no doubt that a trust can carry out one’s wishes just as well as a will (and outside of public scrutiny) but whether a trust does a better job depends upon its intended purpose, who creates it, where that person lives, and what accomplishments are desired. If asset control or management is desired a trust can probably accomplish that assuming it was properly created. A will would not be designed for asset management.

 

  Trusts have been used in estate planning for many years. When used appropriately, trusts can be a valuable financial tool. Setting up a trust is one way of leaving money to children, other individuals, or charities while controlling how assets may be invested, spent, and distributed. Testamentary trusts are established in one’s will and take effect upon the death of the trust creator. The creator can make modifications while he or she is living.  Because testamentary trusts are part of one’s will, they do not avoid probate.  

 

  A living trust, also called a revocable living trust, is also in effect while the trust creator is alive. The trust creator uses this type of trust in all ways – he or she can deposit, withdraw, spend, sell, or give away the assets within it. The person who contributes the assets to the trust is called the grantor. These trusts do not avoid taxation in any way. A common use is asset management. 

 

  An irrevocable trust may also be used while the trust creator is alive.  As the name implies, it is irrevocable, meaning it may not be changed or revoked once created, unless the trust document has made provisions to do so.  Irrevocable trusts are commonly used to remove property and the property’s future income and appreciation from the estate.  Why would a person want to remove assets from their estate?  Saving estate taxes is commonly the reason but there may be various personal reasons for doing so as well.

 

  A living trust should not be confused with a living will.  The living will, often referred to as a “right-to-die clause”, is a legal document that directs those in charge of one’s health care to allow death when maintaining life would require extreme measures.  In most states, the living will must be drafted prior to the knowledge of a terminal or serious medical condition.  Why?  So that those who might profit from their early death (prior to using up assets for healthcare) do not have the ability to pressure the individual into signing such a legal directive.

 

 

 

 

Defining a Trust

 

  A trust is an arrangement under which one person or entity holds legal title to real or personal property for the benefit of another person or entity, such as a charity. The trust will establish the rights and responsibilities of each involved party. A trust is a legal document that potentially continues to exist even though the individual creator may have died. A trust allows an individual to distribute his or her assets at death while still maintaining use of them during life. How long that trust continues depends upon the terms that were stated at its creation. A trust may be set up to accomplish virtually anything legal, but it is not necessarily the answer to everyone’s financial dreams.

 

 

  Trusts are often misunderstood. Some individuals believe trusts can accomplish anything they desire. Like all financial tools, trusts have specific abilities that, properly used, are beneficial but they do not fit the needs of everyone. Aside from a written plan, trusts are perhaps one of the most useful personal financial tools available as long as they are used appropriately and for the right reasons.

 

  Trusts are often used to avoid probate. While this is not sensible for all individuals, it is useful in many circumstances. It is important to note that some professional people should have their estates go through probate since it closes the window on the filing of lawsuits after a specific time period has passed. Assets in a trust continue to exist without a closure date, so the legal ability to sue continues to exist.

 

  Essentially, a trust is an arrangement whereby a creator transfers his or her assets to a legal entity (the trust) created in a separate agreement to be administered by an individual or institutional trustee for a specified beneficiary. The beneficiary can be anyone, including the trust creator. The trust creator may wear multiple hats: he or she is the creator, but may also be the trustee and the beneficiary. Well-written trusts can be a valuable financial tool. A poorly written trust is a waste of money no matter how little it cost to create. Appropriately written trusts can save time and money associated with the probate process, moving assets into the hands of designated beneficiaries more efficiently. Assets need not wait for the creator’s death to be transferred; they may be transferred prior to death if so desired by the trust creator.

 

  There are multiple types of trusts. An inter vivos trust (usually known as a living trust) operates while the trust creator is alive. The testamentary trust goes into effect after the trust creator’s death and is linked to the will. A revocable trust’s provisions can be changed while an irrevocable trust cannot be materially modified.  It should be no surprise that people prefer the revocable trust because it is possible to change the legal ownership of assets while still maintaining control over them. The asset ownership merely changes from the trust creator to the trust document, which he or she controls. Most states allow the trust creator to name himself or herself as both trustee and beneficiary. Because the trust is “revocable” the assets can be returned to the trust creator at any time.  Most trust documents can also be amended at any time, although this right must be granted at the time of the trust creation.

 

 

Irrevocable and Revocable Trusts

 

  While there are various types of trusts the two primary categories are revocable and irrevocable. As the names imply, one can be changed and the other cannot. Both categories of trusts can be valuable asset management tools when appropriately used. Trusts can be set up to exist for generations or the trust may direct the trustee to make partial and final distributions to specified beneficiaries at specified times. Once all assets are distributed, the trust either lives on as an empty vehicle or is ended, depending upon the terms of the trust. An empty trust serves no purpose unless there will be some future use for it.  An empty trust is typically referred to as a nonfunded trust.

 

 

  Trusts are very versatile. That is one reason they are used so often.  In the right hands, a trust can do virtually anything within the law that is desired. For example, if a person has several children, a family trust may be created that divides the assets into equal shares.  Each share becomes a separate trust for each child. The trust may direct the trustee to equally fund each child’s trust based on his or her personal needs. For example, if one child has already completed college while another has not, the trust could equalize the cost of college funding prior to distributing remaining assets. The trust would, in effect, fund comparable benefits prior to asset distribution.

 

Irrevocable Trusts

  An irrevocable trust may not be changed or revoked once created, unless this aspect is specifically granted within the trust document. An irrevocable trust is usually created to remove property and its future income and appreciation from an individual’s estate. Present interest and Crummey trusts are typically irrevocable trusts.

 

 

  Irrevocable trusts are often used for controlling how a beneficiary is able to withdraw or use trust assets. Many parents use irrevocable trusts to prevent a child’s spouse from having access to the trust assets should a divorce occur. A beneficiary who constantly has problems meeting their bills may also benefit from an irrevocable trust. While creditors could reach the income generated, they could not attach the asset itself.

 

  It is often assumed that assets in an irrevocable trust will be removed from the grantor’s estate value, but this is not necessarily true. It depends upon how the trust is drafted. If the grantor retains certain interests or powers in the trust, such as a life income interest or the power to affect asset distributions, the value will continue to be taxable to the grantor’s estate. Assets transferred to an irrevocable trust may be subject to gift tax when all control of them is relinquished so either way taxation may occur. The gift tax exclusion may shield a portion of the value, but the Internal Revenue Service is determined to collect all the taxes that are due – one way or another.

 

  It is possible to reduce taxation and remain within the law. For example, the gift tax may be less than the estate tax would be. An irrevocable trust created for the benefit of one’s children may provide a limited income tax benefit. The amount of this benefit depends upon how much other income the children already receive and whether the kiddie-tax applies to them. It is important to receive professional tax advice since many parents have inadvertently caused financial harm by transferring assets to their children prematurely.

 

  Very strict rules minimize the type of control that an individual or their spouse may keep over trust assets without causing the income to be taxed to them. Income will be taxed if it is used to pay for an item that a parent or guardian is legally obligated to provide as support for the beneficiary.  In other words, a parent who is legally responsible for a child may not arbitrarily move assets into the child’s name to avoid taxation.

 

Revocable Trusts

  Revocable trusts are the most commonly used type of trust.  Most people want to keep control of their assets, which is why they select a trust that allows this.  Also known as a living trust, it is created during one’s lifetime and may usually be amended or revoked at any time for any reason.  Poorly written revocable trusts sometimes overlook the inclusion of an amendment provision allowing change, in which case it would have to be revoked and rewritten if a change were desired.

 

  The trust provisions direct how the assets will be held and managed during the creator’s lifetime. Like a will, it can also direct how assets are to be distributed upon the creator’s death. The primary characteristic of a revocable trust is the power retained by its creator. He or she has full ability to use his or her assets in any way at any time. A revocable trust does not permanently commit the trust creator to anything during his or her lifetime since there is the ability to change or revoke the trust at any time. Once death occurs, it will carry out the directives within it. Upon death, it could be said that the revocable trust suddenly becomes irrevocable since the creator is no longer available to make changes or revoke it. If he or she gave these powers to trustees, the trust could move this ability on to another person or entity, however.

 

  Assets within a revocable trust are included in probate values, though not in the actual probate proceedings. All income and deductions available in the trust property flow back to the creator, so no gift taxes are ever incurred. Gift taxes could be triggered, however, if the creator gives up his or her power to revoke or amend the trust, or if income or principal is paid to someone else.

 

 

  There are no tax advantages to a revocable trust. There can be other advantages, however. It certainly avoids the process of probate and ancillary administration. It may also avoid legal guardianship. If the creator should become incapacitated, the assets kept in the living trust would be managed automatically by a trustee named in the trust document, assuming the attorney was wise enough to list a contingent trustee for such situations. If no contingent trustee was listed, the courts might assign an individual, so listing one is always a wise decision. In fact, a good attorney will probably draft a durable power of attorney at the same time a will or trust is drafted.

 

  If a trust creator wishes, he or she can relieve themselves of the responsibility of managing their assets when creating a trust. If this were their desire, the trust creator would use an independent trustee immediately upon trust creation to manage the assets or investments placed into the trust. This trustee would do all that was necessary, including payment of bills and taxes, for a fee.

 

  As with most things, there are disadvantages in utilizing a revocable trust. There are legal fees and expenses, little or no financial savings, taxation of gifts made directly by a trustee, and title issues for some types of assets, especially real estate. Once assets are moved into a trust, personal business affairs must be conducted through the trust.  While this is not difficult, it can be cumbersome, requiring more steps than would otherwise be necessary.

 

 

  Except for assets that allow a stated beneficiary, such as life insurance policies and annuities, anything outside of the trust will be subject to probate. A major mistake commonly made by creators of trusts is the misconception that a will is no longer necessary. Every individual of legal age should draft a will, even if a trust has been created. We will be stating this fact numerous times throughout this course because it is very important.

 

Example:

  Jeremy drafts a trust so he does not consider it necessary to also draft a will.  His mother does have a will that leaves all her assets to Jeremy.  Jeremy’s mother is unexpectedly admitted to the hospital. On the way to the hospital Jeremy is involved in a car accident and is hospitalized. His mother dies the next morning, and her assets legally go to Jeremy upon her death. Jeremy dies two days later.  Since Jeremy did not have a will and his mother’s assets were not included in his trust, all the property he received from her must go through probate. With no will, Jeremy’s inherited property will be distributed according to the laws of his state – not according to his personal wishes.

 

  Revocable trusts may be ended at any time or they can continue until all assets have been depleted. If that never happens, the trust can continue indefinitely. Everything depends upon the language of the trust (which is why they are so versatile). Trusts are often used to control assets when the beneficiary is seen as someone who is not trustworthy to control the wealth personally. While this is often the case for minor children, it can also apply to an adult who lacks the financial skills necessary to handle large inheritances.

 

  Trusts are often used for minors, since they can financially care for a person over time. A will does not have this ability. A trust allows the appointed guardian greater ability to apply funds as the parents would have wished.  Without a trust, the guardian would have to qualify each child, giving bond (guaranty with surety) to secure performance of his or her duties. Most states restrict how assets may be spent for minors, usually restricting it to land, government bonds and other legals. Each state will have specific laws regarding the use of funds on behalf of minors. Most states do not allow a guardian to use up principal, even for the purpose of education, without the approval of the court. Of course, these laws are for the protection of minor children. A poorly set up trust could provide the guardian extensive authority, enabling him or her to deplete funds intended for the long-term use of the children. Even if the depletion were not intentional the negative effect would still cause financial harm.  State laws attempt to prevent the misuse of funds intended for minors, but that is a difficult task. Therefore, it becomes especially important to draft a trust that is appropriately worded when minor children are involved.

 

  A trustee under a trust is typically paid more than a guardian would be under a will and the cost of this must be considered. Before choosing to use a trust the testator must be certain that enough funds exist to pay the trustee and still accomplish that which is desired. Inadequate trust funding may financially benefit the trustee more than the intended beneficiaries. This is not the fault of the trustee. All professionals charge a fee for their services. Professional trustees clearly state their fees for trust management. Those fees are unlikely to be reduced even when trusts are poorly funded.  Inadequately funded trusts could experience trust fees taking the assets intended for beneficiaries.

 

 

  Even though a trust might be preferred, if there are not enough assets, a will might be the wiser choice. Under a will income producing assets left to minors generally would be given outright to the child when legal age is obtained.  Legal age will depend upon the state in question.  The testator may not feel an 18 to 21 year old is wise enough to manage some types of assets making a trust seem prudent but, unless adequate assets exist, it may not be a viable alternative. 

 

  Trusts are often used in cooperation with life insurance policies.  When used together, the proceeds from the policy are made payable to the trust rather than a named person.  This allows the proceeds to be available for payment of debts, funeral expenses, administration, and taxes.  Having life insurance proceeds available for such purposes avoids the forced sale of assets to cover obligations.

 

  When trusts are utilized, individuals often direct pension and profit sharing benefits to the trust.  Though not required, it often makes sense to do so since there are already trustees involved that can manage the funds.

 

  The use of trusts is available to anyone of legal age.  However, interest has primarily come from older people with large estates.  It is common to name one or more of their children as trustee or co-trustees. Many professionals recommend naming more than one trustee in case one individual is unable or unwilling to serve in the position.  Some trusts stipulate that two or three trustees must exist, prohibiting a single person from having sole power over distribution of assets.  Some trusts combine a family member with a professional trustee, with the hope that each will contribute different perspectives.

 

  While there may be many reasons to select a trust, a common reason has to do with legal residences.  It is now common for retired people to move to warmer climates away from their children.  When the trust creator lives in a different state than the intended beneficiaries a trust may bridge state laws easier than a will would.  That is because a will must be probated according to the domicile state’s laws; a trust does not have the same restrictions.

 

  Probate proceedings are public hearings.  Some individuals desire more privacy than afforded by a will.  It is possible to file a will in a different county and this does afford some privacy, but it will still be a public hearing. For those who wish privacy, a trust is recommended. Trusts may also avoid some types of delays that would exist with a will. Delays often happen in probate due to assets that are not easily valued or transferred. The same difficulties will exist if the asset is placed in trust, however, since the problems come not from probate but rather from the asset itself.  The trust may be instructed to hold an asset until a more favorable market exists for the difficult-to-value asset, but this is not necessarily an advantage for anyone, including the beneficiary who may want the value immediately.

 

  It is common to set up a trust but not fund it. A trust that does not contain assets is referred to as a non-funded or empty trust. Technically a trust does not actually come into existence until it is funded. It is the assets that make the trust viable. Trusts might be non-funded intentionally for some reason (waiting for insurance proceeds, for example), but more often it is a lack of practical experience that allows this to happen.  The testator simply did not know how to legally fund their trust. If the testator thought they had funded the trust, but did not complete the asset transfer, he or she has created a very difficult situation for those who must deal with his or her estate. If a will does not also exist, assets will have no legal protection.

 

 

  Establishing a revocable trust is more expensive than creating a will. Trusts usually cost more to establish and more to maintain. Attorney fees and fiduciary fees are likely to be equal between a trust and a will when settling the estate.

 

  Consumers often expect trusts to do anything they consider desirable. In reality, while trusts can be used in many ways, they do not achieve everything desired. Revocable trusts do not save taxes. Taxation will be the same whether the estate is settled through probate (using a will) or through a revocable trust. Unfortunately, revocable trusts have been sold because the purchaser thought it would act as a tax avoidance vehicle.  In 1990, several states brought legal suit against insurance agencies and other organizations for this reason. Since then, those selling trusts have had fewer complaints regarding misrepresentation, but consumers continue to expect to save taxes through a revocable trust.

 

Present Interest Trusts

  Some types of trusts work well when giving gifts to minors, including the present interest trust. Congress enacted special rules to provide a well-defined method of making gifts to minors that qualify for the annual exclusion. The Internal Revenue Code provides that a gift to a qualifying trust established for a child under the age of 21 will be considered a gift of a present interest and thereby qualify for the annual gift tax exclusion. The trust instrument must provide that the gift property and its income:

·        May be expended for the benefit of the beneficiary before reaching age 21, and

·        To the extent that it is not expended, will pass to the beneficiary upon becoming age 21.

 

  The child must have the right to receive trust assets by age 21. Even so, trust assets are not required to automatically be paid to the child when he or she becomes 21 years old. As long as the child is notified, the trust may give the child the ability to withdraw everything for a period of 30 or 60 days. Once the withdrawal period ends, if the child did not withdraw them, the property stays in the trust and is administered according to the terms of the original document. Should the child die prior to the age of 21, funds must be payable to the child’s estate or under the terms of appointment.

 

 

  The Internal Revenue Code establishes the age standard of 21, so it applies to trusts for children under that age even if state law has the age of majority as less than that.

 

  A Present Interest trust works well when accumulating income for non-tax reasons. It may not be suitable for large gifts due to the requirement that trust funds be payable to the individual at age 21, or at least provide that option. Not every parent or grandparent may want the funds available at that age since the child may not be able or willing to use the money in a positive manner. Additionally, if the funds remain in the trust, it is likely that the taxation level will dramatically increase after age 21.

 

Crummey Trusts

  Also designed to receive gifts, the Crummey Trust is different than the Present Interest trust since an individual can transfer property and have the gift qualify for the annual gift tax exclusion. The distinguishing feature of the Crummey trust is that it gives the beneficiary the right to demand annual distributions from the trust equal to the lesser of either the amount of the contributions to the trust during the year or a specified amount. The specified amount may be stated as either a dollar amount or a percentage of the total trust value. The beneficiary or the beneficiary’s legal guardian must be notified of the power to withdraw the trust corpus, although the power is permitted to lapse or terminate after a short period of time, such as 30 days. If the beneficiary does not make a withdrawal demand during the stated period following deposit, called the window period, the right lapses for that year’s contributions.  Since the beneficiary or his or her guardian has the right to demand distribution of the year’s contribution, that contribution is considered a present interest, so it qualifies for the annual gift tax exclusion.

 

 

  In theory, the minor beneficiary or his or her guardian is not likely to demand distribution since it is assumed that no further contributions would be made in subsequent years. The gifts might stop if the funds were withdrawn and spent. Because of this assumption, these types of trusts are often called “broken-arm trusts.”

 

  Crummey trusts can be very flexible. Once the withdrawal power has lapsed following the window period each year, the trustee can be required to accumulate income until the child reaches a specified age. The trustee can be restricted to using trust assets and income for specific purposes, such as school expenses. The trust may also perform as a vehicle for permanently removing assets from the parents’ gross estate. The Crummey trust’s income is taxed to the beneficiary who allowed their withdrawal right to lapse. Therefore, once the beneficiary is over the age of 13, the income will be taxed at their rates, which will avoid the punitive tax rates applied to trusts.

 

Totten Trusts

  The Totten trust is referred to as an “in trust for” account or trust. It is created when the donor deposits money into a bank account for the benefit of a minor, then names him or herself as trustee. This is an informal and revocable arrangement under certain states’ laws. Upon the donor-trustee’s death, the funds avoid probate and pass directly on to the minor. The trust is not considered a separate entity for tax purposes because the donor retains complete control over the assets in the trust. Accordingly, the donor will be taxed on the income as if the trust were not in existence. Assets in the trust will be includible in the donor’s estate.

 

 

 

Life Insurance Trusts

  According to Ernst & Young’s Personal Financial Planning Guide[1], next to one’s home, life insurance policies are often an individual’s most valuable asset. What many people do not realize is that life insurance proceeds payable to one’s estate will be included in the gross estate for estate tax purposes. Merely retaining even one of the incidents of ownership will cause the proceeds to be included in the estate, regardless of who the policy’s beneficiary happens to be. In order to minimize estate taxation, someone other than the insured should own the policies. All incidents of ownership must be transferred to children or a trust for the family’s benefit. This will bring about significant tax advantages. To be effective, however, it must be properly executed. The gift must be made more than three years prior to death.  The three-year waiting period may be avoided on a new policy if proper steps are taken to have someone else, such as the trustee of an irrevocable trust, apply for the policy. One way to do this is to apply the annual gift tax exclusion to cover contributions of money made each year to the trust for the purpose of paying premiums. The trust can therefore be used as a powerful way to leverage the annual exclusion to get insurance proceeds to the heirs without income, gift, or estate tax.

 

  We often hear that trusts do not prevent the payment of taxes and this is generally true. However, how trusts are used can save on the types of taxes an individual must pay. Life insurance proceeds are free from income taxes when they are paid to beneficiaries. However, the death benefits are included in the insured’s estate and this impacts the beneficiaries. If there is considerable life insurance, the taxable impact is great.  It can increase the taxable rate to as high as 55 percent of the entire estate. An irrevocable life insurance trust avoids estate taxes because it is a separate legal entity in which the insured has no financial or ownership interest. Once the life insurance policy is transferred to the trust, the insured has no control or rights of ownership in the life insurance policy. That is the reason there are no resulting tax liabilities. This may also be accomplished by turning over the rights of the policy to the beneficiaries, usually children, but this lacks the planning flexibility offered by a life insurance trust.

 

 

  Not planning for estate taxes is a major error made by most people. Even with the higher unified tax credit, life insurance can easily push an estate past that mark. Under a life insurance trust, the trustee manages the life insurance trust, maintaining the policy during the insured’s lifetime by paying the premiums as they come due. At the insured’s death, the trustee receives the policy proceeds and follows the directives of the trust. The trust may immediately disperse the life insurance proceeds or pay specific amounts at specified intervals, depending upon the trust directives. In addition to saving estate taxes, the death benefits are paid to the survivors without the costs and delays of probate or estate settlement.

 

  Establishment of a life insurance trust is not difficult, but it must be done correctly. Otherwise, there will be no tax advantage. A life insurance trust may be created by transferring an existing policy to an irrevocable trust.  The transfer is considered a taxable gift, but the tax is calculated on the surrender value of the policy, which is usually less than the death benefit. Term policies may also be transferred with the gift amount being only the amount of the current year’s premium paid in as of the transfer. The tax cost of transferring a policy during one’s lifetime could be much less than the estate taxes due at death. Again, it is important to note that transfers made within three years of death will still be included in the taxable estate, so it is not wise to wait until illness or injury exists.

 

  Once a life insurance policy is placed into an irrevocable trust, all rights to the policy are lost. The insured cannot cancel or amend the trust or withdraw the assets. Even the beneficiary designation may no longer be changed. Therefore, it is very important to use only those who understand how such a trust should be drafted. The trustee must be an individual who also understands the importance of the goal. These selected individuals must have tax and estate planning expertise. There will be costs involved in setting up and administering the trust, but these fees can be more than offset by the tax savings.

 

Grantor Retained Annuity Trusts (GRAT)

  Some types of assets are more difficult than others to transfer. Those having a fair market value that is easily measured, such as securities, do not present a problem but others that must have their values established can cause delays in distribution or transfer.  Some values, such as a business interest, can be very difficult to value.

 

 

  A GRAT can enable a business owner to transfer a large amount of stock or an interest in a partnership to another person at a reduced gift tax cost.  Grantor Retained Annuity Trusts are typically used for transferring interests in a closely held business, but it may also work well for publicly traded stock or real estate that is expected to appreciate significantly.

 

  When using a GRAT, the individual transfers property to a trust for a fixed term of years.  During the trust term, the beneficiary would receive a fixed stream of annuity payments.  When the term expires, any property remaining in the trust would pass on to the owner’s children.

 

  A GRAT should be set up as a grantor trust for income tax purposes, regardless of the type of property intended to fund it.  This is very important when the transfer will be S corporation stock since a grantor retained annuity trust is qualified to hold such stock.  Grantor trust status prevents capital gains from being triggered if some of the trust property is used to satisfy the annuity payments.  All income and capital gains will still be reported on the owner’s income tax return.  If the owner dies during the trust term, the trust property will be includable in his or her estate.  If this were to happen, the owner would be in approximately the same position whether such a trust had been created or not.

 

 

Money Management Tool

 

  Trusts provide a valuable money managing service.  By transferring assets into a trust, it is possible to assign a trustee or trustee company to the duties of managing money and assets.  Asset management is often desired when grantors feel their beneficiaries are not capable money managers.  Banks and trust professionals will certainly charge a fee for performing these duties, but if the beneficiary is likely to mismanage the money or assets, that fee may be money well spent.

 

  The trustee does not have to be a professional.  Any person may be designated as a trustee.  It should be noted, however, that no matter how good a friend might be, he or she may not have the time or expertise to properly manage the trust assets.  This should certainly be taken into consideration before assigning these duties to them.

 

 

 

Probate Considerations

  Asset arrangement is just as important as the vehicles used to distribute them. Poorly organized assets or assets that are difficult to value can be very difficult, as we have said, to distribute. While every American of legal age needs a will, there are some aspects of probate that must be considered and that may indicate the need for a trust (in addition to a will – not in place of it). 

1.     Distribution under a will becomes public record. Anyone can find out what an individual owned, whom money was owed to, and how property was distributed. Filing the will in a different county can minimize this, but it still remains a public document.

2.     If a will is not properly drafted, or if values of assets are difficult to ascertain, property may be tied up for part or all of the probate period. This can be avoided by a properly drafted will with assets designed to provide living expenses for the beneficiaries during the probate process or a trust can be used in conjunction with the will.

3.     The assigned personal representative will not know as much about the assets as the decedent did. If proper instructions and organized information is not readily available, neither a will nor a trust will progress properly. It again comes down to organizing assets in a manner that can readily be transferred.

4.     Some estate planners feel that a public document, such as a will, encourages claims against the estate. Those who might not otherwise have come forward will read the estate records and then file a claim. While this could happen, the claim would have to be legitimate for it to be paid. Of course, no administrator wants to spend their time fighting bogus claims.  However, under a will, at some point claims against the estate do close, which may not happen with a trust if it continues indefinitely. Depending upon the state, a will typically closes (allowing no additional claims) between three and six months following death. Some individuals may want the closure of probate. An insurance agent’s estate should have such closure because the threat of lawsuits exists as long as there are existing policies. Since a trust continues to exist after the testator has died lawsuits can continue to be filed.

5.     Some trust advocators feel estate fees might be higher under a will than a trust.  This really depends upon numerous factors. A will can experience high expenses if it is challenged or contains complicated or unusual assets. A trust may go smoother since it is harder to challenge and can allow longer periods of time to work with assets.

6.     Probate courts follow state laws. Laws may require probate courts to designate appraisers and/or guardians to protect the interests of minor children or handicapped adults. Such appraisers and guardians must be paid from the estate.  Trusts can designate their own guardians, although payment would still apply.

7.     Taxes can only be minimized by surrendering the property during life. Many states do not have death taxes.  In those cases, only federal taxation would be a concern. Smaller estates would not be affected by federal taxation.  Revocable living trusts do not save taxes. At most trusts might delay payment of taxes; not prevent them.

 

 

 

  Trusts absolutely make sense in specific cases.  Even when trusts should be utilized, however, a prudent estate planner still drafts a will for their clients (yes, you’ve heard it before but it bears repeating).

 

  There are alternatives to probate including:

1.     Create a revocable living trust to hold and distribute the property at a specified time or at death. A trust covers only those assets that have been transferred into it.  No trust covers any item that has not been addressed by the trust or transferred into it.

2.     Give the property to an irrevocable trust during one’s lifetime. An irrevocable trust, as indicated by its name, is permanent.  It is possible to allow changes to the trust, but often no such provision is made. Assets given to an irrevocable trust are distributed (given away). Unlike the revocable trust, the creator of the irrevocable trust gives up access and use of the assets. As a result, they are removed from the person’s estate.

3.     Give the property or assets directly to the beneficiaries during life. This might especially be wise if the beneficiary is a tax-deductible charity. One caution: no one should give away so many of their assets that they cannot live comfortably for the duration of their life. We cannot predict our life span. Even if currently ill, unexpected life duration may occur. Medicaid has a “look-back” period so that assets given away prematurely may affect eligibility.

4.     Transfer property to family members or friends in return for their agreement to make annual payments to the testator during his lifetime. This is known as the Private Annuity method of property transfer. It would be wise to check with a tax advisor prior to doing so.

5.     Put real estate, securities, bank accounts, and other assets into joint ownership. This allows the surviving owner to continue using the assets after the death of one of the parties.

6.     Purchase life insurance and annuity contracts with part of the assets. It is important that beneficiary designations be kept current.

 

  In those states having community property agreements, transfer of property will go to the surviving legally married spouse.  Community property agreements may vary from state to state but they have one basic similarity: when one spouse dies assets pass to the surviving spouse.  Even when community property agreements are used, a will should be drafted in addition to it.  No matter what the financial vehicle a will is needed.

 

 

  Some estates combine a revocable and an irrevocable trust, putting some assets into each. Some assets do not do well in a trust because the costs of administering the assets eat up their value. For example, an automobile should not be put into a trust. Some types of real estate also do better under a will. Trust records must be kept, so this is an ongoing expenditure.

 

  Smaller estates generally do best under a will. However, it is still a good idea to minimize probate time and expense. Smaller estates can cost a larger percentage of the total estate to settle than large estates. This is especially true if assets have not been well managed or organized.  The most practical steps are:

1.     Put as many assets as possible into joint ownership.

2.     List a direct beneficiary on any asset that allows one. Obviously, this would include life insurance policies and annuity contracts.

3.     For married couples in those states that allow it, have a community property agreement drawn up by an attorney.

 

  Joint ownership does create risk.

 

For example:

  Jackie is a widow.  She puts her grown daughter, Margaret, on her checking account. Margaret has the right to spend Jackie’s money – even if it doesn’t belong to her. A year later Margaret’s marriage is having problems and there are more bills than income. Already stressed by her marital problems, Margaret uses her mother’s money to pay personal bills. She intends to repay her mother’s account, but as we know, that seldom happens.  Since Margaret was already short on funds, she had no way to catch up and repay her mother.  Each month finds her short of funds so Margaret continues to dip into her mother’s money. Eventually Jackie notices what her daughter is doing but by then it is too late. Most of her funds that were intended for her retirement are gone. Additionally, Margaret’s marriage has ended and she has no way to repay her mother. Even though Jackie may have chosen to help her daughter financially, she was not given the choice. Because Margaret had legal access to the funds, Jackie has no legal recourse even if she would have chosen to pursue one.

 

  It is very important to give joint ownership some thought before proceeding. Even though Jackie trusted Margaret she could not foresee the results of her financial decision.  This is true even when there is no intent on the part of the parties.

 

 

For example:

  Mark names his son, Andy, as joint owner of his annuity. A few years later the IRS levies Andy. Because Andy has joint ownership, the annuity is attached for payment.

 

  While joint ownership certainly has some estate advantages it should not be used without careful thought beforehand.

 

  Many estates will be relatively simple to settle.  Taxation will not be a consideration due to the assets involved or the size of the estate.  The net taxable estate will consist of:

1.     All property that is owned at its value on the date of death.

2.     All or part of any property that is owned with a spouse as a joint tenant with rights of survivorship.

3.     Life insurance and annuity proceeds.  Even though the proceeds may pass outside of probate, their value must still be stated in the probate proceedings.

4.     Pension and profit-sharing benefits payable to the estate.

5.     Certain other types of assets (it depends upon the state of settlement, which is not always the domicile state.).

 

  From these total assets will be some deductions:

1.     Debts, including taxes,

2.     Funeral expenses, and

3.     Costs of administering and settling the estate.

 

  In those states that impose inheritance taxes, life insurance is sometimes exempt from the tax if the policy named a specific beneficiary.  If a trust was used, it is generally acceptable to simply name the trust as the beneficiary.

 

  Lump sum pension and profit-sharing benefits generally are not subject to the federal estate tax as long as it is payable to a designated beneficiary.

 

 

  A survivorship clause is included in many wills, even those that cover few assets. A survivorship clause requires the beneficiary to live a specified amount of time before collecting the proceeds. That time period is usually 60 days past the time of death of the decedent. The aim of such a clause is to keep the assets within the family.  This is usually referred to as keeping them “within the bloodline.”

 

For example:

  Richard marries Sally. It is the second marriage for both of them. Both have children from their previous marriage. Each wants to include the other in their will but they also want to protect their own children. If Richard and Sally were to be in a common accident, one might die shortly before the other. To prevent assets from going to one spouse and then on to that person’s beneficiaries a survivorship clause is included in their wills.

 

  Unfortunately, they are riding together in a car that is involved in a traffic accident. Richard is killed instantly. Sally survives the accident although she is seriously injured.  Sally is taken to the hospital where she lingers in a coma for a week before finally dying.  If no survivorship clause were listed in Richard’s will, his assets would go to Sally. When she died a week later, the assets would then go to her beneficiaries as listed in her will (rather than to Richard’s children as both of them intended). Sally’s children would now receive both her assets and Richard’s. Richard’s children receive nothing.

 

  Given the same scenario, but with the addition of a survivorship clause, Richard’s assets would be frozen for 60 days. If Sally lives beyond 60 days, she would receive his assets, even if she died on the 61^st day.  Since she died one week later than Richard, his assets will go to his children, as directed by Richard’s will.  Sally’s children will receive her assets, as directed by her will.

 

  Richard could have elected to give Sally his assets during her lifetime with a clause that his assets then go to his surviving children. That would keep any remaining assets of his within his bloodline, no matter how long Sally might live.

 

  When minor children or disabled adults are the intended beneficiaries, guardians are named. There are two types of guardians: for people or for property.

 

  Although the same person can be the guardian of both people and property it is seldom wise to do so. There is greater protection when one person is the guardian of minors and a different person is the guardian of the property that funds their support.

 

  The best physical guardian is usually a family member who has a warm loving relationship with the children. This person may not be suited to also monitor the finances, no matter how well meaning they may be. The person best suited to handling assets may not have a loving relationship with the children. Often a bank is designated as the property manager and a relative is designated as the physical guardian. Having two guardians, even if both are related, often is the best financial protection for the children. There is the added protection of two people watching out for their well-being instead of one.

 

 

  All wills name an executor or executrix. An alternative is also named in case the first choice is unable or unwilling to perform the required duties. The alternative performs the function only if the first named individual is not available. Some states require that the executor be a state resident. With the mobility of our society, it is important to update wills at least yearly so that the estate does not end up without a legal executor available.

 

  Parents with minor children often find that trusts work well for them. A trust gives the parents, even after death, more control. This is because:

1.     A trust often provides more flexibility in the types of investments that can be made on behalf of the children. Since funds must last longer when children are involved, a diversified investment plan is usually preferred.

2.     In states where trusts are not under court supervision, an out-of-state trustee may be named.  This is often desired when children are involved. Aunt Bess may be the best financial guardian, but she lives in a different state. A trust will allow her to control the funds.

3.     Money that is not intended for the children’s support may continue to be held by the trust for them even after they reach legal age. It is not unusual for a trust to hold funds until the minor reaches the age of 25 or more.

4.     A trust permits the property to be distributed for minor children according to their personal needs. This allows the estate to follow the desires of the parents.

 

  A trust is a very versatile estate tool. Consumers should concentrate less on turning the trust into a tax avoidance vehicle while looking closer at its versatility.

 

 

 

Trust Language

 

  Everything involves language. From the time we are born we depend upon our communication skills. Whether it is a child seeking comfort or an adult seeking a promotion, language is how we communicate our desires. Those who develop this skill find it a rewarding benefit in their personal relationships and their profession.

 

  Language is based upon several components, one of which is the use of words. For the insurance agent, terminology may seem very boring, but use of language involves use of terms. Of course, it is how we use the language (words) that either achieves or fails to achieve our objectives. Those who love language, such as politicians and actors, have learned to develop not only the words but also the elements that go along with them, such as voice inflection and body movement (referred to as body language). Any individual can learn these skills although some seem to come by it naturally. Language and presentation is very important to the actor or politician, but any person who develops these skills benefits in some way. Most of us know someone who is unusually articulate, such as the woman who campaigns for animal rights or the man who speaks at our church. 

 

  Language plays an important role in any salesperson’s life. One element of communication is the ability to bridge education gaps. The agent has knowledge not possessed by the layperson, but it is important that the layperson understand what is being presented for use in a financial plan.

 

  Terminology is very important in the use of trusts and other legal documents. Whether it is a life insurance policy or a trust the client must have a basic understanding of what they are accomplishing (or not accomplishing in some cases).  It is not possible to have a basic understanding of trusts unless industry terminology is understood.

 

 

 

Trust Creator

  The person who sets up the trust is known by multiple names, but usually he or she is called the grantor or settlor. Although it is possible to set up a revocable living trust solely for the grantor, this makes little sense. Usually the trust is set up for the benefit of specific beneficiaries. The beneficiary does not have to be a person; it can be an organization, such as a charity.

 

Trust Types

  There are multiple types of trusts. A testamentary trust is created under the directions of a decedent’s will; a person who is still alive sets up an inter vivos trust.  The principal in the trust is commonly referred to as the corpus.  The trustee may also be referred to as the fiduciary. 

 

  A trust that must distribute all of its income, without any discretion on the part of the trustee is called a simple trust. When the trustee has the power to accumulate income or to exercise certain discretion it is called a complex trust. A reversionary trust is set up to allow the principal in the trust to go back to the grantor under specific conditions or after a specified time period has passed. Therefore, although the grantor may no longer have any interest in the trust property or income, he or she may have a reversionary interest.

 

  Financial planners love trusts for their versatility, a quality not offered by most financial tools. Because a trust is a legal document that may be drawn up in a variety of ways there is no “right” way to set up a trust, although it must follow the laws.  In other words, while a trust is versatile, it may not do anything that is restricted by law.  It has become popular to use a generic trust.  Originally these were made up of an assortment of forms that the private individual filled out themselves, but now they are more likely to be a computer program. These are purchased by anyone who wishes to set up his or her own trust. Like the tax preparation programs, the user enters their home state and follows the format of the trust program. Of course, such programs are not likely to allow for personal needs and many professionals feel they accomplish very little in the way of financial planning.

 

 

 

Trust Distribution for Minors

  Trustees may be given broad or limited powers, depending upon the provisions of the trust. Trustees typically have the power to distribute income and principal as necessary for the health, education, and support of any minor children. The exact powers to distribute income and principal will always depend upon the provisions of the trust, but when minor children are involved that is usually the intent of the trust document.

 

  Trusts can do whatever the grantor intended (within the limits of the law). A trust may be set up to provide each child with a proportionate share of the estate. The needs of each child may be individually considered, allowing for one child’s needs separately from another. 

 

  In a spray trust the entire principal is available to support the children until the youngest reaches a specified age. The trustee determines the needs of each child individually as long as they are minors. A spray trust terminates when the youngest child no longer needs to be supported. The exact age varies depending upon the situation and the provisions created by the trust. Once the youngest no longer needs or is allowed support, the balance of the estate is typically divided equally among the children. Of course, it is not mandatory that proceeds be equally divided. As always, it will depend upon the trust provisions. Spray trusts usually also address how funds will distribute if one of the children becomes deceased, with options of dividing that child’s portions among the remaining children or allowing their portion to go to that child’s specified heirs.

 

 

 

Selecting Trustees

 

  Simply naming a person to act as a trustee does not mean he or she will accept the position.  Selecting a trustee is an important decision and must be given great thought.  Many professional money managers prefer that an institution, such as a bank or trust company, share the position with a private individual, such as a relative.  The trust creator has no way to know if the private individual will be willing to serve, able to serve, or serve appropriately.  Having an institution whose sole job is acting as trustee provides the expertise that may be necessary to handle the job legally and responsibly.  Having a private person also serve keeps the personal desires of the creator highlighted in all trust decisions.  A personal friend or family member acting as trustee is especially aware of the appropriateness of decisions affecting minor children.

 

 

  While it is not necessary to have co-trustees (two or more people performing the role), many professional planners always advocate two or more in the trustee position.  Especially if the trustee is given broad powers, having more than one unrelated person performing the job is likely to prevent abuse that could rob the beneficiaries of their rightful income.  It is seldom wise to have a family member or friend act as a sole trustee.  While we think we can rely on those we love, that is not necessarily true.

 

  Each state will have specific laws governing trust documents.  Of course, the federal government will govern federal tax treatment of trusts.  A trust will not generally be recognized for federal tax purposes unless steps have been taken to avoid the dangers involved with revocability, reversionary interests, or retained powers.  It can reasonably be argued that any trust that may be revoked by its grantor belongs to the grantor.  In other words, a grantor who can put property into the trust and take it back out obviously still owns the assets involved.  Additionally, a grantor who can create the trust and also terminate it still owns the assets involved.  Therefore, the trust provides no tax benefits.  Tax benefits would exist only if the grantor terminates his or her rights to the assets involved.  As long as the grantor retains the power to revoke the trust, the value of the property (assets) is includible in his or her gross estate at the time of death.

 

 

Probate Protection

 

  Couples that wish to protect each other from what they perceive to be a potentially difficult probate process often creates trusts.  In such cases both of the people will probably serve as trustees for their trust.  They could even be the beneficiaries.

 

For example:

  John Jackson and Julian Floyd live together as a couple.  Although they have not legally married, they act as a married couple would with the same loyalty and responsibilities. They do not plan to have any children. John and Julian want to financially protect each other but because they have not married they are concerned that probate may not achieve what they wish, so they create a trust.  In the trust they name themselves as both co-trustees and beneficiaries. Their intent is to allow each other to receive all trust assets should one of them die and to manage the assets if one becomes disabled. They also want to have use of their assets during life and be able to make changes or perhaps even end the document if they wish, so the trust is a revocable trust. Each person also drafts a will, naming the other as his or her beneficiary.

 

 

Proper Trust Use

  Trusts are a very flexible estate-planning tool, but unless they are properly drafted little may be achieved. The most common mistake is failing to properly transfer assets into the trust.  In some cases, assets are placed in the trust that should not be since the trust makes use or sale of the asset more difficult. Despite these possible problems, trust documents are often used since they have the ability to solve many financial concerns. Revocable trusts typically allow the trustees to direct and control income and principal within the trust, move assets in and out as desired, and distribute assets as desired at death or even long after the creator’s death. Since a trust document does not die with its creator (unless specified to do so) it has the ability to continue to manage assets long after the trust creator’s death. A trust is so flexible that the possible choices are endless.

 

  Many agents have become involved in selling revocable living trusts. It is necessary to know what is being sold in order to avoid lawsuits. Unfortunately, many agents have sold trusts at vastly inflated prices only to discover that little was achieved for his or her client. For the career agent, this is a deadly mistake. Clients who once trusted their agent will cease doing so. It is important to note that Errors and Omissions liability insurance will not cover a trust lawsuit since trusts are not insurance related. Although they may direct funds from a life insurance policy, that does not make the trust an insurance document – it is merely an instrument used to direct insurance funds.

 

  There is much conflicting information regarding trusts and what they can accomplish.  Some of the conflict may be attributed to differing opinions or state laws that are not uniform.  In our view, some of the difference of opinion depends on the context of the information: an author who wishes to sell his book may state different views than an attorney who is considering specific laws within his or her state or specific use of assets within the trust.  While trust sources may express different views, those wishing to use a trust must do so with correct information based on the laws of their state. Therefore, it is very important that the creator seek out professional legal advice for any use of a trust that is not traditional. Never should a selling agent express personal views or give advice on using trust documents unless he or she is certain they have correct information. There are too many variables involved, including IRS taxation.

 

 

  Not every individual needs a revocable trust, despite what those selling trusts may tell you. While trusts do perform well in many cases, for some it simply is not necessary. When a trust is not necessary, purchasing one is wasted money. Some types of professionals need the closure of probate so that their legal liability ceases. Such is the case for insurance agents, for example.  If assets remain in a trust following their death, the ability of their clients and their client’s heirs to sue remains as long as the trust is in effect (unless the trust transferred the assets to someone else).  Therefore, the closure of probate may be preferable to a trust.  In all cases, an individual considering the purchase of a trust should seek out a legal trust professional with experience in the type of trust being considered.  Selling revocable living trusts does not make the person a specialist in the field. A specialist has legal training, understands various types of assets, understands how life insurance may work with trusts, knows the laws of the state, and understands how taxing authorities will view trust assets and their distribution. This course will not make an agent a trust professional. It will allow him or her to understand agent limitations when offering professional advice and may encourage him or her to seek additional training.

 

  Trusts have a long history, but their popularity seems to be rising in recent years.  Consumers often make poor choices, however, based on faulty information.  Trusts exist when a person transfers legal title of assets to the document. As we said, revocable trusts still allow the trust creator to make any desired changes to the document while an irrevocable trust takes away the ability to amend or terminate the trust, except within the terms of the trust document.  Since most people want to retain control of what they own, the revocable trust is most often utilized rather than the irrevocable trust.

 

 

 

Not Everyone Needs A Trust

 

  The value of trusts has been overstated to the public.  In fact, some states have actually taken legal action against agents and others who have misrepresented the value of trusts.  Some of the claims made include:

·          Claim: A trust will protect assets from the delays and expense of probate.  While this is true, what is then assumed is not true: that probate will somehow overlook the assets within the trust. If it is a revocable living trust all assets, including trust assets, must be included in the total declared value for probate purposes. Additionally, a trust provides no protection for assets left outside of it.  It should be noted that a life insurance policy listing a beneficiary accomplishes the same thing. Revocable trusts have many worthwhile uses, but it will not protect asset values.

·          Claim: A trust will be less expensive than the cost of probate. This may or may not be true, depending upon the state of residence.  Not all states have difficult probate proceedings, but even when a person lives in a state that does, he or she must still draft a will. Every person of legal age needs a current will – even if a trust has been created.  For those who want everything distributed via a trust, a simple will that “pours over” into the trust will probably be adequate.  Of course, attorneys charge a fee to draft a will, but it is absolutely vital that one exist.  Trusts have many costs besides the initial fee to create the document. There will be costs to change titles and in many cases, it is not advisable to put specific assets into a trust. Additionally, there are ongoing administrative costs with a trust that will not exist with a will.

·          Claim: Assets will distribute quicker through a trust than a will.  Again, this may or may not be true, depending not only on the state but also on the assets involved. Uncomplicated assets, such as cash, Certificates of Deposit, and assets with an easily determined worth are likely to distribute just as quickly with a will (assuming the will is not challenged). Complicated estates will be complicated with or without a trust in many cases. Complicated estates often require the services of both an attorney and an accountant.  Since they must prepare and file two death-tax returns (one for state and one for federal) the length of time involved will not vary much between a trust or a will.  In simple estates, the process should go quickly regardless of which is used. What can complicate and slow up probate are assets whose value are not easily determined or a challenge to the will itself. It is much more difficult to challenge a trust, although any American has the legal right to challenge just about anything.  It is more difficult to challenge a trust since it is not a public document so it is unlikely that an individual would be aware of its existence. Even the beneficiary has no legal right to view the trust document unless the creator granted that right.

·          Claim: A trust will save taxes.  No, it won’t. Unfortunately, this claim never seems to go away. There are no income-tax savings attributable to earnings of the revocable trust.  Since the creator has full access to all assets within the trust and could revoke the trust at any time, taxes will be levied against assets both in and out of the trust at death and during life. For federal estate-tax purposes, all assets in or out of the trust must be declared and are usually subject to any death taxes that exist. The tax-saving provisions that trusts utilize may also be utilized by a will that has been properly drafted. The words “properly drafted” are true of both a trust and a will. No matter how cheaply a legal document was to have drawn up, if it was incorrectly done it was too expensive. It should be noted that price does not indicate quality.  Some of the trusts that have been peddled to unsuspecting consumers were both inferior in quality and expensive by normal standards.

 

 

 

  As long as there is money to be made by selling trusts to the public there will continue to be claims made that are not true or only partially true.  Typically, consumers are not directly lied to, but rather they are given information in a manner that allows incorrect assumptions.

 

  Living trusts may also be called grantor trusts since they are created for the grantor’s lifetime.  Living trusts may be appropriate for many reasons:

1.         Beneficiaries who may not be capable of handling a quantity of wealth at one time will benefit from a trust that distributes income in a specified manner (such as a set dollar amount per month). Parents often use this method for children who have demonstrated an inability to properly handle money for example.

2.         In some cases, a trust may be used to reduce federal income taxes. This may involve a transfer of income-producing assets to a fiduciary for some other party’s benefit, such as a charity.  In order for this to reduce taxes the trust must be a separate taxable entity. This allows the trust to be taxed at a lower rate than the creator would have been. Several trusts may be used to benefit multiple parties, such as children or other heirs. Any time the goal is tax reduction, the grantor must be aware that the IRS has attorneys working for them, too. Many grantors who thought they were avoiding taxes found out they were still responsible for any taxes that were due even though the assets were given to others.  The result?  They gave away the assets and still paid current taxes.  The grantor might avoid future taxation so if that is the goal it may still be a viable process.  In all cases, an experienced trust professional should be sought out.  Again, a trust salesperson is not necessarily the proper authority to give advice.  Only an experienced, trained trust professional will have the knowledge required to make such judgments and even they are sometimes wrong when it comes to taxation.

3.         A trust does avoid the procedures of probate. It is important to note we said the “procedures of probate.” Trust assets may still be included in the values used during probate for taxation purposes.  Trust assets will avoid probate settlement fees, but taxation includes all assets that were available to the decedent.

4.         A trust is a private document, while probate is a public procedure by necessity.  Probate must be public because it allows persons and companies to request payment for sums they are owed by the decedent. Without this process, creditors would have no way to collect sums they are due.  Many like the privacy of a trust because it prevents the public from knowing what assets were involved, how assets were dispersed, and whom they were dispersed to. Even the beneficiaries themselves are not able to view the trust document. Only the trustees have this right and they must act in a fiduciary capacity, meaning they do not have the right to discuss the document with anyone not having the legal authority to know.

5.         Every person has the legal right to challenge any document. Having that right does not mean the challenge will be successful. Trusts are very difficult to challenge primarily because they are a private document.  It is nearly impossible to challenge a document that cannot be viewed. When a document cannot be examined, there is no way to assess whether it was properly written; no way to determine if beneficiaries were properly represented; and no way to determine the appropriateness of it. As a result, few trust documents are challenged. This makes the trust very useful in cases where an individual is likely to challenge the decedent’s wishes, such as in asset distribution (the most likely reason a document would be challenged).

6.         Trusts are often used to support or reward an individual.  Money may be set aside to ensure the support of a child or even someone who is not related to asset owner. Trusts are often used to ensure the financial safety of a person that would not be considered a normal beneficiary. People often use the trust to repay a person’s performance or care during a decedent’s life. For example, Mr. Burns has a wife and children but the person he most wants to give financial security to is the neighbor who came over daily to care for him during his illness. Mr. Burns sets up a trust for the neighbor and deposits $25,000 in it.  Upon his death the trust turns over the money to the neighbor.  Even though his wife and children would object if they knew, it is likely that the asset will merely move to the neighbor without the family even being aware of the transfer (because the trust is a private document).

7.         Trusts can control assets for a specific length of time. Trusts are sometimes used to support an individual until they graduate from college or remarry.

8.         As many agents know, trusts are often used to hold insurance policies. In this case, the insured would be the grantor, but the trust would pay the premiums and make decisions regarding settlement options. If the grantor has correctly transferred all of his or her interest in the policies irrevocably to the trust, the cash surrender value of the policies usually cannot be reached by creditors.  Why? Because the policy does not belong to the grantor. It legally belongs to the trust and is controlled by the trustees. It must be stressed that the grantor must have given up all personal control of the insurance policy in order for this to be true. Generally, even the IRS cannot attach these funds if they are properly assigned to the irrevocable trust. Since the life insurance premiums must be paid (unless it is a paid up policy) some income-producing asset must also be assigned to the trust. If the grantor is paying the premiums from outside of the trust, both creditors and the IRS may have claim to the funds upon his or her death.

9.         An irrevocable trust may be set up for the benefit of the grantor.  If this were the goal, the grantor would transfer his or her assets to the trust for the purpose of providing for his or her own needs. By making the trust irrevocable, he is guarding the assets from his own poor judgment or poor perception of character.  Why would a grantor feel this was necessary? If Mr. Burns knew he was in the early stages of dementia or Alzheimer’s disease he may wish to protect himself from those who would take advantage of his increasing inability to make sound judgments. By placing his assets in an irrevocable trust no one could persuade him to change the terms of the trust as could be done with a revocable trust.  Nor could others access his assets for their own good. The trustees would bear the legal responsibility of acting on behalf of Mr. Burns and could do only that which the trust document granted them powers to do. Therefore, Mr. Burns must also consider the powers he gives to his trustees when drafting the trust.

10.      Trusts can preserve principal while still allowing interest earnings to be distributed.  If the principal is never distributed and the trust has no termination date, it could continue forever if that is the desire of the grantor. We see this type of trust used for such things as college grants and charities.  In the case of a college fund, the grantor establishes a fund that is designed to help specific students (music majors for example) receive college funds. The grantor may consider this to be his or her legacy, so the desire is for a perpetual trust.

11.      Trusts may be used to support dependents without having the principal subject to claims of creditors. When this is the case, these trusts are often called spendthrift trusts. Not all states recognize the validity of spendthrift trusts so a person considering the establishment of this type of trust will want to check the laws of their domicile state. The spendthrift trust is considered by some states to be a form of fraud against creditors. Even where these trusts are legal, assets may not necessarily be protected since creditors have a legal right to be paid. Spendthrift trusts are never protected from taxation or federal tax claims.

12.      A well-known use of trusts is providing for minor children. This may be accomplished in multiple ways so the type of trust can vary widely. How such a trust is used will depend upon the ages of the minor children, the amount of money available to fund the trust (this is often achieved through a life insurance policy), and the variables that exist in all families. There is no one type of trust that always works best in this capacity.

13.      Trusts are used when voting powers are involved and the desire is to keep the voting powers intact regardless of the grantor’s personal circumstances.  The trustee or co-trustees hold the stock and exercise voting power in a block, giving voting trust certificates without voting power of comparable amount to the beneficiaries.  Parents who own a company and wish to distribute their shares to multiple children often use this trust avenue.  Again, state laws must be considered when using a trust for this purpose since state laws regarding perpetuities may affect how this type of trust may be used.

14.      Trusts are used to keep specific types of assets intact (prevent having them divided or sold in order for the value to be divided) upon the grantor’s death. The grantor’s goal will vary, but usually this is done to preserve the asset’s value or for the use of future beneficiaries, such as grandchildren.

15.      Trusts are used to avoid conflicts of interest.  We often hear of those running for public office putting specific assets into a trust during their term of public service. The assets are maintained outside of the grantor’s control by independent trustees in order to avoid a potential conflict of interest should they be elected. For example, if a politician owned part or all of a business that sought government contracts it would be a conflict of interest for that owner to also hold a public position. It could be perceived to give his or her business an unfair advantage.

16.      Multiple trusts are used to prevent individual beneficiaries from knowing what percentage they receive of the total estate. While a will can give beneficiaries different amounts of the estate, it would be a public document.  Each beneficiary would know if they received a larger or smaller share than someone else. By using trusts, beneficiaries would not have access to that information. Grantors often do this to prevent hurt feelings or problems between family members that do not receive equal shares of the estate.

 

  While there are typically three roles involved in a trust, one person may play all three of them.  Those roles are (1) the trust creator, (2) the trustee, and (3) the beneficiary. One person may fill all three positions in some types of trusts. When the creator is also the beneficiary it is likely that he or she believes the trust may be terminated during his or her lifetime. Many types of trusts play a sophisticated financial planning role and require several people to operate correctly.

 

 

  Since trusts are private documents, there are few statistics to tell us how the majority of the vehicles are used.  However, it is likely that the most common reason for the creation of a trust is to bypass probate proceedings.  Again, assets in a revocable trust are still included in the estate values of probate.  Therefore, a revocable living trust does not prevent payment of taxes that will be due at death.

 

  The word “probate” means: “to prove the will.”  That is precisely what it does.  The most recent will is presented to the court and the court rules it legal and sufficient to meet the state’s laws (or rules it illegal and insufficient which would void the document).  Probate is the court supervised transfer of assets to the decedent’s heirs or listed beneficiaries.  Because this process requires several professionals, there are costs associated with it in addition to any taxes that might be due.  Depending upon the laws of the domicile state and the assets involved it may be a quick and inexpensive process or it may be a costly drawn out affair.  Surprisingly, the size of the estate is not always an indication of cost.  A much more likely indicator of cost and time are the assets involved and the quality of the will.  Many small estates have no will at all because the deceased did not think he or she had any assets of importance.  All individuals who are considered legal adults need to draft a will, whether they have any assets or not.  Today it is possible to purchase software that will allow an individual to draft their own will according to their domicile state’s laws.  When no or few assets exist and there are no special circumstances that must be addressed these basic wills are often sufficient.  Wills need to be reviewed and updated periodically.

 

 

  The costs of setting up a trust are nearly always more than drafting a will.  In addition, most trusts will have ongoing costs to administer them. Some trusts must produce income, such as those funding a life insurance policy. Trust creators should not work with a middleman, but rather with the attorney who actually drafts the document. Using a salesperson or other individual as the go-between not only is awkward but also more expensive since both individuals must be paid. Nor should a trust creator work long-distance with the attorney.  This may happen when a salesperson initiates the process for a company that mass-produces trusts. Although the trust may be properly prepared it is not likely to reflect the individual creating it. Therefore, his or her actual goals may not be addressed appropriately.

 

  It can be very difficult determining who is actually best qualified to draft a trust. While many different people can perform the task that does not mean they will be competent to address the issues that need addressing. Since a trust is a private document that even the stated beneficiaries have no right to see, a poorly drafted trust can be very difficult to correct – sometimes even impossible to correct.

 

For example:

  Mildred wanted to protect her son’s children. Although her son had never married her grandchildren’s mother Mildred wanted them to be cared for.  She knew their mother had few assets and was not likely to ever be in a position to provide them with a college education. Her son no longer had contact with their mother and seldom saw his children.

 

  When a living trust salesperson came to her door Mildred thought she had found the answer to her desired goal. Her only contact was the salesperson. While he wanted to do his best, he was not aware of the total situation.  The attorney, who resided in another state, never spoke with Mildred. The irrevocable trust was drawn up.  She chose an irrevocable trust because she wanted her wishes fulfilled even if she became ill and unable to make sound judgments regarding her finances. The salesperson assumed she would want her only son to be the designated trustee. The attorney gave him full powers to use and distribute the assets as he saw fit. Although Mildred had informed the mother of her grandchildren that the children would have college funds no authority was given her in the trust. The trust never specified that the assets were to be used for college for the grandchildren; it merely stated that the assets were to be used for their general benefit.

 

  When Mildred died and her son realized that she had left nearly all her assets to children he seldom saw and did not feel close to he became angry and resolved that they would see little of the money. Since the trust made no specific parameters regarding his pay, her son paid himself handsomely and distributed funds in ways that benefited him more than the children. Although the children did receive modest benefits, they never received enough to fund college.

 

  Neither the salesman nor the attorney realized the situation they had created. Both assumed they set up a trust that would accomplish what Mildred desired. Had Mildred worked face-to-face with the attorney her goals would probably have been reached. The attorney would have learned that Mildred had already supported her adult son most of his life, he would have learned that the children’s mother seldom received help from the father of her children, and he would have learned that Mildred valued education far more than the feelings of her spoiled child. It is seldom possible to adequately address all issues without talking directly with the attorney or other individual who is drafting the trust document. Consumers are much less likely to confide in a salesperson. Consumers are likely to fully disclose all necessary information with a professional who must meet professional privacy standards. It may not even have anything to do with whether or not Mildred would have told the salesman everything.  Salespeople often do not know to ask all the questions that are necessary. The person actually drafting the trust is much more likely to cover the possibilities simply because he or she is experienced in such matters.

 

  Even though the children’s mother realized that Mildred’s intent was not being followed there was little she could do. Neither she nor her children were allowed to view the trust since it is a private document. Her attorney advised her that it would be very difficult (perhaps impossible) to break the trust since they could not force Mildred’s son to allow access to the document. Without the ability to read the trust the attorney had no way to know if it could be broken.

 

 

 

  There is no specific trust format, although all trusts must follow any laws pertaining to them. Some trusts are purposely not funded for a period of time, waiting for a specific event to occur. Many trusts remain nonfunded in error. Even if assets were partially transferred, it is unlikely that the trust will protect them. In most cases, funding must have been legally completed in order for the trust to activate. Should a person die with a nonfunded trust, assets will be distributed under the terms of the decedent’s will.  If no will exists, the assets will be distributed according to the laws of the domicile state.  Some states accept the assets as transferred if they are merely listed under the trust, even though legal transfer was not completed. There are no guarantees that partially transferred or listed assets will be considered as trust assets, however. When assets are not completely and legally transferred, the courts could decide that the creator had not necessarily decided to put the assets into the trust. If someone challenges the asset transfers it is especially likely that he or she would win unless the assets had been legally put into the trust.  Again, the argument would be a simple one: if the creator had actually intended to transfer the assets into a trust, he or she would have properly and completely done so.  The fact that the creator did not do so indicates that he or she had not fully made that decision.

 

  Since any attorney may draft a trust, are all attorneys competent to do so? There is some controversy regarding this. A trust is actually a pretty simple document, but that does not mean that every attorney has experience drafting them. A trust may be a single page or as big as a novel. Length of the trust document seldom, if ever, indicates quality. Trusts have been so disorganized that trustees have had to hire expensive legal counsel to understand their rights of distribution or trust directives.  Obviously, any expenses of this type come from the trust assets, which directly affect trust beneficiaries.

 

  Attorneys who are experienced in trusts realize that simplicity is an advantage for trustees. While some trusts may warrant more detail than others, even detailed trusts need not be complicated. Well-written trusts generally contain subtitles and a summary of the contents so that trustees can quickly understand the trust content and refer to it easily.  While the trust is a legal document requiring legal wordage that does not mean the language needs to be difficult to read or understand.  If the trust is difficult to read and comprehend it is a reflection of the attorney’s lack of experience or his desire to appear important to the trust grantor.

 

  Some trusts will be complicated due to complicated goals. Legal language does not need to be complicated, although it must be complete to achieve that which is intended by the grantor.  Such trusts will probably be irrevocable trusts rather than revocable. Seldom would a revocable trust be used to accomplish complicated goals.

 

 

 

  Trusts must cover not only circumstances that exist at the time of drafting, but also those that may develop over time.  This would include such things as births, deaths, marriage, divorce, adoption, or any number of other events.  Depending upon the intent of the trust document, it may even be expected to perform into the next generation of beneficiaries.

 

  Most trusts are revocable.  In fact, it is estimated that 90 percent of the trusts written are revocable.  Figures are difficult to come by since only a few people may know the existence of these private documents.  Revocable trusts may be called by other names, including a “family trust,” a “changeable trust,” an “inter vivos trust,” or a “grantor trust.”  All of these names signify that its creator can change the trust document at any time for any reason.  Change would include termination of the legal document.

 

  Why has the revocable trust become so prominent in recent years? Many professional estate planners feel they are most often sold in order to earn a fee for the trust drafter or salesperson.  Others feel their prominence is the result of people wanting to achieve unrealistic goals.  Whether or not either of those is true, it cannot be denied that trusts can perform many worthwhile estate planning goals if they are properly executed.

 

Taxation

  Trusts may or may not prevent payment of taxes. In most cases, taxes will be paid at some point, although the creator may be able to transfer who pays them from one person to another.  It is important to realize that trusts have seldom been intended to prevent payment of taxes. They have many worthwhile uses, but tax avoidance is seldom one of them. The Internal Revenue Service employs many of the best attorneys in the country.  Why would anyone believe that IRS attorneys would allow an individual to avoid taxation?

 

  Estate taxes come under federal law rather than state law, although states may also tax an estate in some capacity. Estate taxes are federal taxes on the values of property left behind by the deceased. A revocable living trust allows the creator to use the assets within it so all assets in such a trust are included in the values that will be taxed.  It is true that assets in a revocable living trust will not go through the proceedings of probate, but all asset values will be included for the purposes of probate (which includes estate taxation).

 

  Inheritance taxes are paid by the estate and are typically considered to be state taxes rather than federal taxes. A few states do not have inheritance taxes, but most do.  Inheritance taxes will be levied in any state where real property is located and taxes are applicable. Therefore, if the deceased had legal residence in a state that did not levy inheritance taxes but owned real property in a state that did, that property would still be taxed by the state in which it was located.  The domicile state does not affect or prevent taxation by other states. There are two types of property: real and personal. Real property would include land and any items permanently attached to it, such as buildings or crops. Personal property is everything else, such as clothing, art, jewelry, furniture, and so forth. The location of personal property will be taxed based upon its location, with only a few exceptions.

 

 

 

Creditor Protection

  Creditors may make claims against a trust as well as a will. The difference has to do with creditor knowledge. Since a will is public whereas a trust is private creditors may not know a trust exists so may not make claim to funds due them. 

 

  In many circumstances there is less protection from creditors with a trust than would have existed under a will. Why? Because the will has a specified time period during which creditors must file claims. Past that point, no additional claims may be filed regardless of how valid they may be. Under a trust, claims may continue to be filed for as long as the trust is a valid document. Many trust creators do state a trust termination date, which would also close claims against it (if no trust exists, no claims may be filed). State laws may restrict time periods for filing creditor claims against the trust, but usually the periods stated are several years in length allowing much more time than would a will. This is why many professions that constantly face lawsuits, such as doctors, prefer the use of wills over trusts: they want the closure of probate. If the professional has incorporated, the use of a will may only apply to their business, allowing personal use of trusts.

 

Bankruptcy Protection

  Many attributes are given revocable living trusts that do not actually exist. One of those are asset protection should bankruptcy be filed. Since the trust is revocable, allowing its creator full use of all assets within it, there is no protection from the procedures of bankruptcy. It is important to also understand that bankruptcy is a federal procedure rather than a state procedure. This means that rules are based on federal law. Assets put into an irrevocable trust may be protected from bankruptcy attachment, but only if all asset income and rights have been terminated. If income exists, creditors may attach it although the asset creating the income may have protection in some circumstances. Most people do not want to give away their assets during their life, so irrevocable trusts are used far less often than revocable trusts. It cannot be stated too often: assets in a revocable trust receive no special protection. They still belong to the trust creator in every way.

 

Medicaid Qualification

  Medicaid is often referred to as Title 19 qualification. In the past it was easier to qualify for Medicaid since merely moving assets to adult children allowed qualification. As nursing home and other medical costs have soared, states and the federal government are no longer willing to absorb costs for those who could pay for their care personally through use of their assets. Even moving assets into the names of their children no longer means automatic Medicaid qualification.  There is a period of time called the “look-back period” for Medicaid qualification.  If any assets were transferred to another person or entity (such as a trust) for less than fair market value, that individual will be disqualified for the period of time the asset would have covered their care. For example, if Bernice transfers her beach home valued at $50,000 to her son, Jerome, and the local nursing home charges $5,000 per month to care for Bernice, she is not eligible for Medicaid benefits for 10 months ($50,000 divided by $5,000 = 10). This look-back period is currently five years.  It had previously been set at three years, but as the states and federal government experienced increasing costs it was increased to five years. Since the look-back period could change again, agents must be aware of current requirements.

 

  An irrevocable trust would face the look-back period but a revocable trust would not since the assets would still be available to the trust creator. Assets in a revocable trust are considered to belong to the trust creator since they are available for use.

 

 

Avoiding Probate Proceedings

 

  Trust assets do avoid probate proceedings. They do not avoid probate valuation for taxation purposes when the trust creator retains asset control. In other words, if the trust creator could use, sell, or otherwise control any asset within the trust during his or her life then that asset value is included in the probate proceedings. What may be gained is quicker availability for the trust beneficiaries.  Since the assets do not need to go through the probate proceedings, assets are made available to beneficiaries very quickly, unless assets turn out to be difficult to value. In some cases, this can delay distribution even from a trust. This would especially be true if a buyer must be found for the asset before it can be split among beneficiaries. An asset that is merely transferred to the beneficiary intact would not have a time delay since selling it is not required. Some trusts may not require any type of asset transfer since it continues to be the holding entity. Many trusts live on even after their creator has died.

 

 

 

Estate Privacy

  Privacy is the reason many people prefer using trusts over wills.  Although it is possible to file a will outside of the resident’s county, it still remains a public document.  Anyone who wants to take the time to find out where a will has been filed can view its contents.  Only those who have a role in creating the document or overseeing, dispersing, or receiving trust assets will know a trust exits. As a result it is a very private document.  Both a will and a trust may be legally challenged, but since few people will be aware of the trust’s existence it is less likely to face that possibility. Even if a person is aware a trust exists he or she has no right to examine it making the trust very hard to challenge.

 

Generation Skipping

  Revocable living trusts do not have to end when its creator dies.  It may continue on for many generations.  Generation skipping is often an overlooked benefit of the revocable trust. The creator is able to skip his or her own children and leave assets to their grandchildren instead. This may not be possible through a will since many states have mandated inheritance laws. In other words, a state may require that a minimum portion of an estate be awarded to each child as well as a legally married spouse. A trust can hold assets for grandchildren enabling the creator to bypass the legal requirements of a will.  Each state may differ on inheritance laws so it is important that a trust creator use an attorney or other trust professional that is aware of individual state laws.

 

  There may be taxation as a result of generation skipping. It is called a generation-skipping transfer tax.  This tax applies to gifts or bequests that skip a generation, so there can be many variables regarding it. An example of a generation-skipping transfer is a gift of property directly from a grandparent to a grandchild. This skips the intervening generation, which prevents the IRS from collecting tax they would otherwise receive.  The generation-skipping transfer tax is designed to impose the equivalent of the gift or estate tax the intervening generation would have otherwise paid.  On a direct gift from a grandparent to a grandchild, the generation-skipping tax generally represents the amount of tax that would have been owed if the property has first been transferred to the child, who then died, leaving the asset to the grandchild.

 

  While the estate tax has a progressive rate structure, the generation-skipping transfer tax is imposed at the maximum estate and gift tax rate. It would be payable in addition to any estate or gift tax otherwise due. It is important to note that gifts to grandchildren that qualify for the annual gift tax exclusion are not subject to the generation-skipping transfer tax. Payments of tuition and medical expenses that are not gifts also are not taxed under the generation-skipping transfer tax. Fortunately for those wishing to skip a generation, each person is also entitled to an aggregate exemption of more than one million dollars from the tax for lifetime transfers and transfers at death. Since married couples may split their gifts, each transferring assets to grandchildren, the lifetime exemption is effectively doubled.

 

 

  For the very wealthy who may be interested in transferring greater amounts to their grandchildren, there are many ways to set up trusts to avoid the generation-skipping tax.  Of course, such important items as wills and trusts should be periodically reviewed with or without the possibility of this tax.

 

Asset Management, Conservation, and Distribution

  Asset management, conservation, and distribution are a major reason cited for trust use.  A trust can do anything conceivable within the law.  All the trust requires are assets to fund it, someone wise enough to draft the document effectively, and trustees who can carry out the goals of the creator.

 

  Assets may be managed in any way desired by the trust creator. They may be distributed or held within the trust for generations, distributing only interest earnings. Any goal may be carried out by the trust, regardless of whether or not it treats heirs or beneficiaries equally. In fact, the trust has little concern for equality unless that is a provision within it, which is why many people choose a trust. Trustees may do only that which the trust document allows. The trust may grant broad trustee powers or very limited trustee powers.  It can even prevent trustees from correcting obvious errors, which is why it is so important that the document be properly drafted.

 

 

  Both beneficiaries and property must be clearly identified in the trust.  A charity that merely lists “the humane society” may leave trustees with the power to distribute to a group far from the organization actually desired by the creator.  Stating a beneficiary as “my Aunt Amy” may leave a trustee trying to figure out whether the creator meant his Aunt Amanda in Pennsylvania or his Aunt Mandy in New Jersey.

 

  Property should be identified by legal descriptions when possible.  If property contains such things as artwork or antiques, pictures should be included to eliminate any doubt as to the piece intended. When assets are not clearly identified it can hold up settlement of the estate.  From a legal standpoint, no trustee may distribute property that is not clearly identified. Additionally, if there are multiple beneficiaries, there may be family quarreling over which asset was intended for which person.

 

 

  Most trust professionals feel all trusts, even irrevocable trusts, should have some provision within them for change (these are usually referred to as amendable provisions).  Inexperienced attorneys may not realize the importance of this so they may not ask the creator if he or she would like to do so. If the creator decides to make a change, without an amendable clause, he or she may have to terminate an existing document and draft an entirely new one. This, of course, causes needless additional expense. Once the creator has died, it should state whether trustees have the right to amend the trust document and, if they do, the exact circumstances under which they may do so.  For example, the creator might give the trustee the right to include any additional grandchildren that might be born after the creation of the trust. It should never be a vague provision. Consider the following:

 

Myra Jones creates a trust and includes one of the following provisions:

 

“I grant the trustee power to add any grandchild to my list of beneficiaries that may be born following my death.”

 

“I grant the trustee the power to add any grandchild to my list of beneficiaries that I have omitted from my trust document.”

 

“I grant the trustee the power to add any grandchild that may have legal claim by right of blood to me as a beneficiary under this trust.  The child may claim no more than his or her equally divided portion of all living grandchildren.”

 

  Following the death of the trust creator, Myra Jones, James comes forth claiming to be a grandchild of the creator. This position is claimed on the basis of marriage between his mother and the son of the trust creator following her death. Although James is not a blood relative, he is the grandchild by virtue of marriage. Would he have a claim to part of the trust estate?

 

  Under the first statement James would be eliminated as a grandchild if he were born prior to Myra’s death since her statement clearly says the grandchild must be born after her death.  It is likely that Myra was thinking of an additional child born to one of her children, although she might have wanted to include James had she considered the situation when drafting the trust.  James could challenge the trustee’s decision to exclude him.  In that case a court would make the final decision, but they are likely to exclude James based on the wordage of the clause.

 

  James would likely be included under the second statement since the provision simply said “any grandchild that I have omitted” should be included. This statement is much broader.  Other beneficiaries may argue that she intended only grandchildren by blood be included. Even if Myra had openly stated this, however, the courts would probably include James based on the statement that was made in the trust document.

 

  The third trust provision is much more detailed. Here it states “any grandchild that may have legal claim by right of blood to me” should be included. Myra has specified that the grandchild must be a blood relative of hers. She has also included the requirement of legal claim, which would mean the child would have to prove blood relationship. This, of course, would exclude James since he is related not by blood, but by marriage.

 

 

  In many ways, the more detailed the provision the easier the trustee’s job is since it provides specific instructions of inclusion. Under the broader clause, trustees may make judgment calls, which might be challenged. Of course, any decision made could be challenged but when the clause is very specific there is little chance that a challenge would be successful. The most important reason to make a clear directive is so the creator’s wishes can be carried out in the manner he or she desires. Without a clear statement it will be the trustees who decide how assets are distributed or maintained.

 

 

In Conclusion

 

  Trusts have many valuable uses and are a significant estate-planning tool. However, trusts cannot do everything.  The agent that makes such promises is either uneducated or wearing a “sue me” sign on his forehead. Trusts are not necessarily appropriate for everyone or every goal, although they are very versatile.  Trust sales are not covered by the agent’s E&O liability policy.  Therefore, when agents market trust documents they must be well trained and knowledgeable.  Never should an agent make an “educated guess.” A mistake may not be realized until it is too late to correct it. Agents must always be aware that they are personally and professionally responsible for their actions and their errors and omissions liability policy will not cover non-insurance errors/omissions. What does this mean? It means the agent’s personal assets guarantee their actions and recommendations when selling or promoting trusts.

 

 

End of Chapter 4