Estate Planning and Trusts

Trusts are legal entities used to protect various aspects of an estate. The most popular types of trusts are intended to shield significant assets, such as homes and other investments (stocks, bonds, etc.), from the costly process of probate. Trusts help dodge probate by actually “owning” your major assets: when you establish a trust, you must retitle the assets you are placing into the trust so that official ownership of those assets transfers from you to the trust. Trusts also have various other benefits. For example, trusts can:

Protect information about your estate from public disclosure
Protect life insurance from taxation, allowing it to be used to pay estate taxes
Minimize estate and income taxes (assets in charitable trusts reduce taxes and generate tax deductions)
Facilitate charitable giving and gifting to heirs

All trusts have grantors, trustees, and beneficiaries:

Grantors: The person or people who set up the trust
Trustees: The person, people, or entities (such as a bank trust department) who make decisions about investments, sales, and income distribution in the trust
Beneficiaries: The person, people, or entities who receive the benefits paid out by the trust (the grantor of the trust can specify the precise benefits that each of the beneficiaries will receive from the trust)

Who Needs Trusts?

People in the following situations should strongly consider establishing trusts:

Situation		How Trusts Help
A married couple who anticipate having more than $1 million each in combined assets, both jointly and personally owned		Trusts hold title to assets. This shields assets from probate and prying eyes and allows the trustee(s) to sell the assets if one or more of the grantor(s) is incapacitated. This is especially important if there are missing or incomplete powers of attorney.
Someone caring for an incapacitated or disabled person		Strict Medicare and Medicaid rules apply to benefits for disabled persons. By setting up the appropriate trusts, the caregiver(s) can provide additional assets for the needs of the disabled person while still getting medical and other benefits under Medicare/Medicaid.
Someone whose estate needs liquidity at death, such as a business or real estate owner		Assets in a trust are available to the beneficiaries immediately. That means no probate, minimal hassles, and the freedom to sell property immediately. Estate taxes must still be paid if owed.
Someone who wants to create an estate with life insurance and not have the proceeds (the death benefit) become a taxable asset in their estate		Life insurance owned by an irrevocable life insurance trust is not taxable at the insured’s death. In addition, life insurance pays a large future benefit in exchange for comparably small current payments, which can help establish a sizeable estate upon death.
A person (or couple) who wants to preserve assets but also qualify for Medicaid coverage of long-term care needs		In most cases, assets transferred to an irrevocable trust are outside the assets Medicaid considers when determining eligibility. By placing money in the trust, an individual or couple can make themselves eligible for Medicaid. Though this may sound enticing, it can be tricky both legally and ethically (see Medicaid Planning).
Someone with a retirement home in another state		Having a trust own the home avoids ancillary probate (see Probate).
Someone who wants to protect the privacy of his/her assets and heirs		Information about a trust’s contents is not part of the public record. The content of a will, on the other hand, is public.

Trusts are Not Substitutes for Wills

Though trusts are valuable tools, creation of a trust does not eliminate the need for a will.

Wills specify provisions not covered by trusts, such as guardian(s) of minor children and disabled dependents.
Wills ensure that major assets not owned by your trust(s) are distributed in accordance with your wishes.

Most trusts include a second will called a pour-over directive to “pour” any overlooked assets into the trust when you die. A pour-over directive is important, as it can help safeguard overlooked assets from probate by allowing the trust to assume ownership when you die.

If You Think a Trust Might Be Right For You

If you believe that a trust might be a valuable estate planning tool for you, your best course of action is to read through the descriptions of different kinds of trusts (see Types of Trusts) and to discuss your needs with your financial advisor or a professional estate planner. Do not attempt to set up a trust by yourself.

Acknowledgments & Disclaimer