WILLS & TRUSTS
Why do I need a will? There are several reasons:
First, a will provides for the orderly transition of probate property to one’s designated heirs and beneficiaries. If you died intestate (without a will), the laws of the state in which the property was located would govern who received what, which may not be in accord with your wishes and could cause feuding among your heirs.
Second, when someone dies intestate, property passes title by probate (the process of having a court decide how property is distributed). Not only is it possible that property will not be distributed in accord with your wishes, but the process can be costly and time consuming for your heirs.
Third, when drafting a will your first task is to choose a person to oversee the distribution of your property in accordance with your wishes. This person is called a Personal Representative (formally known as an Executor). You can appoint more than one Personal Representative. If you died intestate, the State will appoint someone and that individual may not be the person you would want to oversee your property.
Fourth, many parents attempt to avoid probate by holding bank accounts jointly with their children. It can be effective, but it requires a lot of unnecessary effort to keep balances equal among the children. These efforts can be prematurely halted by a parent’s sudden illness or incapacity. There is also the risk that a joint account holder predeceases the parent. It is much easier to have a will that clearly defines the children’s percentages of available assets.
Fifth, the Will is the vehicle where you can appoint who will take your place as guardian of your minor children should both you and their other parent both pass away. Often times parents make a will for this reason alone.
Today, many individuals and families are utilizing trusts to: (1) avoid probate; (2) maintain privacy; (3) save on paying taxes; (4) regulate the use of assets during their lifetime as well as after they are gone; and (5) plan for Medicaid.
Trusts are formed in one of two ways: Testamentary trusts are formed from a will and do not come into existence until after you die. Inter vivos trusts are created while you are alive and can continue long after you die. Inter vivos trusts are either revocable or irrevocable. Once created an irrevocable trust cannot be changed. Revocable trusts can be changed or revoked at anytime. We often times use revocable trusts in estate planning and reserve the use of irrevocable trusts when planning for Medicaid planning. Some commonly created trusts for estate planning needs are:
Revocable or “living trusts”
Revocable trusts essentially are set up to change legal ownership of one’s property from the individual to the name of a Trust for the benefit of others (the beneficiaries). The owner appoints him or herself as Trustee and can still maintain control of the assets in the capacity of Trustee and can use those assets for his or her own benefit. Because the trust is revocable, the Trustee can change the terms or dissolve the trust at anytime. After the Trustee’s death, the trust become irrevocable and a successor Trustee (appointed by the owner/Trustee) manages or distributes the assets held by the trust to the beneficiaries.
Family trust are set up by parents for the purpose to hold and manage assets for the benefit of their children until the children reach the age which they receive full distribution of the trust’s assets. This type of trust is funded only when both parents are deceased. Distribution can be used for college or spread out at various ages such as when a child reaches the age of 25 and another distribution at 30. If not created, the State would appoint a Conservator to oversee the assets inherited by the children. These assets would then have to be turned over to a child at age 18, which may be too young for some and hence not utilized prudentially in accord with the parent’s wishes.
Credit Shelter Trusts
A credit shelter trust is created for the benefit of a surviving spouse, used to avoid estate taxes at a first spouse’s death and which takes advantage of the available federal estate tax credit. It may also be referred to as a “B Trust” (in an “A/B Plan”) or bypass trust.
It is an irrevocable trust that is established in a will or living trust of the first to die of a married couple. The trusts designate beneficiaries (usually the couple’s children) and provides that when the first spouse dies, the trust will be funded with the maximum amount of property that can pass estate tax free (the “applicable exclusion amount”) from the deceased spouse’s estate. It is required that the surviving spouse be entitled to all income generated and may use the property for limited purposes such as for his or her health, education, support and maintenance. The trust is not included in the surviving spouse’s estate because the surviving spouse does not own the property outright and hence the property then passes estate tax free to the beneficiaries and allows a couple to use both of their exclusion amounts.
A Qualified Terminable Interest Property trust (QTIP) also known as “A Trust” in an “A/B Plan,” is set up to provide someone’s spouse with income for life. The surviving spouse receives income earned from the assets placed in the trust. Generally, the surviving spouse does not have access to the principal funds or property in the trust. When the surviving spouse dies, ownership of the trust’s assets passes to the beneficiaries named in the trust.
QTIP trusts are usually set up to ensure that the property passes to the beneficiaries. Usually, beneficiaries are the couple’s children, or the first spouse’s children from a previous marriage. For example, a husband can set up a QTIP trust to provide income for his second wife when he dies and he names the children from his first marriage as the beneficiaries.
The second wife gets the trust income such as dividends earned from stocks placed in the trust. The wife cannot sell or transfer the stocks. This ensures that the wife cannot use trust assets to benefit a new spouse, her children from a previous marriage, or her children from a new marriage. When the wife dies, ownership of the stocks passes to the late husband’s children from his first marriage. The entire value of the QTIP trust is included in the surviving spouse’s gross estate and may be subject to estate taxes.
Supplemental Needs Trust
A supplemental needs trust created to provide for the continuing care of a disabled spouse, child, relative or friend. The beneficiary of a supplemental needs trust will have access to the trust assets for purposes other than those provided by public benefits programs. This then allows the beneficiary to not lose eligibility for benefits such as Supplemental Security Income (SSI), Medicaid and low-income housing.