As we discussed last week, Revocable Living Trusts can be an important component of an estate plan. They can express your wishes for how to handle your assets both during your lifetime and after you have passed, they can be changed as the circumstances of the Grantor’s life change, and they provide flexibility in inheritance that Wills cannot provide. So what makes a good trust?
The best trusts are known as Grantor trusts, where the Grantor, the Trustee, and the Beneficiary are all the same individual initially. This allows for the Grantor, if they are not disabled, to handle the assets held by the trust as they would individually—they can buy and sell property, invest in stocks and bonds, control businesses, and anything else they would like to do as they did before the trust was created. The Trust uses the Grantor’s social security number for identification purposes and any income passes through to the Grantor’s income tax return, so a separate tax return for the trust isn’t necessary.
It is important that your trust sets out your plan for how to handle your assets when you are disabled. The disability plan dictated in your trust can dictate how long you wish to stay at home (obviously as long as possible) and the quality of any care facility you may have to go to. This also gives your Trustee a fiduciary duty to act in accordance with your wishes during your disability. If your trust’s disability plans says “I want to keep wearing clothes and accessories from the stores and brands I’m accustomed to,” and you’ve always been known for your designer clothes and purses, your Trustee should be prepared to keep buying them for you. But the disability plan can also be used if there is any chance you may need Medicaid for nursing facility care in the future. If that’s a possibility, it should explicitly state that you wish for your Trustee to consult with an experience elder law attorney to ensure that asset protection planning is done correctly.
A good trust should be able to hold different kinds of retirement accounts. With the passage of the SECURE Act, there was a fundamental shift in the way that estate planners use IRAs in a plan—it is no longer as simple as naming the trust as a beneficiary and getting the stretch based on the oldest beneficiary’s age. Now trusts should acknowledge that with the 10-year distribution rules, the Trustee should determine what distribution schedule will work best for a beneficiary. In some cases, it may be best to front load the distributions, such as if the beneficiary is young and in a lower tax bracket or older and expecting to receive Medicare and/or pay IRMAA’s. For others, equal distributions may be appropriate. But this flexibility needs to be stated in your trust for your Trustee to take advantage of it. And any trust must have correct language in it to receive favorable tax treatment; without that language your beneficiary is stuck with a 5 year tax payout.
Your trust should provide asset protection to your beneficiaries after your death. There is always a chance that something in their life could change after your death—lawsuits, divorce, bankruptcy, disability. All of these in a poorly written trust could leave your beneficiary’s share vulnerable to outside creditors. Just having the wrong kind of income distributions can create a severe tax burden, due to the high rate of taxation on undistributed trust income. A new form of trust share, known as a Beneficiary Deemed Owner Trust (or BDOT for short), has made it possible for the income in a trust share to passthrough to a beneficiary, much as is does for the Grantor (see paragraph 2). While this can expose the income of the trust share to creditors, other provisions may allow for the trust share to change form if this becomes an issue for a beneficiary. The best provision to handle this is…
The Trust Advisor! The last thing a good trust should have is a Trust Advisor or Trust Protector. This individual has the power to step in and make changes to the trust if needed. They also have a fiduciary duty, like the Trustee, and their job is to ensure that they keep with your intentions and protect the interests of the beneficiaries of the trust. This can involve removing and appointing Trustees, revoking or restoring withdrawal rights to protect the income of a trust share, and amending the trust if changes in law would affect the trust administration. Having a Trust Advisor named in your trust alleviates the burden of having to go to Court anytime these changes need to be made.
Not all trusts are the same. Most trusts do not contain the provisions discussed above. Many trusts are designed only to avoid probate; most are not designed to be portable and work in any State. Many trusts contain old estate tax plans that were important at the time but are no longer needed and can frustrate your beneficiaries. Many trusts have never been funded which frustrates the very reason for creating a trust. All trusts should be reviewed from time to time by an experienced attorney who concentrates the law practice in trust planning. If you believe your trust is missing any of these important components, or you would like your trust to be reviewed to make sure that it includes these concepts, call W.G. Alexander & Associates at (919) 256-7000 to make an appointment.