Michigan Estate Planning Blog

What are the Different Types of Trusts?

 

Fortune’s recent article, “Understanding trusts: An important estate planning tool for everyday Americans,” gives a concise run-down of all of the various types of trusts.

AB Trust. Also called a credit shelter or bypass trust, this trust is used by married couples to get the most benefit from estate tax exemptions. An AB trust is two trusts. The easiest way to remember them is that the A trust is for the person “above ground,” and the B trust belongs to the person “below ground.” Assets up to the annual estate tax exemption are put in the B trust to avoid estate taxes and usually pass to the couple’s children (“bypassing” the spouse). The remaining assets are placed in the surviving spouse’s A trust. When the surviving spouse dies, assets in both trusts pass to the designated beneficiaries.

An AB trust may be best for highly affluent married couples with large estates wanting to max out their estate tax exemptions.

Charitable Trust. This trust can benefit three parties: you, the grantor, your beneficiaries, and a charitable cause. They come in two types—charitable remainder trusts and charitable lead trusts. They still have one thing in common: the benefiting charity must be a qualifying organization per Internal Revenue Service guidelines. A charitable remainder trust is a type of irrevocable trust that provides income for you or your beneficiaries during your lifetime. You typically will move highly-appreciated assets into the trust, which the trust then sells—avoiding capital gains taxes—to create the income stream. After your death, the remaining assets in the trust are distributed to one or more charitable causes. A charitable lead trust is an irrevocable trust that’s the opposite of a charitable remainder trust. It first benefits the charitable beneficiaries of your choice during your lifetime. When you die, the remaining assets are distributed to your beneficiaries. A charitable lead trust can be funded during your lifetime or when you die through instructions in your will. A charitable trust may be best for individuals with highly appreciated assets, like stocks, that can be used to help meet philanthropic goals during or after their lifetimes.

Grantor Retained Annuity Trust (GRAT). A GRAT is an irrevocable trust generally used by the wealthy to reduce tax implications for their beneficiaries. You transfer assets into the trust that are expected to appreciate over time and specify the term for which you’ll receive an annuity payment based on those assets. Once the GRAT’s term expires, the assets and any appreciation of those assets in the trust will pass to your beneficiaries with little to no estate tax burden. A GRAT may be best for wealthy individuals who want to help family members avoid paying estate taxes on their inheritance.

Irrevocable Life Insurance Trust (ILIT). Putting life insurance into a trust is a strategy the wealthy use to cover several fronts. You fund an irrevocable trust using one or several life insurance policies. When you die, the payouts from those policies typically avoid estate taxes but can be used to pay for things like state estate taxes and funeral expenses. The funds in the trust can help avoid the need to liquidate assets to meet these financial needs. An ILIT may be best for people who expect to pay state estate taxes and want to protect life insurance policies from creditors or divorce.
Special Needs Trust. This trust can help provide long-term care for a loved one with physical or mental disabilities who’s under age 65. The big benefit of special needs trusts is that assets held in them don’t affect their eligibility for Social Security and Medicaid benefits. There are three types of special needs trusts. Therefore, it is important to create one with an attorney specializing in special needs trusts. This trust may be best for those with mentally or physically disabled family members.

Reference: Fortune (June 9, 2023) “Understanding trusts: An important estate planning tool for everyday Americans”

When is a Trust a Good Idea?

If you prefer to place specific conditions on your assets after you pass away, you should have a trust in place, says Kiplinger’s recent article, “Why Do I Need a Trust?”

Trusts can be especially important with second marriages, where one spouse wants to leave their assets to their children but not their stepchildren. Here are some other benefits of a trust:

Creditor Protection. If your profession has a high probability of liability, having assets transferred via a trust (once the trust becomes irrevocable) may shelter funds from being attached in a lawsuit. This can be very specific concerning state law and the type of lawsuit, so discuss this with an experienced estate planning attorney before making any decisions.

Passing Funds Outside of the Estate. For large estates that are anticipated to grow, creating trusts during your lifetime and gifting assets can remove the growth from your estate and lower future estate taxes. If your estate is higher than the exemption, and you have more funds than you need to live on, funding an irrevocable trust now is beneficial. Also, remember, revocable (or living) trusts become irrevocable on your passing, so anything in the revocable trust will be out of the beneficiary’s estate.

Providing for Grandchildren. If you want to provide for grandchildren at your death or don’t trust the parents to set inheritance funds aside for their children, creating a trust for the grandchildren is an option. If you leave assets outright to their parents, there’s no guarantee that the funds will get to them.

Protect Against Fraud or Beneficiary Changes. Seniors can be duped into updating their beneficiaries when they’re in the hospital or under hospice care. If the individual can sign a form and their signature matches what is on file at the custodian—and they have no immediate family to catch the update—this can be a problem. If the elderly person is not of sound mind, the attorney will likely be able to notice something is wrong compared to submitting a beneficiary form to a custodian directly.

Special Needs Beneficiaries. If you have incapacitated beneficiaries who require special care due to mental or physical disability, setting up a special needs trust may be a good move. A Special Needs Trust will ensure that assets can be given to this person but not interfere with government benefits or disability payments.

Ask an experienced estate planning attorney if your situation and your intentions warrant a trust. They can help you protect your assets and your wishes.

Reference: Kiplinger (August 31, 2022) “Why Do I Need a Trust?”

What Trusts are Available for Estate Planning?

A trust is a legal agreement that has at least three parties. The same person(a) can be in more than one of these roles at the same time. The terms of the trust usually are embodied in a legal document called a trust agreement. Forbes’s recent article entitled “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts” explains that the first party is the person who creates the trust, known as a trustor, grantor, settlor, or creator.
The trustee is the second party to the agreement. This person has legal title to the property in the trust and manages the property, according to the instructions in the trust and state law. The third party is the beneficiary who benefits from the trust. There can be multiple beneficiaries at the same time, and there also can be different beneficiaries over time.
The trustee is a fiduciary who must manage the trust property only for the interests of the beneficiaries and consistent with the trust agreement and the law. Although a trust is created when the trust agreement is signed and executed, it isn’t really operational until it’s funded by transferring property to it.
A living trust, also called an inter vivos trust, is a trust that’s created during the trustor’s lifetime. A testamentary trust is created in the trustor’s last will and testament. A trust can be revocable, which means that the trustor can revoke it or modify the terms at any time. An irrevocable trust can’t be changed or revoked.
Assets that are owned by a trust avoid the cost, delay and publicity of probate. However, there are no tax benefits to a revocable living trust. The settlors-trustees are taxed as though they still own the assets. The trust assets are also included in their estates under the federal estate tax.
An irrevocable trust typically is created to reduce income and/or estate taxes. This type of trust can also protect assets from creditors. When assets are transferred to an irrevocable trust, the income and gains are taxed to the trust when they are retained by the trust and taxed to the beneficiaries when distributed to them.
Under the federal estate tax and most state estate taxes, assets that are retitled to an irrevocable trust aren’t part of the grantor’s estate. Transfers to the trust are gifts to the beneficiaries. The grantor’s gift tax annual exclusion and lifetime exemption can be used to avoid gift taxes, until gifts exceed the exclusion and exemption limit.
A grantor trust is an income tax term that describes a trust where the grantor is taxed on the income. That’s because he or she retained rights to or benefits of the property. The revocable living trust is an example of a grantor trust.
A trust can be discretionary or nondiscretionary. A trustee of a discretionary trust has the power to make or withhold distributions to beneficiaries as the trustee deems appropriate or in their best interests. In a nondiscretionary trust, the trustee makes distributions according to the directions in the trust agreement.
Another type of trust is a spendthrift trust. This is an irrevocable trust that can be either living or testamentary. The key term restricts limits the beneficiary’s access to the trust principal, and the beneficiary and the beneficiary’s creditors can’t force distributions. The spendthrift provision is used when the settlor is worried that a beneficiary might waste the money or have trouble with creditors. Many states permit spendthrift trusts, but some limit the amount of principal that can be protected, and some do not recognize spendthrift provisions.
Finally, a special needs trust can be used to provide for a person who needs assistance for life. In many cases, it’s a child or sibling of the trust settlor. It can be either living or testamentary. Critical to a special needs trust is it has provisions that make certain the beneficiary can receive financial support from the trust, without being disqualified from federal and state support programs for those with special needs.
For more about trusts and how one may fit into your estate planning, contact an experienced estate planning attorney.
Reference: Forbes (Oct. 26, 2020) “Here’s What You Need To Know About The Most-Popular Estate Planning Trusts”

Filling in the (Estate Planning) Gaps with a Letter of Intent

Your estate and your plan for it are more than just a set of documents. Nevertheless, it is only through documents that you and your wishes truly get a voice. There are the legal documents that speak to the court, but that does not necessarily do all of the speaking you need it to. When you need to leave that much more instruction behind there is an important tool to be found in the Letter of Intent. A “Letter of Intent,” not unlike the business version used in and around business transactions, is not the document that does the legal heavy lifting but it can move things along. So, too, with letters of intent which are meant to supplement and complement a will or trust arrangement, but never to do the work standing alone. LifeHealthPro offered some important perspective on the Letter of Intent in a recent article with some special attention to planning for special needs children and it is worth your thoughts: “Letter of intent: a useful component of an estate plan.” If the will tells the probate court what you want to do with your assets, the Letter of Intent gives you the voice to say the same for all of the other topics, from your hopes and wishes to very practical instruction regarding this or that. If you have a child with special needs, then a Letter of Intent can give you the space to offer all manners of practical instruction that simply cannot fit within a will and may be inappropriate for a legal document in the first place. That is the rub, of course. The Letter of Intent is not the will and is not legally binding. For a bit more on the Letter of Intent as a tool and for a great deal more advice on how to use it, particularly with regard to children with special needs, check out the original article. Sometimes this little letter can mean all of the difference. In any event, it might help you and your loved ones organize your thoughts. In the end, however, if your objectives require that some essential legal concerns are addressed, then the heavy lifting needs to be done in properly drawn legal documents. So what are your needs and how will you put them to paper?

Reference: LifeHealthPro (June 3, 3014) “Letter of intent: a useful component of an estate plan”

Planning for Your Special Needs Child

1. Caring for your child with special needs requires much more thought and planning. After all, you are responsible to ensure the well-being of your child in a world without you. How can you possibly ensure for the future of your children, especially when they have certain dependencies? CNBC recently touched on this topic offering up a solution - the special needs trust. If this topic touches you and someone you love, then take a moment to read the original article titled “Special needs trusts: Helping parents provide for kids' futures.” Trusts are powerful legal devices made to do what you program them to do, all under the watchful gaze of a responsible trustee. The needs of a child with special needs are especially amenable to special planning. You can’t leave your assets to them outright, as your child is likely unable to use them. In fact, just owning them might endanger their government assistance. Sure, money could be left to another child or other loved one with express instructions to care for the special needs child. However, without formalization, it’s never guaranteed that the money will be used for this purpose. Instead, that money would be open to the other individual’s liabilities, suits, divorces, and other legal pitfalls. The special needs trust solves all of this in a very tidy way and even ensures that there is always a financial guardian of sorts in the trustee. Why do you need to leave assets to your child with special needs in the first place? After all, they will be receiving government assistance, right? This depends greatly upon the nature of the care needed, of course. But as many parents can already attest, those government benefits can only take you so far and even sometimes force decisions. Your special needs trust can care for them without any benefits, if your have the means of course. In reality the express goal of a special needs trust is to bridge the gaps and protect all aspects of their life and longevity. Just what kind of a trust you can put together and what kind of needs you have to fulfill depends on your finances and your child. Regardless, the trust needs to be drafted by a steady hand and a careful mind. Competent counsel can knit together the plan, the ability and the needs in light of current (and even future) laws and regulations to provide for a loved one’s care. In the end, that’s not just peace of mind now, but the assurance of a happy life for your loved ones who cannot take care of themselves.

   Reference: CNBC (May 31, 2014) “Special needs trusts: Helping parents provide for kids' futures”

Planning for Your Special Needs Child

Caring for your child with special needs requires much more thought and planning. After all, you are responsible to ensure the well-being of your child in a world without you. How can you possibly ensure for the future of your children, especially when they have certain dependencies? CNBC recently touched on this topic offering up a solution - the special needs trust. If this topic touches you and someone you love, then take a moment to read the original article titled “Special needs trusts: Helping parents provide for kids' futures.” Trusts are powerful legal devices made to do what you program them to do, all under the watchful gaze of a responsible trustee. The needs of a child with special needs are especially amenable to special planning. You can’t leave your assets to them outright, as your child is likely unable to use them. In fact, just owning them might endanger their government assistance. Sure, money could be left to another child or other loved one with express instructions to care for the special needs child. However, without formalization, it’s never guaranteed that the money will be used for this purpose. Instead, that money would be open to the other individual’s liabilities, suits, divorces, and other legal pitfalls. The special needs trust solves all of this in a very tidy way and even ensures that there is always a financial guardian of sorts in the trustee. Why do you need to leave assets to your child with special needs in the first place? After all, they will be receiving government assistance, right? This depends greatly upon the nature of the care needed, of course. But as many parents can already attest, those government benefits can only take you so far and even sometimes force decisions. Your special needs trust can care for them without any benefits, if your have the means of course. In reality the express goal of a special needs trust is to bridge the gaps and protect all aspects of their life and longevity. Just what kind of a trust you can put together and what kind of needs you have to fulfill depends on your finances and your child. Regardless, the trust needs to be drafted by a steady hand and a careful mind. Competent counsel can knit together the plan, the ability and the needs in light of current (and even future) laws and regulations to provide for a loved one’s care. In the end, that’s not just peace of mind now, but the assurance of a happy life for your loved ones who cannot take care of themselves.

Reference: CNBC (May 31, 2014) “Special needs trusts: Helping parents provide for kids' futures”

Planning A Special Inheritance For A Special Beneficiary Mid-Michigan

We plan our estates to ensure our loved ones will be okay after we are gone. If a loved one has mental or physical special needs, then your estate planning needs some special planning itself. So what more should you do to ensure the happiness and wellbeing of your child with special needs? Special planning is, of course, very much tied to the needs of your child with special needs and to the needs of the rest of your family. As you might imagine, such planning entails important tools, rules and guides. To get started, consider a recent article in The Slott Report titled “3 Tips When Planning for a Special Needs Child.” One of the keys to special needs planning is understanding how public assistance aid works and its sources. Generally, the two major sources are Supplemental Security Income (SSI) and Medicaid. Both programs are “needs-based.” In other words, eligibility to receive benefits is all about qualifying financially, preserving that qualification, and ensuring a painless transition (read: not getting caught in bureaucracy). Tip #1: Consider implementing the all-important Supplemental Needs Trust. Properly drafted and funded, this is a special trust designed to offer security and care, without endangering needs-based program benefits. Tip #2: Plan ahead and plan carefully! These public assistance benefits may not be enough or offer as much security as you would want to ensure. In fact, you might want to find a way to leave more behind. Life insurance is an excellent option. Tip #3: What’s the final tip? You need to plan for yourself, too, and for your entire estate. As important as your loved one with special needs is, you have to ensure that the rest of your plans work together, too. For example, make sure to plan for threats to your own financial security, like high long-term care costs in old age. Without proper planning now, all could be lost later. In the end, if there is no security for you, then there may be no future security for your loved ones. The original article has a bit more to chew on, with some helpful pointers to get you moving in the right direction.

Reference: The Slott Report (November 20, 2013) “3 Tips When Planning for a Special Needs Child”

For more information, see www.jerryreiflawyer.com

Estate Planning for a Special Needs Child

Financial and estate planning for your special needs child or grandchild may be the last thing on your mind while caring for their needs, but know that planning ahead can ensure proper protection for their future. The Wall Street Journal recently addressed this subject in an article titled Build a Financial Plan for Special-Needs Child. While you must approach your estate planning with a sense of urgency, the planning itself is an ongoing activity. Nevertheless, with special needs there are special concerns. Estate planning truly is a process and not an event. Don’t forget to consider the potential lack of public assistance resources in the future while coordinating your estate and financial planning. In addition, remember to factor in the lengthening life expectancies of adults with special needs. Life insurance, owned in the proper manner and in the proper amount, can provide additional financial security and peace of mind.

Reference: The Wall Street Journal (July 28, 2012) “Build a Financial Plan for Special-Needs Child”

Estate Planning for a Special Needs Child

Financial and estate planning for your special needs child or grandchild may be the last thing on your mind while caring for their needs, but know that planning ahead can ensure proper protection for their future. The Wall Street Journal recently addressed this subject in an article titled Build a Financial Plan for Special-Needs Child. While you must approach your estate planning with a sense of urgency, the planning itself is an ongoing activity. Nevertheless, with special needs there are special concerns. Estate planning truly is a process and not an event. Don’t forget to consider the potential lack of public assistance resources in the future while coordinating your estate and financial planning. In addition, remember to factor in the lengthening life expectancies of adults with special needs. Life insurance, owned in the proper manner and in the proper amount, can provide additional financial security and peace of mind.

Reference: The Wall Street Journal (July 28, 2012) “Build a Financial Plan for Special-Needs Child”

ESTATE PLANNING & ELDER LAW / SPECIAL NEEDS PLANNING

Some of us need to focus on planning for a child with special needs, especially when we are no longer there to organize and advocate on their behalf. Parents of children with special needs must make careful estate planning choices to coordinate all of the legal, financial, and special care needs of their children – both now and in the future. Comprehensive planning involves maximizing opportunities and minimizing risks. Making arrangements for lifetime special needs care is different than ordinary estate planning. Special needs planning is a balancing act to provide for the loved one with special needs, as well as for other members of the family, while at the same time protecting eligibility for government benefits designed to help those with special needs: “There are many intricacies in planning for the secure future of your family member with special needs. The process can certainly appear daunting at first, but the key is recognizing that you do need to plan, and the time to start is now.” We work daily with families facing these issues and offer a wealth of information on our website where you can learn about the four essential steps in Special Needs Estate Planning, why Special Needs Trusts are important and how proper planning can maximize your resources for your loved one(s) with special needs, while preserving their eligibility for public benefits.