Benefits &Financial
Options for Trusts
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In a perfect world, one moves effortlessly from a lifetime of work to a comfortable retirement. Upon death, your fortune would amply provide for your spouse and eventually flow to your children, who would then use their inheritances as you envisioned they would. However, real life circumstances of divorce, remarriage, stepchildren, illness, and untimely death require more forethought. Estate planning means more than simply distributing your assets. Addressing a family's unique circumstances requires setting up trusts that can be tailored more carefully than a Will to reflect both your wishes and your family's needs.
Don’t assume that trusts are only for the wealthy who need to cut taxes. Trusts are the most versatile tools in estate planning, allowing you to accomplish such disparate goals as providing for heirs who are minors, disabled, or from previous marriages, and naming a loved one to manage your assets if you become incapacitated. A living trust is frequently used as the foundation of an estate plan, and from there, more intricate trusts are devised to address special situations.
Minor's and Disabled Person’s Trusts
The two easiest ways to transfer assets to a child are to open a custodial account for the child at a bank or brokerage or to bequeath the assets in your Will, but both methods are inappropriate for substantial sums, because they allow the child to have full control of the funds at the age of majority, regardless of whether he or she is mature enough to handle the money. However, establishing a minor's trust to hold a child's assets permits you to keep the money in the trust beyond the child's 18th or 21st birthday as well as influence how the money is ultimately used.
Trusts may be established which dictate that the funds must be used to pay for tuition, books, room, board and other living expenses while a child is attending a four-year university, and that, upon graduation, the child will receive a small sum or portion of the money. The remainder in the trust can later be distributed to the child in increments at varying ages, such as 25, 30 and 35. Minor’s trusts may be established in your Will or during your lifetime, allowing you to give a child certain sums of money each year gift-tax free with some limited exceptions.
Providing for a disabled relative requires a more complex type of trust, known as a Special Needs Trust, because money paid to a disabled person, either directly or from a minor's trust, could disqualify him or her from vital government aid, such as Medicaid and Supplemental Security Income. Thus, the goal of a Special Needs Trust is to preserve an heir's eligibility for public assistance while providing support that will permit a higher standard of living than would be possible on government aid alone. Without a Special Needs Trust, a disabled heir is likely to deplete an inheritance quickly, with only public assistance for future support.
Qualified Terminable Interest Property Trust For Blended Families
A husband or wife typically leaves all of his or her assets to the surviving spouse with the understanding that the survivor will then arrange to convey the estate to the couple's children. However, if there are children from a previous marriage, you cannot safely assume that your spouse will provide for children who are not his or her biological offspring. Therefore, a QTIP (qualified terminable interest property) trust is needed. In brief, a spouse contributes property intended for the surviving spouse into a QTIP.
When the first spouse dies, the survivor is entitled to all of the trust income. After the survivor’s death, however, the trust principal passes to beneficiaries who were named by the first spouse when the trust was established. During the lifetime of the surviving spouse, trust principal can be withdrawn only if he or she has no other means to pay for health care, education, maintenance or support.
Leaving a financial legacy is not the only goal of estate planning. Through the judicious use of trusts, you can also leave a legacy of family harmony.
Victoria J. Hoffman, J.D., CFP, a 1981 graduate of Emory University Law School, maintains a law practice concentrating in advanced estate planning, retirement planning, and asset protection as well as transactional and litigation representation in commercial, business, corporate, franchise and equipment leasing matters. She is a Certified Financial Planner and an arbitrator (inactive) for the NASD.