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10 Myths and Truths About Living Trusts - Part II
Last month I explained five myths and truths to help you choose whether to use a Living Trust in your estate plan. Here are five more myths and truths about living trusts to increase your understanding:
6. If You Have a Trust, You Do Not Need a Will. MYTH and TRUTH. If you have a Trust, its provisions will affect the property that you have placed in the Trust during your life. For example, if your Trust states that you leave your home to your son, the Trust can only be used as authority for that transfer if the house was titled in the Trust during your life. If the home was titled in your name alone at your death, it is probate property and its disposition will depend on the terms of your Will. The trust provision will be ignored as the trust did not own that property.
If you have been careful to title all assets in the name of your Trust during your life, then the Will provisions will not be consulted to transfer Trust assets.
Another important reason to have a Will in addition to a Trust is to name a guardian for a child.
7. Corporate Trustees are Only For Wealthy Families. MYTH. Corporate trustees (usually a trust officer at a bank) can be used by families with moderate levels of wealth. Yes, they do get paid for performing this service, but the cost is often well worth it. In some families, there is no obvious choice for successor trustee (or executor.) Also, there may be disharmony among family members so the named trustee is in for a rough road fielding complaints at every turn. Few among us are trained to be a trustee, and the job can entail more than keeping an orderly checkbook. Decisions may have to be made about discretionary distributions among young family members. Tax elections may have to be made. A trustee family member takes on a "fiduciary duty" to the beneficiaries of the trust, and could even be liable in certain circumstances for mismanagement. Finally, this is simply a big job and you may want to hire a professional rather than saddling a family member with the hours of work required to accomplish it.
8. Don't Name Your Trust as Beneficiary of Your IRA. TRUTH and MYTH.
For tax reasons, it is generally agreed that a trust is not the best choice to be beneficiary of an IRA or 401(k) account. But tax reasons are not the only consideration. There may be beneficiaries who should not inherit funds in their own name. Perhaps they are too young or disabled; or perhaps they are wasteful of money even though they are adults. A trust can be drafted to comply with tax rules so that the result is not disastrous when the trust is named beneficiary of a retirement account. However, your attorney should be consulted before you name the trust as IRA beneficiary to make sure your particular trust is properly drafted.
9. Trusts need to be Amended Every 5 Years. MYTH.
Even though the rules on estate taxes seem to change every few years, and even though your family situation may have drastically changed, (from 0 kids to 5 kids!) the trust probably was drafted to effectively handle most of these changes. It is a good idea to have your estate plan reviewed approximately every 5 years, or if any of the following are true for you:
a. You have been divorced;
b. Your level of wealth has significantly increased;
c. A family member has become disabled;
d. You have moved to a new state.
10. At Your Death, Your Trust is "Set in Stone". TRUTH and MYTH.
When the person who set up a trust (the "settler" or "grantor") dies, usually the terms of the trust become set in stone - and the grantor probably wanted this result. He did not want anyone to be able to change his beneficiaries or the rules he set up for timing certain distributions to those beneficiaries.
If the trust was a joint trust and the other grantor is still living, the surviving grantor can change the terms of the joint trust.
Also, some trusts grant powers to a "trust protector," so that necessary changes to a trust can be implemented even after the grantor's death. This is very useful, for instance, to allow a person to modify or amend the trust instrument to achieve favorable tax status or to have the trust itself be transferred to another state. In addition, the trust protector could be empowered to remove or appoint a trustee, or to terminate the trust.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
10 Myths and Truths About Living Trusts - Part II
Last month I explained five myths and truths to help you choose whether to use a Living Trust in your estate plan. Here are five more myths and truths about living trusts to increase your understanding:
6. If You Have a Trust, You Do Not Need a Will. MYTH and TRUTH. If you have a Trust, its provisions will affect the property that you have placed in the Trust during your life. For example, if your Trust states that you leave your home to your son, the Trust can only be used as authority for that transfer if the house was titled in the Trust during your life. If the home was titled in your name alone at your death, it is probate property and its disposition will depend on the terms of your Will. The trust provision will be ignored as the trust did not own that property.
If you have been careful to title all assets in the name of your Trust during your life, then the Will provisions will not be consulted to transfer Trust assets.
Another important reason to have a Will in addition to a Trust is to name a guardian for a child.
7. Corporate Trustees are Only For Wealthy Families. MYTH. Corporate trustees (usually a trust officer at a bank) can be used by families with moderate levels of wealth. Yes, they do get paid for performing this service, but the cost is often well worth it. In some families, there is no obvious choice for successor trustee (or executor.) Also, there may be disharmony among family members so the named trustee is in for a rough road fielding complaints at every turn. Few among us are trained to be a trustee, and the job can entail more than keeping an orderly checkbook. Decisions may have to be made about discretionary distributions among young family members. Tax elections may have to be made. A trustee family member takes on a "fiduciary duty" to the beneficiaries of the trust, and could even be liable in certain circumstances for mismanagement. Finally, this is simply a big job and you may want to hire a professional rather than saddling a family member with the hours of work required to accomplish it.
8. Don't Name Your Trust as Beneficiary of Your IRA. TRUTH and MYTH.
For tax reasons, it is generally agreed that a trust is not the best choice to be beneficiary of an IRA or 401(k) account. But tax reasons are not the only consideration. There may be beneficiaries who should not inherit funds in their own name. Perhaps they are too young or disabled; or perhaps they are wasteful of money even though they are adults. A trust can be drafted to comply with tax rules so that the result is not disastrous when the trust is named beneficiary of a retirement account. However, your attorney should be consulted before you name the trust as IRA beneficiary to make sure your particular trust is properly drafted.
9. Trusts need to be Amended Every 5 Years. MYTH.
Even though the rules on estate taxes seem to change every few years, and even though your family situation may have drastically changed, (from 0 kids to 5 kids!) the trust probably was drafted to effectively handle most of these changes. It is a good idea to have your estate plan reviewed approximately every 5 years, or if any of the following are true for you:
a. You have been divorced;
b. Your level of wealth has significantly increased;
c. A family member has become disabled;
d. You have moved to a new state.
10. At Your Death, Your Trust is "Set in Stone". TRUTH and MYTH.
When the person who set up a trust (the "settler" or "grantor") dies, usually the terms of the trust become set in stone - and the grantor probably wanted this result. He did not want anyone to be able to change his beneficiaries or the rules he set up for timing certain distributions to those beneficiaries.
If the trust was a joint trust and the other grantor is still living, the surviving grantor can change the terms of the joint trust.
Also, some trusts grant powers to a "trust protector," so that necessary changes to a trust can be implemented even after the grantor's death. This is very useful, for instance, to allow a person to modify or amend the trust instrument to achieve favorable tax status or to have the trust itself be transferred to another state. In addition, the trust protector could be empowered to remove or appoint a trustee, or to terminate the trust.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
