Estate Plan Check-Up 7: Trusts

When talking about trusts, it’s important to dispel a misconception out there that only really, really rich people use trusts. That’s just not true. Trusts are a foundational part of all of the planning that we do. Everybody who thinks about doing estate planning deserves to have the knowledge about how a trust could help them.

Think of a trust, like a family business – for example, a pizza restaurant. A family-owned pizza company has a founder. That’s the grantor of a trust. The company also has a president (who may or may not be the same person). For a trust, the role of president is called a trustee. That’s the person who makes all the decisions about the trust. The company also has assets – a bank account, maybe some real estate, and other assets. All of the assets are held in the trust for the benefit of one or more family members (or others) – the beneficiaries of the trust.

There are two types of trusts:

Revocable trust.
A revocable trust is a will substitute. It says that instead of all your wishes being in your will, some of them are going to be carried out through the trust. It’s a tool that we use to address particular needs and circumstances – for example, if you live in a jurisdiction other than New Jersey where probate is very expensive, or you own real estate in different jurisdictions, or you want privacy in your estate plan (a will is a public document). You still need a will though, even if you have a revocable trust.

Irrevocable Trust.
This is usually a trust that’s created for a specific purpose. Maybe you do some gift tax planning or asset protection planning for an older adult to be able to set aside some of their assets so they’re not subject to a forced spend down. There’s usually a particular reason that we would put together an irrevocable trust.

So how does one actually use a trust? Example. Let’s say that you have children that are under the age of 18. Legally, they can’t inherit assets in their own name and, practically speaking, you really don’t want them inheriting assets in their own name at age 18. They just don’t have a lot of life experience to know what to do with significant assets. By having a trust, you could have a beneficiary who is a child and have a trustee, who is an adult family member, and that trustee can provide guidance to the beneficiary, use the trust on their behalf, and eventually turn the money over to the beneficiary.

Why have a trust instead of just owning the assets in your own name? The single most important aspect of a trust is asset protection. If you create a trust for children (or someone else) and you put your money into the trust – this is whether you create an irrevocable trust while you’re alive or you create a trust inside of your will or revocable– creditors of the beneficiaries cannot get to that money. Example. If you have assets in a trust for a child and the child gets divorced, the money in the trust is not on the table when considering the division of marital assets.

Example. If you leave money to your spouse and your spouse is an entrepreneur and runs their own business and something unexpected happens and the business is failing, and there are personal debts of the individual, such anything they guarantee (e.g., a lease or a bank loan). The assets in a properly drafted and administered trust cannot be used to satisfy those guarantees even if there’s a judgement against them.

Example. For married couples, we sometimes use trusts for tax reduction. That said, as of 2021, you don’t have to worry about an estate tax unless your estate is valued in excess of $23 million. That could certainly change, though, and when there is an estate tax, using trusts is a way that you can actually reduce the estate tax and maximize the wealth that’s passed along to your family. In sum, trusts are for more than just the wealthy.

Professional Trustees
We are sometimes asked if we recommend that our clients hire professional trustees to administer their trusts. The best answer to this is “it depends.” It depends on who the family members are, who might be alternative trustees, and who the individual is. Sometimes you might have a difficult family situation where an outsider is the best person to take on the burden of trusteeship. Other times, if the trust is very complicated from a financial standpoint, you may really want to have that professional guidance. (The trustee could also hire an experienced financial advisor, without actually making the advisor the trustee.) Professional trustees are great, but they come at a price. Indeed, the biggest consideration with respect to professional trustees is whether or not it’s an expense that you want to incur. Also, if you want to provide the trustee a bit more personal touch, it may be better to have a family member than a professional trustee.

​Example. If you have a lifetime trust for the benefit of your child, but you want the trustee to have the flexibility to distribute all of the money sooner in life if there’s really no reason to hold it in trust (minor children grow up and are in a position to manage the money themselves), it would be better to entrust that discretion to a family member. Why? Because a professional trustee is likely to be more formal, more conservative in how they handle the trust. However, to the extent that the terms of the trust that you are putting in place are consistent with what you think you’re going to want for the long haul, a professional trustee is great – if you’re okay with the added cost.

Trusts and Social Security Benefits
We are sometimes asked if Social Security death benefits can be paid directly into a trust – for example, to support minor children who have lost a parent. Social security death benefits do not automatically go to a trust for a minor child, and the Social Security Administration (SSA) is not legally bound by any type of direction, in a will or otherwise, that the money be assigned or paid to a trust. That said, SSA has a mechanism to make sure that benefits paid to support a minor child (or for any Social Security beneficiary not handling their own financial affairs) go for their benefit, and that is the appointment of a representative payee. You certainly could say in a letter of instruction that it is your desire that a given person serve as representative payee, and then that representative payee could pay the monthly income into a trust. But it would be at the discretion of the Social Security Administration whether to honor that request.

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This post is for general informational purposes only. The information provided may or may not apply to you given the specifics of your situation. For a video presentation of this information, please visit Estate Plan Check-up. For more detailed information, please visit porzioplanning.com or contact us for a free 20 minute telephone consultation.

By Deirdre R. Wheatley-Liss, LL.M, CELA and Crystal West Edwards, Esq., CELA