In this episode of The Practical Planner, hosts Anne Rhodes & Thomas Kopelman dive deeper into the world of trusts, giving nuanced definitions of what differentiates a revocable trust from an irrevocable trust and providing advisors with the knowledge they need to discuss the functionality and benefits with their clients.
Watch or stream wherever you get your podcasts.
The common name for a trust that benefits the trust creator’s spouse. A sub-trust is a type of trust that is “created under” another Trust (or a “trust within a trust”).
A Marital Trust is useful for someone who has children from a previous relationship, worries about someone influencing their spouse to disinherit their beneficiaries, or is wealthy enough to worry about the estate and generation-skipping transfer taxes.
They receive a deceased spouse’s assets for the benefit of the surviving spouse. They generally protect assets from creditors while preserving the deceased spouse’s wishes for how their assets will be distributed and used, including at the surviving spouse’s death. When properly structured for tax planning purposes, they can preserve the deceased spouse’s generation-skipping transfer tax exemption amount without jeopardizing the unlimited marital deduction.
There are many ways to design a Marital Trust. If you want your spouse’s inheritance to qualify for a benefit called the “unlimited marital deduction” (i.e., passing an unlimited amount of property at your death to your spouse completely free of estate tax and without using your estate tax exemption), the Tax Code has stringent requirements for the design of this Trust. The Trust must qualify as a “qualified terminable interest property” (or QTIP) Trust. The wealth.com Marital Trust is this type of Trust.
Download A Printable Version of this Marital Trust Guide
Download PDF*Disclaimer: wealth.com is not a law firm and is not practicing law. That said, our platform is maintained with care by attorneys who used to practice at the top trust & estate law firms in the U.S. so you can be sure each legal document created with Wealth.com is of the highest quality and is legally valid and optimized for its state, covering all 50 of the United States and Washington D.C.
A good estate plan allows you to understand what happens to your assets when you pass away.
Generally speaking, there are three factors that can impact what happens to your assets at death:
It is not commonly understood that there are certain assets, such as a 401k, with beneficiary distribution rules that can override what is outlined in a Will or Trust.
This means that understanding the totality of various beneficiary designations is crucial to your estate plan functioning as you intend.
If that seems daunting, you’re not wrong. Trying to consolidate and manage everything that requires beneficiary designation manually can be tricky, especially as your life circumstances change over time. Fortunately, the wealth.com platform makes all of this easier to manage.
More on that in a bit — first we further explain how beneficiary designations function within optimized estate planning.
Many types of assets allow for a formal “beneficiary designation,” which directs where that asset will go upon your death regardless of the terms of a Will or Trust. Common examples of such assets include retirement accounts and life insurance policies. .
A closely related cousin of the beneficiary designation is a “pay on death” (POD) or “transfer on death” (TOD) designation. The same idea applies: if you pass away, your designation will bypass your Will or your Trust. Some states allow vehicles, personal objects, and real estate to pass through TOD, but the documentation must be carefully prepared to meet the legal requirements. Bank and brokerage accounts, closely-held stock and other securities may also pass by POD or TOD depending on the bank or custodian that maintains the account for you.
Typically, beneficiary designations are made through the institution where the asset is held (a custodian or administrator). Once a beneficiary designation has been made through the institution, it is important to keep track of who you designated as beneficiary for each asset so it aligns with and does not contradict how you want asset distribution to go in your estate planning documents.
Not all assets are eligible to have a designated, POD or TOD beneficiary. For example, there is currently no cryptocurrency exchange or investment platform that will allow you to designate a beneficiary for your crypto assets. It turns out a Will or Trust is one of the best ways to make sure your crypto will go where you want them to at your death.
Your assets can be owned in different ways. You can own them jointly with others and the titling carries implications for the designation upon death, or through an entity like a trust or corporation.
Certain ownership types, like “With Right of Survivorship,” “Joint Tenancy” or “Tenancy by the Entirety,” legally indicate that at one of the joint owner’s death, the other surviving joint owner(s) will automatically inherit the asset. In that case, the last survivor takes the entire asset and will be able to pass the asset to their beneficiaries through their Will or Trust. These forms of titling are especially common when you purchase real property with someone else.
The automatic transfer on death processes supersede any beneficiary designation or terms in your Will or Trust.
If you own an asset through an entity or arrangement governed by an agreement, the agreement may specify what your rights and restrictions are upon death. For example, you may own real property through an LLC.
The operating agreement for the LLC may contain provisions restricting your ability to transfer your LLC interests to your own beneficiaries upon your death, or give a right of first refusal to the other LLC members to purchase your interests.
If post-death rights are not spelled out, those LLC interests would likely default into your estate and pass to your beneficiaries through your Will or Trust.
Finally, many assets do not transfer to someone else automatically upon your death, as outlined in the two categories above.
These assets typically pass pursuant to your Will or Trust.
These three methods of asset distribution can work together as part of your overall estate plan to dictate where your assets will go upon your death.
However, understanding which assets have beneficiary designations and whether how you have titled the asset affects the default rights upon your death can be difficult because they are often disaggregated.
This is where the wealth.com platform comes in: our Asset Aggregation and Ownership Balance Sheet tools help record how you own your assets and what their various beneficiary designations are all in one place.
This information at the asset by asset level can be seamlessly paired with your estate planning documents to give you an understanding of how your assets will be distributed and with whom they will end up after your death.
Wealth.com helps you create and maintain a cohesive estate plan — providing the peace of mind that comes from knowing the friction your heirs will experience is minimized and your estate will be administered correctly when the time comes.
Note: Recording or updating beneficiary designations in the wealth.com platform does not alter your beneficiary designations; instead, we make recording all of your externally designated beneficiaries simple which helps maintain updated records and aids in the estate administration process.
The Checklist available for download below is designed to help people understand their responsibilities and organize tasks following the death of an individual who asked them to administer an estate.
Advisors can use this as a general guide to help clients navigate the administration of an estate through to its conclusion.
Estate Administration Checklist Download PDF
What is the difference between a trust and a will? This is one of the top questions in estate planning, but finding a clear answer isn’t always easy.
In this episode of The Practical Planner, Anne & Thomas dispel common misconceptions through straightforward discussion of the differences between wills and trusts, both definitionally and in practice — providing advisors with an actionable basis for estate planning conversations with their clients.
Watch or stream wherever you get your podcasts.
Adding value to a client doesn’t have to be complicated; sometimes, it’s as simple as making sure your client’s loved ones are taken care of if something were to happen to your client.
The checklists available to download below can be used to help clients optimize their planning — wherever they are in their estate planning journey.
But first, what is estate planning?
Estate planning encompasses two types of planning:
Every single one of your clients needs a foundational estate plan – and knows it. You can deliver massive value just by helping them check that box off. Then, you can graduate your client into the more complex transfers if they need it.
Review the legal documents alongside all beneficiary designations (e.g., IRAs, 401 (k)s and life insurance) and right of survivorship designations (e.g., WROS on financial accounts and real estate). These designations override the Will or Trust, which may come as a surprise to your client. Designations are often used as stop gap solutions until someone has a proper Will or Trust, at which point the designations may be removed in favor of the estate or be “funded” (i.e., transferred) into the Trust.
*An attorney or digital estate planning platform like wealth.com can help your client determine if a Trust is more appropriate than a standalone Will. The key consideration is whether avoiding a full-blown probate process, including privacy, is important to your client.
How often do you find wrong or missing beneficiaries when you go over the Will or Trust of a client (or potential client)?
Our partner Retirement Tax Services found that over 60% of prospective clients have wrong or missing beneficiaries, when they have an estate plan at all. That means the prospective client would be leaving assets to someone they didn’t expect at all. This is when the client has that “aha” or “I can’t believe this” moment.
Using the checklists included in the PDF below can help advisors create these “aha” moments and improve their clients overall financial wellbeing with better estate planning.
Estate Planning Checklist
Download PDFIn the premiere episode of The Practical Planner, hosts Anne & Thomas break down the foundational estate planning knowledge advisors need in an actionable way with real-life examples.
Watch or stream audio wherever you get your podcasts.
TL/DR: Estate planning isn’t as complex as it may seem and you don’t need a legal degree to create one. In short, estate planning is simply recording your wishes for what happens if you’re unable to manage your own affairs. This quick and comprehensive overview will give you a working understanding of the estate planning basics.
________________________________________________________________
No one likes to think about death, especially their own. But think about this: What will happen to your stuff—money, family heirlooms, even a pet—if something happens to you? If you haven’t created a document that tells your loved ones who should get what, and who should sign off on those decisions and do all the paperwork, your loved ones will have to decide for (and potentially argue among) themselves. You can provide for your family’s needs, ensure your wishes are honored, and save your loved ones a lot of anguish during an already stressful time by creating an estate plan.
Although estate planning is essential for ensuring your money and property are distributed in exactly the way you want, only one-third of adults in the U.S. have a Will. That overall number has fallen steadily over the past five years, but the COVID-19 pandemic did inspire those ages 18 to 34 to write a Will—63% more people in that age group created a Will in 2021 than in 2020.
So why don’t more people do it? The five main reasons are:
Unfortunately, these misconceptions are preventing people from putting even a basic plan in place. People perceive estate planning to be complicated, scary, or simply not relevant to them. The reality is, you don’t have to be a millionaire or own multiple homes to benefit from an estate plan.
You need an estate plan if:
Do any of these sound like you? Because most everyone can benefit from the peace of mind an estate plan brings, we want to demystify the process so everyone—yes, even those without a law degree—can see that it’s simpler and more accessible than they think. And, hopefully, the information in this guide will equip you with enough information to quit putting off this important task.
At its most basic level, estate planning is making preparations for when you’re no longer able to make decisions for yourself. It requires creating and signing a few legal documents; but more importantly, it requires thoughtful decisions so that the money and possessions you have earned and accumulated can be passed down to your family or whomever you choose.
Let’s talk about what you’ll put in place as part of a basic estate plan. The legal documents are:
There are two types of Trusts.
No one needs an estate plan. That is, unless you want to avoid confusion, chaos, hurt feelings, family drama, and delayed distribution due to probate. So, maybe you do need one?
An estate plan lets you give the gift of clarity to your loved ones—and does all the legal heavy lifting so they don’t have to. When you spell out your wishes in the legal documents listed above, there’s less second-guessing about your intentions for how your stuff should be distributed.
The opposite is true if you die without a Will or Trust in place. Legally, you are dying intestate, and your home state’s succession laws will determine how your assets will be distributed and to whom. These succession laws differ from state to state, but were likely drafted a long time ago, based on the most common wishes of a typical, American nuclear family, and likely do not reflect the complexities of your family and cultural heritage.
By not creating an estate plan, you are just letting the state legislature from decades ago take a guess as to what your wishes are. This is especially true if you’re single and don’t have dependents.
You may own assets that will not pass through your estate, either because of the title on the asset or because you designated a beneficiary. For example, jointly owned property–real estate, a car, or bank account–will automatically pass to the survivor, or you may have designated a beneficiary for a life insurance policy or retirement account. However, it is still important to have a Will or a Trust for several reasons. Certain assets must pass through your estate (for example, personal objects or cryptocurrency), so the only way to direct where they go at your death is through a legal document. Having no assets in your estate will make it difficult to pay for your last expenses, including funeral costs, legal fees, and any taxes.
Now that we’ve looked at the important reasons why to have an estate plan, it’s time to turn to the who in an estate plan.
The most important person is you, the creator of the Will (testator) or Trust (called grantor, settlor, or trustor–not to be confused with the trustee!). By taking the time for careful consideration and creating various legal documents, you are establishing clear expectations for how you want your money and property to be handled upon your death.
The other essential players involved in estate planning include:
Beneficiaries: These are family members, loved ones, or charitable organizations—anyone who receives an asset of yours in your Will or Trust. Assets can include cash, real estate, or that piano you inherited from your grandparents.
Heirs: If you die without an estate plan (or all the beneficiaries you listed in your estate plan have passed away or otherwise do not qualify to receive your assets), the people who will receive your assets are known as your heirs. Your heirs are determined under default succession laws. They are not necessarily the people you would have named as your beneficiaries.
Executor: If you create a Will, you will name an executor (sometimes called an administrator or personal representative) to manage your affairs after you die. This person will collect your property, pay any debts and taxes, and distribute the remaining property according to the terms of your Will. This often takes a bit of legwork, including contacting banks, investment and insurance companies, and appraisers.
Trustee: When the centerpiece of your estate plan is a Trust rather than a Will, this person manages your affairs just like an executor would. Because the roles are so similar, generally the same person is named in the role of successor trustee and executor. Moreover, if you put assets into your Trust during life, the trustee can manage them during your incapacity, instead of relying on a financial power of attorney.
Agent or attorney-in-fact: Not to be confused with an actual lawyer, this is the person you named in your financial or health care power of attorney to act or make decisions on your behalf.
Guardian: If you have children who are minors or have special needs, this is the person you name to care for the wellbeing in case both you and the other parent are unable to care for those children.
If you’re wondering whether a lawyer is also part of this list, it depends. Most people can set up and manage their estate plan on their own using online tools, like Wealth, which are backed by extensive legal expertise.
When you put together the what, why, and who behind estate planning, you can see it really boils down to thinking about and documenting your final wishes, then appointing someone you trust to be in charge of executing those wishes after you die. It’s a simple, thoughtful act that protects your family and your legacy.
We hope these explanations have shown that estate planning is important but not impossible. Like death itself, it’s not something people talk about much, which has led to a myth that it’s too complicated for the average person to tackle. The reality is, estate planning takes time and consideration, but it’s time well spent to safeguard your loved ones’ wellbeing.
TL/DR: Digital online estate planning can be safe, easy, and practical. Common questions about the process are discussed below.
_______________________________________________________________
Online options for things we once did in person are on the rise, and estate planning is no exception. Inexpensive and easy-to-use digital planning tools now allow you to create your Will, Advance Health Care Directive, and other estate planning documents at a fraction of the cost of hiring an attorney. But how do you know if digital estate planning is the right choice for you?
Below we answer common questions regarding ease of use, privacy, and security considerations when selecting a digital estate planning platform.
A: An online estate planning service should maintain rigorous security standards to protect user privacy. Wealth uses multi-factor authentication and bank-level encryption to secure all data from any potential breach.
A: Most online estate planning platforms work well for uncomplicated family and financial situations. The Wealth platform provides for unique situations, including blended families, gifts of specific items, creation of estate tax-exempt Trusts (e.g., the credit shelter or bypass Trust), and family-owned businesses. If you have any questions regarding your estate, you should consult a qualified attorney. Even if you’ve already created a Will or Trust with an attorney, you can still use online estate planning to modify those documents and manage your estate plan and keep track of your Trust assets.
A: Online digital estate planning can be much less expensive than meeting with an estate attorney in person. Additionally, you can revise your estate documents if you change your mind about gifts, agents, or if your life circumstances change. Digital estate documents do not include legal advice specific to your situation. If you have any questions about your estate documents, you should speak to a qualified attorney.
A: You can start your digital estate plan by simply providing your contact information and creating an online account. Once your account has been set up, Wealth will guide you step by step through the process of adding family members, beneficiaries, assets, gifts you would like to give, etc. Wealth provides guidance on how to select trusted agents, validate documents, and alerts you when issues might arise when transferring property or giving gifts.
A: Each state has its own laws about signing, witnessing, and notarizing estate planning documents. Wealth provides signature pages that are valid in your state of residence. Additionally, your Wealth documents will include detailed signing instructions and will alert you if a notary and/or witness(es) is required at the time of signing.
A: Wealth estate planning documents have been customized for the laws of your state and have been reviewed by a licensed attorney in your state. Wealth uses multi-factor authentication and bank-level encryption to secure your data from any potential breach. You can revise your documents at any time on your Wealth Portal online account. For an additional fee, an attorney licensed in your state is available to answer questions specific to your estate needs.
Ready to begin creating your estate plan? Click here to get started.
Start My PlanSo much of estate planning is thinking through how you want things handled after you die, before you start actually making a documented plan. The idea of a financial power of attorney (FPoA) flips that a bit, because it’s about appointing someone to handle your affairs in case you become incapacitated and can’t make your own decisions. The process seems complex, but we’ll simplify it so you can make sense of the basics you need to know to include this important element in your estate plan.
In a nutshell, a financial power of attorney is a document in which you appoint a trusted person to act on your behalf to make financial decisions. In establishing a FPoA, you hand over the legal reins to another person to conduct financial transactions, sign documents, or make other legal decisions as if they were you. This might happen for only a limited period of time (during a serious illness or after an accident, for example), or it can take effect immediately upon signing and last up to your end of life. Once your FPoA is completed, your trusted person, the agent, sometimes called an attorney-in-fact or fiduciary, can be responsible for managing your financial affairs. You will need to use a second document, called an Advance Health Care Directive (sometimes known as health care proxy or health care power of attorney), to designate who should handle all of your medical decisions. There are several types of FPoA, so consider the specific needs of your estate before selecting one.
The type of FPoA most commonly used in estate planning is a durable power of attorney. “Durable” indicates that your agent has your permission to act on your behalf even though you are incapacitated or disabled. In other words, the FPoA is effective until you either revoke the document or have passed away.
You can spell out your agent’s powers, responsibilities and restrictions in the FPoA. The powers vary from state to state but usually include the ability to:
Hire professional assistance, such as a lawyer or advisor
When an FPoA is not “durable,” your agent’s powers end when you become incapacitated or disabled. In other words, you want to supervise your agent’s use of the FPoA powers. This can be a good option for transactions that are not driven by estate planning needs. For example, you might grant your advisor a non-durable FPoA to conduct time-sensitive trades on your behalf.
In addition, you may be comfortable allowing your agent to change your estate plan or the rights of your beneficiaries; because these are such sensitive powers, in most states, you must affirmatively grant each estate planning power.
A complete estate plan should provide not only for death, but incapacity and unavailability. Putting a FPoA in place allows someone to continue managing your financial affairs if you cannot sign important documents yourself in case of emergency, a routine surgery, or even travel abroad.
Keep in mind that to complete your FPoA, it must be signed in accordance with your specific state’s requirements, which might mean signing before a notary public or witness(es).
The wealth.com platform makes it straightforward to get your Financial Power of Attorney drafted and securely stored in our Vault, and provides state-specific guidance on how to fill out and sign your FPoA.
Get this guide to Financial Power of Attorney as a printable PDF
Download PDFA Trust is a financial agreement between someone who owns an asset and a trusted person to hold and manage that asset for them. In estate planning, a Revocable Trust is often used as a substitute for a Will, but there are many types of Trusts that accomplish different objectives. If you’re trying to decide whether you should have a Trust in your estate plan, read this two-part article.
__________________________________________________________________
What’s the difference between a Marital Trust and a QTIP Trust? Are Bypass Trusts and Credit Shelter Trusts trying to accomplish the same goals? As you start learning about Trusts, you’ll learn that there are subtle differences between the Trusts that you might include in your foundational estate plan. Adding to the confusion, each lawyer has a different name for Trusts that do pretty much the same thing, and we try to provide the most common names for them.
Choosing to use a Trust in your estate plan is about being clear on your goals for how your assets should go to your loved ones. Trusts are created through a contract, and so there are a million different ways to write a contract to meet your specific goals.
This Article is divided into two parts. Part 1 is a primer on the key differentiators between Trusts. This Part 2 is a summary of the most commonly created Trusts in a foundational estate plan and their benefits.
The trusts named in this article are the ones you are most likely going to encounter when creating your foundational estate plan, which is centered on a Will or Revocable Trust and disposes of your assets when you pass away. This article does not discuss Trusts that you might create during life for wealth transfers or tax planning.
It is also important to realize that the descriptions for these Trusts are not mutually exclusive; you can use multiple adjectives to describe one Trust in your estate plan. For example, you can create a Marital Trust that is also a Spendthrift Trust.
This Trust is most often used as an alternative to a Will for disposing of someone’s assets at death. It is also a great vehicle to transition the management of your financial affairs smoothly to someone whom you trust, in case you become incapacitated.
Learn more about Revocable and Irrevocable Trusts in Part 1 of this article.
The Trust’s creator (“trustor”) creates this irrevocable Trust for the primary benefit of the spouse (i.e., your spouse can enjoy your assets after you have passed away). A Marital Trust is useful for someone who has a blended family, worries about elder abuse of their spouse or someone influencing their spouse to disinherit their beneficiaries, or is wealthy enough to worry about the estate and generation-skipping transfer taxes. There are many ways to design a Marital Trust, but if you also want your spouse’s inheritance to qualify for a benefit called the “unlimited marital deduction” (i.e., you could pass an unlimited amount of property to your spouse completely free of estate tax at your death), the Tax Code has stringent requirements for the design of this Trust (see “QTIP Trust” below).
The Qualified Terminable Interest Property Trust is a specific kind of Marital Trust. Its terms are properly structured to comply with the tax rules so that you can pass your property to your spouse in a trust and still benefit from the unlimited marital deduction.
One of the biggest “loopholes” under the estate tax rules is the unlimited marital deduction. This deduction allows you to pass unlimited amounts of property to your spouse (beyond the estate tax exemption of $12.92M in 2023), completely free of the estate tax.*
Not all Marital Trusts comply with these rules. For example, your Marital Trust may say that your spouse will be the only beneficiary for the rest of your spouse’s life, but if your spouse remarries, the Trust will end and your assets will pass to your other loved ones. By inserting the condition about remarriage, your Marital Trust does not comply with the tax rules. Your gift to your spouse counts toward the federal tax exemption, along with any property you pass to other non-charitable beneficiaries, and could lead to an inadvertent foot fault where your estate owes estate taxes.
____
*As with all things tax, there are a lot of factors to unpack in this statement. Importantly, your spouse must be a U.S. citizen. In addition, the federal government only grants this benefit to individuals who are legally married, and not individuals in a domestic partnership, civil union, or other relationship arrangements. The fact that the unlimited marital deduction was not available for individuals in same-sex marriages performed under state law was the basis for the seminal case, U.S. v. Windsor, 570 U.S. 744 (2013). The case declared the federal law, the Defense of Marriage Act, to be unconstitutional and forced the federal government to grant the same government benefits to same-sex spouses. Those government benefits include the estate tax deduction!
This Trust goes by many names, but in essence, it is an irrevocable Trust created at your death to allow your family to engage in death tax planning.* If your estate may have a tax issue, this Trust allows your executor or trustee to use what remains of your tax exemption amount ($12.92M in 2023 at the federal level*2) and shelter those assets from future death taxes. This Trust becomes a “family bank,” where assets continue to grow and benefit a family, but no death tax will be imposed with the passing of each generation.
____
*“Death taxes” in this article refers to the estate tax and generation-skipping transfer tax. These two tax regimes exist at the federal and state levels.
*2 The exemption amount may be significantly lower at the state level, and can be as low as $1M.
This term applies to estate planning for couples. It describes the most common combination of Trusts that are formed at the death of the first person who passes away: the Marital Trust (“A Trust”) and the Family Trust (“B Trust”). Your estate plan will then specify a mechanism for how your executor, trustee, or even your spouse, can allocate assets between those two Trusts.
As an additional variation on this term, if you and your spouse have a joint Trust (i.e., you created your estate plan together through one Revocable Trust), your estate plan may use A/B/C Trusts. In addition to the Marital and Family Trusts, your estate plan might create a Survivor’s Trust (read more below).
The Survivor’s Trust is relevant only when a couple creates a joint revocable Trust; it is the continuation of the revocable Trust once one person has passed away. With a joint Trust, the estate plan must describe where all of the couple’s assets will go – not only the deceased person’s assets, but also the survivor’s assets. Because one half of the couple is still living, the Survivor’s Trust exists to collect and hold the survivor’s assets without requiring the survivor to create a brand-new estate plan. The survivor can thus change and revoke the Survivor’s Trust as desired (but a Marital Trust or Family Trust is irrevocable).
This type of Trust goes by many names, and often references the name of the primary beneficiary (e.g., Trust for Sara). This irrevocable Trust allows the beneficiary to enjoy the Trust assets, but without the full control that comes with owning assets in their own name. This Trust is useful for designating someone else to manage financial affairs while the beneficiary is not ready or able to handle the responsibility, ensuring that assets stay within a family, protecting an inheritance from divorce or creditors (e.g., the beneficiary’s personal debts), and planning for death taxes.
These Trusts are drafted in many different ways, and can take the form of a Holdback Trust or Special Needs Trust, as appropriate.
The primary purpose of this Trust is to “hold back” the inheritance for a younger beneficiary until the beneficiary comes of age. This irrevocable trust is meant to be a temporary vehicle and is more robust than a UTMA account in allowing the trusted person to manage the beneficiary’s finances. Usually, you will be given the opportunity to decide on which birthday the trust will end and the beneficiary should be able to receive all the assets.
This irrevocable Trust is structured with a beneficiary who has long-term special needs in mind. The Trust usually lasts during the life of the beneficiary and preserves the beneficiary’s eligibility for government programs like Medicare. This Trust should have provisions allowing a trusted person to modify the Trust terms to optimize the Trust for the needs of that beneficiary, such as restricting certain powers, or adapting to government rules to access benefits.
This irrevocable Trust benefits a charity, and usually is created so that the gifts to the Trust qualify for a charitable deduction for income tax purposes, estate tax purposes, or both.
The second of the biggest “loopholes” in the estate tax rules is that a properly made gift to charities qualifies for an unlimited deduction (see “QTIP Trust” for the other unlimited deduction). To set up a Charitable Trust for tax planning, you must make sure that there are restrictions so that the organization cannot receive a Trust distribution unless it qualifies under the Code (usually, an organization that has maintained its 501(c)(3) status, but the estate tax rules have slight variations).
This irrevocable Trust benefits pets. You would name someone to take care of the pets and to handle the finances for your pets (which may be the same person or different people). However, Pet Trusts are disfavored under the law. For example, you may be able to benefit only the pets who are alive when you pass away, and not their descendants, and the Trust’s distributions are taxed as income to the caretaker even if they are used to cover the pets’ expenses.
This Trust must be properly structured according to state law to grant the layer of protection from legal claims against the beneficiary and the creditor’s state must also respect that result. When the asset protection is respected, the Trust’s assets are considered separate from the personal assets of the beneficiary to satisfy personal claims against the beneficiary. For example, the Trust’s assets may not be considered in alimony calculations upon divorce, or the Trust’s assets cannot be forced out of the Trust to pay the debt or a monetary judgment against the beneficiary. Oftentimes, creating this Trust requires an affirmative statement in the Trust document and giving the trustee full discretion to decide when distributions can be made.
A Trust is a financial agreement between someone who owns an asset and a trusted person to hold and manage that asset for them. In estate planning, a Revocable Trust is often used as a substitute for a Will, but there are many other descriptions for any single Trust such as Irrevocable, Living, Joint, Testamentary, and Grantor. If you’re trying to unpack these terms and decide whether you should have a Trust in your estate plan, read this two-part article.
_________________________________________________________________
A Joint Trust, a Testamentary Trust, a Sub-Trust, a Revocable Trust (which sounds so much like “Irrevocable Trust” when said out loud)… There are so many adjectives used to describe Trusts, and it can quickly make your head spin. Once you dig deeper into these descriptive words for Trusts, you realize that many of these concepts come in pairs. Once you understand what feature of a trust is being described, and what the point of comparison is, it becomes much easier to understand the Trust’s use case.
This Article is divided into two parts. This Part 1 is a primer on the key differentiators between Trusts. Part 2 is a summary of the most commonly created Trusts in a foundational estate plan and their benefits.
Choosing to use a Trust in your estate plan is about being clear on your goals for how your assets should go to your loved ones. Trusts are created through a contract, and so there are a million different ways to write a contract to meet your specific goals.
Here are the ways to describe a Trust that we will explore in this article:
Every term describes a different aspect of a Trust, and they are not mutually exclusive. In fact, every Trust can be described using one of the two choices from each category above. For example, if you use a Trust as a substitute for a Will in your foundational estate plan, you likely created a Revocable, Individual, Inter Vivos, Grantor Trust (most commonly shortened to “Revocable Trust”). If a Marital Trust will be created at your death, you will be creating an Irrevocable, Individual, Testamentary, Non-Grantor Trust. Let’s unpack each of these terms.
The Revocable Trust, as the name implies, can be undone or unwound; the person who creates the Revocable Trust can simply “revoke” or “pull back” the Trust. The Irrevocable Trust, on the other hand, is much harder to change.
The Revocable Trust is often used as an alternative for a Will. It can also be used as an alternative to LLCs or Corporations to own an asset more privately while the owner is still alive.
The Irrevocable Trust is often used to give away assets while maintaining control over how the assets are used or to protect from specific types of taxes.
For most people, the introduction to Trusts begins with their own estate planning when they have to choose between making a Will or a Trust. In this context, the type of Trust you will be considering is the Revocable Trust (also commonly called a “Living Trust”).*2
Just as you would be able to change or completely revoke a Will (in many states, you could do this by ripping the original document!), you should be able to change or completely revoke your Revocable Trust. This is important because you could change your mind over the course of your life about key terms, such as who should get what asset. While you are alive and have mental capacity, you can easily change or revoke your Revocable Trust by signing a new Trust document.
An Irrevocable Trust is much harder to change, and it becomes especially difficult to remove or add beneficiaries or modify their individual rights. You might encounter this type of Trust even when creating your foundational estate plan (for example, a Marital Trust). In most states, once the Irrevocable Trust exists, changing this Trust requires the appointment of an independent trustee (if the Trust allows for it), the agreement of all the beneficiaries, or a court action. All of these options may be expensive and may require hiring an estate planner to do it right. For this reason, you must be certain you understand what powers and benefits you are giving up when you transfer property into an Irrevocable Trust.
That being said, Irrevocable Trusts are powerful vehicles for wealth transfer and preservation because you can control how the assets will be used. When properly structured, they provide protection against death taxes and creditors, which Revocable Trusts cannot do.
___
*This article is about different adjectives describing Trusts. To learn more about why you would want a Revocable Trust instead of a Will, check out the article.
*2 “Living” is also sometimes used interchangeably with “Inter Vivos” (see section on “Inter Vivos v. Testamentary Trusts”). But its most common use is to mean a Revocable Trust that is used as a substitute for a Will.
An Individual Trust has one creator (called a “trustor,” “grantor,” or “settlor”), whereas a Joint Trust has two or more trustors. If you would like to create a Trust with someone else, be clear on why.
The most common reason to set up a joint trust is with your spouse. You already share in the management of the assets (e.g., you live in a community property state), file income taxes together, and share similar values, goals, and beneficiaries.
Income tax filings and payments may become messy if you and the other person are expected to report and pay the income taxes on the assets of the Trust (see “Grantor vs Non-Grantor Trust”) below.
For gift tax reasons (as well as introducing potential for complicated legal claims), you should also consider carefully giving your assets into a Trust that was created by someone else. For example, it may be tempting to give an inheritance to your nephew in a Trust that your parents set up for your nephew. It may be better for you to set up your own Trust to keep the Trust management straight-forward.
Inter Vivos Trusts* are created during the trustor’s lifetime, whereas Testamentary Trusts are created only at the trustor’s death. This description is about the timing of when a Trust exists and can hold assets.
Inter Vivos Trusts allow the creator of the trust to transfer assets during life. Testamentary Trusts lie in wait until the creator has passed away and receive assets only then. The most common way to create a Testamentary Trust is to draft it into a Will or within another Trust (i.e., a “Sub-Trust”).
You may encounter both Inter Vivos and Testamentary Trusts when creating your foundational estate plan. For example, if you use a Revocable Trust as a substitute for a Will, you are creating an Inter Vivos Trust. In fact, it is important to transfer as much of your assets into this Trust during your life, if minimizing probate is important to you.
Your estate plan may also involve any number of Testamentary Trusts (created under your Will or your Revocable Trust) in order to specify how your assets can be used or given away after your death or to allow your loved ones to minimize future taxes. For example, you might set up a relatively short-lived Testamentary Trust called a “Holdback Trust” just so someone can help your child manage their financial affairs until your child is older.
____
*This term means “among the living” in Latin, and the English translation is “Living Trust.” However, the Living Trust is now commonly associated with Revocable Trusts used as a substitute for a Will, and so “Living” has become a confusing term because you can create an Irrevocable Trust during your life.
If you’ve made it this far in this article, you are really well on your way to understanding the features of a Trust that are important to an estate planner. Here is one more concept, which may matter more to your CPA. Your Trust may own assets that produce income (for example, real estate that is leased). It’s important to understand who is responsible for paying income taxes for Trust assets: you or the Trust.
A Grantor Trust does not pay its own taxes; another person (usually the Trust creator) must include the Trust’s income on his, her or its tax return and pay any income taxes. A Non-Grantor Trust pays its own taxes using the tax brackets for estates and trusts, which are different from the tax brackets for individuals.
Grantor Trusts retain enough of a connection to its “owner” (or “Grantor”) under the Tax Code so that the Grantor pays the taxes. Who is an owner is determined under a complex set of tax rules, and estate planners often intentionally turn on or turn off Grantor status on the Trust; but at a minimum, the owner must still be alive.
Having a Grantor trust is beneficial if you do not want to complicate tax reporting by having the Trust file a separate tax return or you want to treat the payment of taxes as an additional annual gift to your loved ones. In addition, a Non-Grantor Trust generally pays more income taxes than an individual taxpayer on the same amount of income. This is because the trust tax brackets are “compressed”; a Trust taxpayer reaches the maximum tax rate (i.e., 37%) at a lower income than does an individual taxpayer.
How does this concept apply to your foundational estate plan? If you use a Revocable Trust as a substitute for a Will, it will be a Grantor Trust that you “own” during your lifetime. A Revocable Trust does not result in any income tax savings: you must include the Trust’s income on your own tax return and pay those income taxes.
If you use a Sub-Trust (or Testamentary Trust) in your Will or Trust, that Trust will be created at your death and will usually be a Non-Grantor Trust. It will have to file and pay its own income taxes.
If you’re ready to get started creating a Revocable Trust follow this link.
To learn more about specific types of Trusts and their objectives, read Part 2 of this series.
