As the Federal and New York State estate tax exemptions continue to increase over time, clients are less concerned with the tax consequences of their estates and more concerned with protecting their beneficiaries from outside invaders, like divorcing spouses, creditors and long term care expenses. As a result, the wills and trusts we draft today are geared towards protecting those heirs. It may be time to review your estate plan in view of the changes in the estate tax laws and the general evolution of trust law itself.
A major shift is in how we transfer assets to beneficiaries. Many clients in the past would create trusts that distributed assets to children at specific time intervals, i.e. upon turning the age of 25, 30, and 35. While this is still an option, it does not provide the maximum level of protection for the beneficiary. By creating trusts that we refer to as “descendants trusts”, the beneficiary can have creditor protection, protection from divorcing spouses, Medicaid protection and protection against estate taxes when the assets are passed on to the beneficiary’s heirs.
A Descendant’s Trust can be drafted in many different ways. The beneficiaries can be their own trustee, co-trustee at a stated age and then their own trustee at a later age, or have a co-trustee indefinitely. The beneficiary can be entitled to the income generated from the trust assets and can distribute principal to themselves for health, education, maintenance and support (HEMS – an IRS term). Although HEMS is a broad term, if the beneficiary needs principal for any other reason, they can appoint a friendly independent trustee to authorize principal distributions.
The trust can state where the assets will go on the death of the beneficiary without the beneficiary having discretion over the disposition at their own death. Alternatively, beneficiaries can have a “limited power of appointment” which allows them to designate where the trust assets will go upon their own death. The limited power of appointment will state that the beneficiary can designate in a will, trust or separate instrument, the group of people who can inherit the assets upon their death. For example, a father creates a trust directing that upon his death the assets are put into two descendants’ trusts, one for each of his children. The trust can allow each child the power to appoint the assets to their spouses, descendants, and/or charities. In certain circumstances, a larger group of possible beneficiaries could be allowed. However, in order to protect the assets from the child’s creditors, the power would expressly disallow the power to appoint to the child’s estate, creditors, or the creditors of the child’s estate.
Furthermore, the will or trust can add “trigger” supplemental needs trusts that can protect the beneficiary if he or she needs long term care. With many of my clients living well into their 90’s, their children may be in the 60’s and 70’s when the parent dies. The may have done their own asset protection planning only to inherit more assets from a parent that are not protected. By creating descendants’s trusts in their documents, this problem can easily be solved.