Question: My friend told me that when he dies, his house and brokerage accounts are going to go to his children in trusts. I thought that trusts were only for people with large amounts of money that are trying to avoid taxes. Is this true? What are the benefits of his children receiving assets in a trust?
Answer: No, it is not true that trusts are only for the extremely wealthy. Trusts serve a variety of purposes, many of which are not related to estate tax savings.
Some individuals choose to put their assets in a trust while they are alive, while others choose for their assets to pass pursuant to a last will and testament. Regardless of whether a client creates a trust or only executes a last will and testament, each document can state that the assets go on to the beneficiaries in a trust that provides them with creditor protection. We often refer to these trusts as descendant trusts (if naming children as beneficiaries) or beneficiary trusts. The assets that are left to a beneficiary in this type of trust are considered separate and apart from the beneficiary’s estate, therefore not being subject to creditors, such as lending institutions or a divorcing spouse.
In this type of trust, the beneficiary can serve as their own trustee. As trustee, the beneficiary can make principal distributions to themselves for their health, education, maintenance and support. If the beneficiary wants a distribution for any other reason, he or she can appoint an independent trustee to make this distribution. If a beneficiary is a minor or below a state age in the document, the language creating the trust can provide that the beneficiary becomes co-trustee at a stated age and then maybe becomes the sole trustee at a later age. This may give the client peace of mind that the beneficiary will learn how to manage the trust assets over time rather than be thrown into the responsibility, potentially leading to a waste of assets.
The creator can decide if the beneficiary will receive distribution of trust income. Many times, the beneficiary will receive all income generated from the trust so that the income generated by trust assets will be taxed at the beneficiary’s individual tax rate rather than at the, often higher, trust tax rate.
Your estate planning should be able to protect you as well as your beneficiaries after your death. A properly drafted document can include protections for your beneficiaries that are far beyond the protections they could create for themselves. It is important to meet with an estate planning and elder law attorney who can help create the best plan for you.
– Michal Lipshitz, Esq. and Nancy Burner, Esq.