Trusts can serve as an important component of your Estate Plan. However, unlike a Will, they are not a necessary component for you to memorialize your wishes regarding how you want your estate to be divided after you die. That said, Trusts can serve many important functions in your estate plan.
A Trustee is very similar to an Executor. Like an Executor, a Trustee is a fiduciary. A fiduciary is a position of trust and honesty and is held to the highest standard of care possible under the law. They are the individual who is “in charge” of administering the Trust according to its provisions. However, unlike an Executor, a Trustee could serve in this role for many years. An Executor’s role is terminated upon the completion of the probate process. However, Trusts can be designed to support many different generations over a very long period of time. Therefore, careful thought is required not only to who should serve as your Trustee but also in the purpose of one’s Trust.
An individual can set up a series of Trusts for younger beneficiaries. Without the proper provisions in an Estate Plan, if a beneficiary of your estate is under the age of eighteen, their inheritance has to be judicially supervised. A guardianship has to be setup for the child and will be maintained until the child turns eighteen. At that time, whatever funds remain in the guardianship account are handed over to the eighteen year old.
As many eighteen year olds are not accustomed to handling large sums of money, they may not be very responsible with it. An individual can employ a system of trusts to avoid this result. You can designate at what age or ages they receive their inheritance. For example, you could create a Trust that provides that the beneficiary receives the first half of their inheritance when they turn twenty-one and the second half of their inheritance when they turn thirty. This way you can better insure that the beneficiary is mature enough to make responsible decisions regarding their inheritance.
In addition, during the time that their inheritance is held in Trust, the younger individual can still enjoy the financial benefits of their inheritance. You can provide the Trustee with instructions to provide the beneficiary with funds for their support, education, and health. However, the intention is to ensure that their inheritance is used responsibly. Thus, the Trustee could assist with the payment of college but also could reject a request from the beneficiary that the Trustee purchase them a new sports car.
One of the powerful estate planning tools is the marital exemption. Under current law, an individual can leave an unlimited sum of money to their surviving spouse without incurring any estate tax liability. Without proper planning, such an approach can result in the surviving spouse needlessly incurring estate tax liability at their death. Regardless, the marital exemption is a critical aspect of all married couples Estate Plan. The question becomes, how does one effectively use it and still ensure a degree of control?
One way is to simply give your surviving spouse their inheritance outright and free of trust. However, there can be certain unanticipated problems with this approach:
The proper use of a Marital Trust can allow you to take advantage of the marital exemption while ensuring that the surviving spouse’s inheritance is only used for their support. It allows you to direct who shall receive the remaining assets in the trust after your surviving spouse dies. Moreover, the Trustee can effectively care for your surviving spouse’s needs for their entire life. It is a powerful tool which allows you to care for the needs of your surviving spouse while ensuring your wishes are continually carried out well after your death.
Many individuals with disabilities receive special public benefits such as Supplemental Security Income and Medicaid. If not managed properly, a bequest to an individual with disabilities can disqualify them from receiving such benefits. This in turn can cause that beneficiary to undergo unanticipated hardships. It often requires the individual to spend down their inheritance in order to re-qualify for their public benefits. This is often far from what you had originally intended when you made the bequest.
A Special Needs Trust can allow one’s inheritance to be used in a manner which does not render the beneficiary ineligible for additional public benefits. Their Trust can be structured so that their inheritance can be used for things such as travel, education, hobbies, as well as for health care needs not covered by their benefits, such as dental and vision care. The federal and State rules governing what constitutes a Special Needs Trust are complicated and subject to change. Therefore, great care must be taken in drafting a Special Needs Trust so as to ensure it is in compliance with the relevant regulations.
These are but a few short examples of how a Trust can be used in one’s Estate Plan. Moreover, one can have more than one type of Trusts within their Estate Plan.