What trusts can accomplish

Trusts give you greater control over how the assets you bequeath will be used. Some trusts let your assets bypass probate and get to your beneficiaries much sooner. Some let your assets bypass estate taxes. Some allow assets to bypass probate and estate taxes.

Some common benefits and objectives of trusts include:

• Avoid other taxes — A common tax-saving trust is an irrevocable life insurance trust. After you die, the death benefit from your life insurance policy is added into your estate. If sizable enough, that benefit can expose an estate to federal estate taxes. But set up an irrevocable life insurance trust and any death benefit proceeds will be sheltered from estate taxes.
• Keep family matters private — Trusts that avoid probate don’t become a matter of public record.
• Protect property even after it becomes someone else’s estate — Suppose you want to leave $500,000 to your minor daughter but fear she may mismanage it. You can establish a trust that gives her living expenses each year, and then a final lump sum at whatever age you think she’ll handle the money responsibly.
• Fund an heir’s secondary education — You can establish trusts to make money available to your children, relatives and even nonrelatives for college tuition and room and board expenses.
• Benefit charities and other institutions — You can establish a charitable trust that annually funds a charity while you’re still alive, then provides a larger annual amount upon your death. You can even have a trust make payouts to you while you’re alive and then, upon your death, turn over any remaining amount to a charity.

A living trust serves much like a will, but spares beneficiaries probate

A living trust is more of a will than a living will. A living will isn’t really a will — it leaves no assets to anyone — but a statement of your preferred medical treatment parameters should you become incapacitated. A living trust is very similar to a will, but differs in either of two significant ways:

• If the living trust is revocable — Your assets will bypass probate and you have the option of terminating the trust whenever you wish.
• If the living trust is irrevocable — You cannot terminate the trust in life, but your assets will still bypass probate and bequests from the trust will bypass estate taxation.

In a revocable living trust, you appoint yourself as the trustee and name a successor trustee to take over at your death. You then transfer ownership of your property to yourself as the trustee. This means that if your home will be part of the trust, you must change its title into the trust’s name. As trustee, you administer the assets for your lifetime. When you die, the successor trustee can distribute the trust’s remaining assets to beneficiaries (your spouse, your children) quickly, without the delay of probate.

In an irrevocable living trust, an independent trustee manages the assets and distributes them to trust beneficiaries. Transfer of the assets makes them the property of the trust, not your estate, which means the assets not only bypass estate taxation, but are also beyond the reach of creditors and lawsuits. An irrevocable living trust may also permit you to shelter some assets from capital gains taxes.

A further benefit to either type of living trust is that, should you become incapacitated, the successor trustee or independent trustee can assume control, ensuring the trust funds any healthcare you require.

One last caveat: You will still need a will to protect any assets you have not transferred into the living trust and to accomplish other goals, such as naming a guardian for minor children and forgiving debts.

Special-needs trusts and other irrevocable trusts

Irrevocable trusts cannot be amended or revoked once they have been created. Aside from irrevocable life insurance trusts and living trusts, you can establish irrevocable trusts for children and charities.

An irrevocable trust is a smart way to leave money for loved ones with special needs. If you were to leave it to them in a will, the bequest would count as income and likely disqualify them from receiving Social Security Income (SSI) and Medicaid benefits. A special-needs trust enables them to receive the benefit of your bequest without having to incur probate, dilution through estate tax, and an end to their disability assistance.

A special-needs trust specifically prohibits the use of trust funds to replace the benefits and assistance provided by any public benefits program, so it does not run afoul of public assistance. The trust’s funds can be used to pay for personal care attendants, vacations, home furnishings, out-of-pocket medical and dental expenses, education, recreation, vehicles and physical rehabilitation.

Testamentary trusts

Testamentary trusts are created from instructions in your will, which means they are not created until you die and the probate process is finalized. Testamentary trusts help provide for young children and others needing someone to manage their inheritance. A testamentary trust is not appropriate for helping someone with special needs because the trust’s payouts qualify as income and would likely disqualify the recipient from receiving public assistance such as SSI and Medicaid.

Handling trust litigation

Fillmore Spencer LLC offers a complete range of services in trust, estate, and fiduciary litigation. Our trust lawyer’s in Utah counsel and represent clients in lawsuits involving the appointment of trustees, the interpretation and construction of trusts, breach of trustee fiduciary responsibilities, beneficiary disputes and settlement agreements involving all types of trusts. Of course, one effective deterrent to trust litigation is sensible and thorough estate planning in designing and drafting the trusts.