Michigan Estate Planning Blog

Is a Trust a Good Idea?

If chosen wisely, with the help of an experienced estate planning attorney, a trust can be a great chance to minimize taxes on your estate.

Forbes’ recent article entitled “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy,” explains that trusts are legal arrangements that benefit causes or people you choose down the line. They vary in how they are activated and accessed, according to these basic types.

Revocable or irrevocable: In a revocable trust, a grantor can reclaim assets whenever they want during their lifetime. In an irrevocable trust, a grantor gives up the right to reclaim property once the trust is designated.

Testamentary or living: a testamentary trust, created under a last will, becomes effective when the grantor dies and then becomes irrevocable to administer the inheritance. A living trust, also called an “inter-vivos trust,” is a transitionary method that helps with incapacity planning, putting a trust into action before death, and avoiding potential problems in the probate process.

Grantor or non-grantor: In a grantor arrangement, income is generally taxed to the grantor rather than to the trust. In a non-grantor arrangement, income is generally taxed to the trust (unless it is being distributed that same year).

With the help of an experienced estate planning attorney, you can look at the best opportunities for you to protect your assets from unnecessary charges, leaving behind as much of your legacy as possible.

Reference: Forbes (May 23, 2022) “Estate Planning Opportunities: How Trusts Can Minimize Taxes On Your Legacy”

What Is a Testamentary Trust?

 

Trusts are created to hold assets, and money in a trust is managed according to the instructions of the person who created it. A testamentary trust is a trust that’s created by a will after death, explains WTOP’s article entitled “What Is a Testamentary Trust and How Do I Create One?” Once the trust has been created, assets are placed into it and then distributed, as designated by its legal documentation.
There is also something called a revocable trust, which is a living trust created prior to a person’s death. A revocable trust is created outside of probate, which means that the heirs do not have to go through probate to receive assets from a living trust. Instead, a trustee can distribute funds directly to beneficiaries. Both testamentary trusts and living trusts are used for estate planning. However, a living trust allows for more flexibility and can have lower long-term costs. Living trusts are not only created outside probate but managed outside the court system as well. In contrast, testamentary trusts are administered through probate for as long as they are in effect.
A testamentary trust is frequently used to manage money for minor children, but it can protect assets in other situations too. The good thing is that there is a lot more court oversight. The bad part is court oversight is not cheap.
For example, a testamentary trust could be used to manage money for an 8-year-old beneficiary until age 25. But that means 17 years of probate. So, while testamentary trusts may be less expensive than living trusts to set up, they could cost more in the long run. These trusts are rare, and the one time a testamentary trust may have an advantage over a living trust is if someone involved in the estate is prone to taking legal action, in which case court management may be the better option.
You should ask an attorney to draft the documents. It should be an attorney who specializes in trusts and estates. Having an attorney draw up will and trust documents will make certain that they meet the state’s requirements and are written so that your assets are distributed according to your instructions.
When the creator of the trust dies, the testamentary trust will be created, and assets moved into it as stipulated in the deceased’s will. Distributions will then occur from the trust, as instructed in the trust documents.
Reference: WTOP (July 19, 2021) “What Is a Testamentary Trust and How Do I Create One?”

Should a Trust Be a Component of My Estate Planning?

 

Let’s say that there’s a young father with a wife and young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him.
This father owns his home is joint tenancy with right of survivorship with his wife.
Does he need to set up a separate trust, if most of his assets pass through beneficiary designations?
Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.
The minor would also receive the assets upon attaining the age of majority, which in most states is age 18.
No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.
The best option is to leave assets in trust for the benefit of the minor son.
The trustee can manage and use the assets for the benefit of the young boy with limited court involvement.
The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the beneficiary, if at all.
For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.
In some instances, the terms of the trust are included in a will. This creates a trust account after death, which is also called a testamentary trust.
Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.
Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”

Why Is a Trust Smart Estate Planning for Farmers?

 

A will gives people the basic assurance of where farm and personal assets will go at an owner’s death. However, a trust can give you added detail and instruction, plus flexibility to transition your farm in the manner you intend.

The LeMars Daily Sentinel’s recent article entitled “Trusts can serve as important estate planning tool for farm families” says that a trust is a very useful and flexible tool for estate planning. However, it’s most likely the most underused estate management technique.

A trust is essentially the creation of another entity to hold title to assets and then writing the rules as to what should happen with those assets, while so held.

An experienced estate planning attorney will help you decide if a trust is necessary in your specific family situation. More complicated situations with multiple generations and rights of ownership and management can make a trust a wise choice.

Some of the common mistakes people make with trusts include forgetting to retitle assets into the trust now or by beneficiary designation, so they will become part of the trust at death, and making certain the parties comprehend the types of tax liabilities based on the type of trust that is created. There are two main types of trusts—living and testamentary trusts. A living trust is established by a living person, as opposed to a testamentary trust that is created in a will and goes into effect at the time of death. Living trusts can be revocable or irrevocable. Every trust has different stipulations on what the grantor can and can’t control, as well as different types of tax liability.

With the help of an experienced estate planning attorney, a trust can help keep a family member in farming and let the other family members receive ownership in the farm, land, money, or whatever assets the grantor chooses. Due to the fact that farm operations have so many moving parts and expenses, a trust can help make the transition as easy as possible and can accomplish the goals of the grantor.

You should be transparent with family members and tell each one where they stand concerning the estate. Sharing documents and holding family discussions can also help keep everyone on the same page.

Everyone should have a copy of these documents, including a will, power of attorney, or a trust because everyone in the family should know what is going on.

Reference: LeMars (IA) Daily Sentinel (Dec. 29, 2020) “Trusts can serve as important estate planning tool for farm families”

Why Is a Trust Smart Estate Planning for Farmers?

 

A will gives people the basic assurance of where farm and personal assets will go at an owner’s death. However, a trust can give you added detail and instruction, plus flexibility to transition your farm in the manner you intend.

The LeMars Daily Sentinel’s recent article entitled “Trusts can serve as important estate planning tool for farm families” says that a trust is a very useful and flexible tool for estate planning. However, it’s most likely the most underused estate management technique.

A trust is essentially the creation of another entity to hold title to assets and then writing the rules as to what should happen with those assets, while so held.

An experienced estate planning attorney will help you decide if a trust is necessary in your specific family situation. More complicated situations with multiple generations and rights of ownership and management can make a trust a wise choice.

Some of the common mistakes people make with trusts include forgetting to retitle assets into the trust now or by beneficiary designation, so they will become part of the trust at death, and making certain the parties comprehend the types of tax liabilities based on the type of trust that is created. There are two main types of trusts—living and testamentary trusts. A living trust is established by a living person, as opposed to a testamentary trust that is created in a will and goes into effect at the time of death. Living trusts can be revocable or irrevocable. Every trust has different stipulations on what the grantor can and can’t control, as well as different types of tax liability.

With the help of an experienced estate planning attorney, a trust can help keep a family member in farming and let the other family members receive ownership in the farm, land, money, or whatever assets the grantor chooses. Due to the fact that farm operations have so many moving parts and expenses, a trust can help make the transition as easy as possible and can accomplish the goals of the grantor.

You should be transparent with family members and tell each one where they stand concerning the estate. Sharing documents and holding family discussions can also help keep everyone on the same page.

Everyone should have a copy of these documents, including a will, power of attorney, or a trust because everyone in the family should know what is going on.

Reference: LeMars (IA) Daily Sentinel (Dec. 29, 2020) “Trusts can serve as important estate planning tool for farm families”

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”