Many people consider trusts a tool for the wealthy to avoid taxes. While trusts are a useful device for reducing estate taxes, there are many different types of trusts and tax planning is only one reason to create a trust. In fact, since the estate and gift tax exemption amounts have increased significantly over the last several years, only a small percentage of high net-worth families and business owners now face estate tax liabilities. Depending on your goals and needs for yourself or your family, the objectives for a trust can vary from the ability to direct your property after you are no longer able to control it (due to death or incapacity) to providing protection for vulnerable family members. A trust can be funded with as little or as much value as an individual desires. Property of any sort may be held in a trust.
One simple reason to create a trust is to maintain privacy. A trust can be established purely for privacy, and, in many states, that is an attractive feature. In Georgia, an individual’s Will must be admitted to probate after death to have any force and effect. During the probate process the Will becomes a public record, open for inspection by anyone. A trust is created privately by the individual working with an attorney and is effective upon its execution and funding. There is usually no need for a court to be involved and thus, none of the trust’s assets or the operative provisions in the trust agreement are necessarily disclosed to the public. For some people, simply the attraction of keeping one’s affairs private makes a trust an idyllic option.
While the probate process in Georgia is not particularly difficult or expensive, in other states the probate process can be both time consuming and expensive. Even for a Georgia resident, trusts can be used to avoid the expense and delay of a probate procedure, especially if one owns real estate located in another state. Establishing a trust during one’s lifetime can cause the assets to be distributed to the heirs efficiently without the cost, delay and publicity of probate. Avoiding probate may also be especially attractive if you have concerns about a conflict over your Will, since the creation and administration of a trust does not require notice to anyone.
Avoid Assets Passing to Minors
Trusts are commonly incorporated in a Will to plan for an individual’s premature death and to ensure that property is not transferred outright to minor children. In a testamentary trust (a trust created under a Will when the person dies), if the children are under 18, or under some other age prescribed in the Will (ages 25 and 30 are common), a trust will be created to provide for your children during their minority or until the contingency age is reached, so that a 16 year old child will not end up owning a house with the responsibility of making mortgage payments.
An individual who would like to have control over his or her property after death may consider creating a trust to leave his or her estate to family members in a way that is not directly and immediately payable to them. For example, you may want to stipulate that your children receive their inheritance upon certain conditions being met, such as graduating from college, or you may provide for age-based distributions that provide for the trust assets to be distributed to your children in fractional shares upon attaining certain ages, such as 25, 30, and 35. This will allow them to grow into managing assets and/or to learn from their mistakes with only a portion of their inheritance. The trust can also stipulate that distributions only be made for specific purposes. For example, you can stipulate that a trust will make money available to your children or grandchildren only for college tuition or perhaps for future health care expenses.
Trusts are effective tools for individuals who have concerns about family members who are financially irresponsible or vulnerable to exploitation. In those situations, you can control how and when assets are distributed to your family members. Trusts used to protect beneficiaries against their inability to handle money can also be used to protect the beneficiary from creditors by including language in the trust that protects the trust’s assets from creditors of, or a legal judgment against, a trust beneficiary. If you have family members that are doctors, lawyers, accountants, or business owners that have liability exposure to third parties, you can create a trust which may provide protection of their assets and estate from creditors and judgments since the trust assets are not considered their personal assets.
Individuals with Special Needs
Individuals with a disabled child or family member may establish a trust to provide for the family member without compromising the beneficiary’s eligibility for government benefits. An outright distribution to a person who receives government benefits may cause him or her to forfeit important subsidies for housing and/or healthcare since such benefits are often determined based upon income and assets.
A trust can also be established to plan for your own incapacity, in which case the trust is a planning tool to protect your own assets in the event you are no longer able to manage your own affairs. You can give the trustee the power to take immediate control of your assets in the event that you become incapacitated and direct how your assets will be utilized for your care. In that case, you do not have to worry about burdening your children with making decisions regarding your care or with incurring the expense associated with your long term care.
Life insurance trusts are useful since the death benefit from a life insurance policy payable to your estate would be subject to claims by your creditors or creditors of your estate. If the policy is purchased by an independent trustee and held in an irrevocable life insurance trust that is created and funded during your lifetime, then the life insurance proceeds can pass outside of your estate, but can still be used to help your family members, including help covering your estate expenses. An irrevocable life insurance trust holds a life insurance policy on the policyholder’s life and provides immediate benefits when the policyholder dies, without the necessity of having the proceeds pass through probate.
Individuals who own a business or hold an interest in a business may consider the use of a trust to hold their ownership in the business. Trusts can also be important for the management of family businesses and for families in the creation of a succession plan to transfer ownership between the family members. Transferring ownership of the business from one generation to the next in an efficient manner can very often be the difference among keeping the business in the family and being forced to sell it following the business owner’s death.
Marital Trusts for Blended Families
If you have been married more than once, and especially if you have children from different marriages, providing for your spouse while ensuring your children inherit from you can present some estate planning challenges. In a second marriage, each spouse brings different assets into the marriage and each may have different objectives regarding the passage of wealth to their children. You may want to support your surviving spouse, but also want to ensure that the balance of your estate ultimately goes to your children (instead of your spouse’s children) after your spouse dies. Addressing these complexities through a marital trust can provide income and even principal for a surviving spouse, while preserving the underlying assets and controlling how they are distributed to children from a previous marriage. Blended families may also want to consider establishing two trusts, one for the spouse and children of second marriage and one for the children born of a previous marriage.
A trust should also be considered if a client is not married, but has a life partner (whether opposite sex or same sex couples). Married couples have more ability to transfer property to one another during life and after death, so unmarried couples may consider a trust to facilitate the same types of transfers even though they do not qualify for the same benefits. If unmarried partners desire to leave their property to one another, then a trust can be a useful tool to hold property jointly and to pass the property to the survivor upon death without incurring lifetime gift taxes or estate taxes.
There are many different situations which may indicate that trust should be considered. But no matter what the reason is for establishing a trust, ultimately knowing your property and the beneficiaries of your property are protected can give you peace of mind. Our attorneys have experience with all forms of lifetime and testamentary trusts and can assist you in evaluating whether a trust should be part of your estate plan.