Trust Types and Benefits
Trusts are unique, fascinating, and powerful.
They constitute a separate legal entity, which can own property, sign contracts, sue or be sued, and hire and fire managers or employees, all like a corporation or an LLC can. Yet, they are private, and not registered with the Secretary of State. Depending on your purpose, no one but family even needs to know a trust exists. As long as the person who set it up (you) is alive, the IRS and State Department of Revenue “disregard” them—so you also don’t need to file any tax documents.
No probate at death, because trusts don’t die. Instead, they merely change managers when the founder dies. And here’s one that is surprisingly important: your right to gradually, incrementally, give up control as you train the person whom you want to take over managing your affairs for you (e.g., an adult child) during your final years. That simply cannot be done with a “power of attorney.” Powers of attorney are often “clunky” and “jarring” and provoke anxiety, especially as one gets elderly and infirm. (See below.) The MANY other benefits of trusts are summarized below
No. None. You're still in charge 100%. You'll wear three hats. You are the creator of it (“settlor” or “trustor”). You’re the manager of it (“Trustee”). And it exists solely for your benefit (and perhaps your spouse’s) as long as you live (“Beneficiary”). In a married couple, when the first one dies, the trust continues to be solely for the remaining spouse—and no one else—as long as the remaining spouse is alive (i.e., unless you want it to work differently). And it’s completely “revocable” and can be changed in any way you want, by you, throughout your life. You and your spouse never lose control of your money or assets by putting them into a trust.
No, once it’s set up properly. While either husband or wife is alive, it’s called a “Grantor Trust” and requires no separate tax ID number or additional tax returns. Even your mortgage banker cannot object to your house being owned by your trust. You’ll manage your property “held in your trust” almost exactly like you did before you created a trust. There’s almost no learning curve.
A power of attorney grants someone else the authority to manage your property and affairs for you. But it’s “clunky” in that the power is either yours or theirs. On or off. You manage your affairs until the moment when they do. Letting go of all control, all at once, is scary—a major life shift—and not a proud moment. As a result, most clients wait far too long before they let go.
With a trust, you invite the next generation of manager to share power as a “co trustee,” and you train them, sharing power or control in whatever way YOU are comfortable with, for as long as you want. Someday—maybe—you resign and let them take over 100%. This “co-trustee” sharing power is far less anxiety-provoking, as you gradually turn over the reins. Your training and guidance, while your mind is still clear and strong, lead to much better outcomes.
In addition, a “power of attorney” is not always enforceable; the law requires financial institutions to honor them. Occasionally, they refuse to. But they can’t refuse a “co-trustee.” He's a legal owner of the property. A trust is more certain to get cooperation from banks, etc., with fewer hassles. (There are many more reasons that a “power of attorney” is no substitute for a trust. It's not a fair comparison.)
This rarely gets discussed. Since a trust doesn’t die and doesn’t go through probate but merely changes managers (“trustees”), there are huge benefits to be gained from the resulting continuity of property management and/or investment management. Few things necessarily have to change when you die. Or even when the second spouse dies. Some do. But the aspects of management that don't change can yield significant benefits to your family. That is simply not possible with a will or a power of attorney.
A trust is extremely private, both while you’re alive and after you’re gone. In contrast, probating a will after your death is extremely public. It's done in court, and everything that anyone says, files, or argues is all a public record. (A trust does not get probated.) If you have any circumstances in your family that you’d prefer not be wide-open publicly, then use a trust. Not a will.
One reason trusts are so powerful is that they are extremely flexible if your lawyer really knows trust law. Trusts can be drafted (and later managed) to achieve a wide variety of different, beneficial purposes. Which “goals” or “purposes” should you want from your trust? It all depends on your family members, their ages, lifestyles, the dynamics between them, your goals, your fears, and your unique collection of assets. And no one has just one purpose. You'll want to achieve multiple different goals with one trust. I can custom-design a trust for precisely the goals and purposes that fit your family.
Various Kinds of Special Trusts
Creditor-Protected Trusts.
If your child might possibly go through a divorce, or get sued someday (e.g., your child is a doctor, engineer, landlord, or engaged in other high-risk occupations or hobbies), then you may wish to protect their future inheritance from lawsuits. It is easy to give them a level of “asset protection” on their inheritance, which they literally cannot get on their own savings. And regarding the risk of future divorces, your trust can function like a “parental-guided prenup,” preventing them from ever losing any of the inheritance to a “future ex-spouse.” And there are many other scenarios where your creating “asset protection” on their inheritance could pay huge dividends, perhaps long after you are gone.
Special Needs Trusts [a.k.a. Supplemental Needs Trusts].
What if a child, grandchild, or other family member has “special needs,” such as autism? They may someday be eligible for Medicaid or other government financial assistance. If you leave them an inheritance in a “normal” trust or through a will, then it could destroy their eligibility. They could be required to spend all of it on their own needs BEFORE they will eventually be deemed “eligible” for any governmental assistance. We can prevent that. With a special needs trust, any money you leave them can be managed and spent on them in ways that do not impact their eligibility for governmental aid, allowing them the best of both worlds.
Incentive Trusts.
Perhaps some of the people you love are not living a life that you are proud of. Some people need incentives to make better decisions and live a healthier, more respectable life. You can leave them money in a way that builds in very healthy incentives to help mold and guide your heir’s future behavior and even character development. This need not be viewed as overly controlling, but instead as very loving. Depending on their need for it, doing so can be one of the kindest, most beneficial things you could do for them.
Charitable Trusts and “Donor Advised Funds.”
If you are wealthy enough that giving some to a church or charity will not dramatically reduce the impact of your other gifts on your kids’ lives, then you may wish to consider giving to charity. A small gift to some charities can do vastly more good than adding that small amount to the [already large] gift to your own child. There are specific types of trusts that are optimal for giving to charity at your death. And this: do you want to incentivize and facilitate your own kids and grandkids becoming philanthropists and inculcating those socially beneficial values? You can arrange a gift to charity in a way that your heirs are [invited to or required to] be involved 1–4 times per year to help them internalize philanthropy and to grow in character and enjoy the self-esteem from “their” charitable giving.
Taxes—the “Step-Up in Basis” – Efficiency in Capital Gains Taxes.
For most prosperous and moderately wealthy clients, “death taxes” simply are not a concern; they won’t affect you, no matter what planning you do. But income taxes and capital gains taxes can absolutely still affect how much of your wealth, at your death, will go to the government. Lots of money can be saved, or lost, to taxes, depending on whether you plan right or wrong, especially regarding “capital gains taxes” upon the sale of real estate, a company, or blocks of stock. The amount of taxes saved can be vastly more than the legal fees required to do the advance planning.
Taxes—Efficient and Inefficient Ways to Make Charitable Gifts at Death.
If you have any goal or thought of leaving any gift to any charity, then you need to plan ahead about which assets to leave to charity and which to leave to your kids or family members. The rules are different for IRAs, 401(k)s, Roth IRAs, and other assets you have owned for a long time that might have large “unrealized capital gains” built in. You need to plan carefully which asset goes to whom, to achieve the most tax-efficient outcome so as to maximize the total amount of good you do for all of your family and beloved charities (and to minimize the portion that goes to the government). Carefully designed trusts can achieve this.
Business Succession Planning.
If you own all or part of any closely held small business, such as an LLC or S corporation, then you need to plan ahead for how it will be handled after you are deceased OR suddenly incapacitated. Who will receive the economic value of your shares or ownership? Who will receive the “managerial rights” to manage the business or even to sell or liquidate it? How, and under what circumstances? How do you prevent them from arguing and fighting over big decisions after you are gone? You can either control all this or give lots of valuable guidance, in advance, with the right kind of trust.
“Upstream Planning” and Trusts Built for Those About to Inherit.
What if you are about to inherit a large sum of money yourself, from an elder, and you want to maximize its positive impact on your own life? We can! We can design terms, before you inherit, that give you “asset protection” on your inheritance, which lasts and pays dividends for the rest of your life, and maybe even the generation after that. But act fast, while your elder can still cooperate!
Pet Trusts.
Is it possible that you might leave behind a cat, dog, or other pet that you love at the time of your death? You should plan for their future, also. You can pre-arrange to give possession of the animal and money to maintain it very well to a trusted friend or family member. You can leave money in a trust to cover all future vet bills and other expenses. You can give incentives for treating your pet very lovingly and keeping it alive as long as possible. You can leave whatever amount is left at the pet’s subsequent death to anyone of your choice: to the pet’s caretaker, to your other heirs (e.g., your kids), or to a charity, perhaps even a charity that cares for abandoned animals. (They can do wonderful things with a modest amount of money and will be eternally grateful.) Creating a trust like this does NOT cost a fortune; it might just be $5,000 or $10,000 (i.e., perhaps just a fraction of 1% of your residual wealth at death, to ensure that your beloved pet has a wonderful rest of their life).
Family [Ancestor’s] Cemetery or Grave Trust.
Have you ever considered what may become of your (or an ancestor’s) gravesite and headstone many decades after your death? You can create a long-term trust to maintain and repair it over decades, maybe even hundreds of years. You'd be amazed how little it costs. Use a “Cemetery Maintenance Trust.” It takes very little initial funding (i.e., at the time of your death) to grow over decades with investment gains, paying for annual or periodic maintenance, refurbishing, or even replacement of components. Who knows what the future holds? There could even be a legal challenge, where a real estate developer or city wants to remove the cemetery. Your trustee will have the legal right and the funds to fight back and preserve the cemetery with a minimally funded Cemetery Maintenance Trust.
Gun Trust
If you wish to leave firearms to any family member, then you need to be careful to do so in a safe and responsible way that does not violate federal firearm laws, nor risk getting them in trouble by owning one.
Other Special Trusts Available.
These are many of the common goals and types of trusts, but there are more. Your needs may be even more unique. Call me, set up an appointment, and let’s discuss them. Trust law is so flexible that we can probably create a bespoke, customized trust that achieves your unique goals.