"Trusts and Estate Planning – Determining if a Trust is Right for You"
TRUSTS AND ESTATE PLANNING Determining if a Trust is Right for You Geoffrey Garrett Estate Planning Attorney Your Last Will and Testament is the cornerstone of your estate plan; however, for most people, an estate plan does not stop there. Various other estate planning tools are typically used in order to create a comprehensive estate plan that covers all the various facets of estate planning. More and more people are choosing to include a trust as one of those additional components. While only a lengthy consultation with your estate planning attorney can help you make the final decision, answering some basic questions may help you decide if a trust is right for you and if so, which one works for your estate plan. TRUST BASICS Decades ago, trusts were used primarily by wealthy families who were trying to keep the family fortune in the family. Today, trusts have evolved to the point where even the average individual can benefit from a trust. Whether a trust is intended to guard the family fortune, or simply provide for the family pet, all trusts operate on the same concept and require the same four elements. At its simplest, a trust is a legal entity wherein you give fiduciary control over assets to a person or institution for the benefit of a third party. To create a trust, you need a trustor (the person who creates the trust), a trustee (the person who manages the trust assets and administers the trust), trust assets to fund the trust, and beneficiaries. Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 2 WHEN DO YOU WANT THE TRUST TO BECOME EFFECTIVE? Trusts that are created within your Last Will and Testament are referred to as testamentary trusts and do not become effective until your death. Trusts made outside of your Will are intervivos, or living trusts and become effective when properly signed and funded. Typically, a testamentary trust is used when you have small children whom you wish to provide for in the event of your death but to whom you cannot leave assets directly. Other common reasons to choose a testamentary trust are when you are creating a pet trust or a charitable trust. One important consideration when deciding between testamentary and living trusts is property ownership. Property used to fund a testamentary trust will remain yours until death whereas property used to fund a living trust may or may not remain yours depending on whether you make that trust revocable or irrevocable. Keep in mind that all assets owned by you at the time of death are subject to estate taxation. Therefore, if you own considerable assets, an irrevocable living trust may be a better choice. Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 3 DO YOU WANT THE ABILITY TO MAKE CHANGES TO YOUR TRUST? Another important consideration is whether you want to create a revocable or irrevocable trust. Testamentary trusts are always revocable up to the point of death because they are part of your Will which can always be revoked. A living trust, on the other hand, can be either. The primary advantage to an irrevocable living trust is that assets used to fund the trust are transferred out of your name and, therefore, are no longer subject to taxation. This can be a significant benefit for a taxpayer with high value assets or assets that will likely appreciate considerably over the years. Do not, however, overlook the primary ● ● ● disadvantage – an irrevocable trust is exactly The primary advantage to that –irrevocable. If, for example, you create a an irrevocable living trust trust and name all four of your children as is that assets used to fund beneficiaries and then have a falling out with the trust are transferred out of your name and, one down the road, you cannot remove the therefore, are no longer beneficiary from the trust. Likewise, if your subject to taxation. trust terms dictate that distributions are to ● ● ● begin when the beneficiaries reach the age of 21, but your 21 year old beneficiary develops a drug or alcohol problem, you cannot change the terms of distribution. Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 4 WHOM SHOULD YOU CHOOSE AS TRUSTEE? This is one of the biggest decisions you will make if you create a trust. Your trustee has both a tremendous amount of power and a considerable amount of responsibility. Even a simple trust requires detailed record- keeping, ongoing correspondence with beneficiaries, and yearly tax preparation because a trust is a separate legal entity. The more complex your trust, the more experienced your trustee needs to be. While many grantors initially consider appointing a family member as trustee, most ultimately choose a professional for the position. Even if a family member has the experience and education required for the position, it is often better to appoint someone who will not be emotionally involved in trust decisions. This is particularly true if your prospective trustee is also a beneficiary under the terms of the trust. A trustee must always act in the best interest of all beneficiaries which can be difficult to do when the trustee is a beneficiary or when the beneficiaries are his or her family members. Furthermore, it can create discord or outright hostility on the part of family members if one sibling, or family member, is appointed to the position instead of other potential candidates. Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 5 HOW MUCH DISCRETION SHOULD YOU GIVE YOUR TRUSTEE? This can be a very difficult decision to make. On the one hand, if you are too detailed in the creation of your trust terms, you can inadvertently tie your trustee’s hands if an unusual circumstance comes up. On the other hand, giving a trustee too much discretion can result in outcomes that you did not expect or authorize. It can also lead to a squandering of trust assets by the beneficiaries in a worst case scenario. This is precisely why your choice of trustee is so important. Most experts agree that a trustee should have a certain amount of discretion to deal with unexpected events; however, this means that your trustee must be competent and trustworthy. WHEN DOES THE AVERAGE PERSON NEED A TRUST? Complex trusts such as dynasty trusts, grantor retained annuity trusts (GRATs), and generation skipping trusts have historically been aimed at taxpayers who have valuable estate assets to protect. There are, however, a variety of circumstances that the average person faces that could warrant the creation of a trust, including: Providing for a pet – a pet trust can be created to ensure that your family pet is well cared for after your death. Supporting a special needs child – children with special needs frequently need assistance from federal or state programs such a Medicaid or SSI. In order to ensure they will qualify for those Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 6 programs while still holding on to your resources, you may want to create a special needs trust. Protecting a beneficiary from himself – if you have a child or grandchild who is too young to know how to handle money, or is simply irresponsible with money, a spendthrift trust can protect the assets you leave to him from creditors while still providing financial support. Once you understand the basics of a trust, and answer some of the above questions, you should be ready to consult with your estate planning attorney to determine if the addition of a trust would benefit your estate plan. Living Trust Network ---Types of Trusts American Bar Association -- Trusts Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 7 Recommended Book Co-Authored by Attorneys: Geoffrey H. Garrett and Stanley R. Byrd with Robert Armstrong and Sanford M. Fisch Co-Authored by Attorneys: An estimated $41 trillion in inheritance will change hands in the next years – H. 75% of families have Byrd 45Geoffreyyet Garrett and Stanley R.failed to plan. The world becomes with Robert Armstrong and especially Fisch more complicated by the day, Sanford M.in the area of tax and estate planning. With the ever-changing and confusing tax laws, it is difficult An estimated what type in inheritance will appropriate in your for you to know$41 trillion of planning is mostchange handsfor the next 45 years goal 75% of families have provide families with more family. The– yet of our new book is tofailed to plan. The world becomes more complicated by the day, especially in to area of tax over an readily available information and equip themthetake controland estate planning. With misunderstood. The best part is tax the book is area that is often the ever-changing and confusingthat laws, it is difficult for you a know what type follow question and answer format written into practical, easy to of planning is most appropriate for your family. The goal of our new instead of technical legalese. book is to provide families with more readily available information and equip them to take control over an area that is often misunderstood. The best part is that the book is written in a practical, easy to follow question and answer format instead of technical legalese. About Geoffrey Garrett Byrd Garrett PLLC 2150 N. 107th St., #501 Seattle, WA 98133-9009 Phone: (206) 363-0123 www.byrdgarrett.com Geoffrey H. Garrett purchased assets of the law practice of Stanley R. Byrd in 2008. For more than twenty-seven years previously, he pursued two challenging careers simultaneously, as an attorney in an active sole practice and a senior pilot for a major airline, where he achieved the rank of B-747 captain in the international operation. He was honored as his airline’s 2005 Captain of the Year in Seattle. He has been a frequent speaker on the subject of reorganizing troubled airlines, has written significant papers about airline code sharing and fleet restructuring in bankruptcy, and is the co-author with Stanley R. Byrd of Estate Planning Basics in Washington. Mr. Garrett advises in matters of estate planning and probate, trust administration, guardianship and planning for special needs, elder law and asset protection. He assists owners of small businesses with respect to entity formation, administration and compliance, purchase and sale of businesses and succession planning. Byrd Garrett PLLC| Trusts and Estate Planning: Determining If a Trust is Right For You 8