Happy Estate Planning Awareness Month!
It seems like anything and everything has a “month” these days. A quick Google search reveals that October is Breast Cancer Awareness Month, Cybersecurity Awareness Month, Polish American Heritage Month, National Learning and Development Month. October also contains World Mental Health Day, World Arthritis Day, World Allergy Awareness Day, World Menopause Day, and My Birthday (most important)!
Anyway, I am sure you are all celebrating Estate Planning Awareness Month appropriately! I am not exactly sure how one celebrates estate planning, but it is always a good idea to make sure your ‘affairs are in order.’ Maybe pretend like you’re dead and see what your loved ones do??
What Is a Trust?
One key piece of estate planning involves the creation of a trust(s). The main reason for creating a trust is to make things easier on your loved ones after you’re gone. Or, as we like to say in our business, you’ve reached the end of retirement. For most Americans, the current estate tax limit is so high ($13.61 million per person) that there is generally no tax savings. Even after the existing rules “sunset” on January 1, 2026, the estate tax exemption will be around $7 million per person ($14 million for a couple).
A trust is simply a legal document that lays out rules for what happens with assets during the grantor’s life and after death. A grantor is the person (or people) who puts money and other assets (like real estate) into a trust. For most people, the overall goal is to avoid the lengthy and sometimes costly probate* process.
Types of Trusts
Revocable Living Trust
A Revocable Living Trust (Living Trust) is the most common trust utilized in estate planning. It allows the grantor(s) (the person who puts the money into the trust) to retain control of all the assets during their lifetime and specifies how their assets will be distributed after death. These types of trusts help to avoid probate* and maintain privacy for the grantor and the beneficiaries. A living trust also provides unique advantages for managing assets, especially in case of incapacity, and simplifies the distribution process upon death. Unlike a will, which only takes effect after death, a living trust becomes operational while the grantor is still alive.
Irrevocable Trust
An Irrevocable Trust cannot be altered or revoked once it’s established. The grantor effectively gives up control of the assets placed in the trust. While this may seem restrictive, irrevocable trusts are often used for tax purposes, asset protection, or for leaving assets to beneficiaries without the grantor’s estate being taxed heavily. They can protect assets from creditors and may reduce estate taxes. These are usually used for families that will exceed the estate tax limits.
Testamentary Trust
A Testamentary Trust is created as part of a will and only comes into effect after the grantor’s death. This type of trust is commonly used to manage assets left to minor children or individuals with special needs, ensuring that assets are distributed according to the grantor’s wishes over time. Unlike living trusts, testamentary trusts do not avoid probate. These are also called Trust Under Will (TUW) or a Springing Trust.
Charitable Trust
A Charitable Trust is designed to benefit a charitable organization or cause. There are two main types: a charitable remainder trust and a charitable lead trust. In a charitable remainder trust, the income from the trust is paid to beneficiaries for a set period, and the remainder goes to charity. In a charitable lead trust, the charity receives income for a set period, with the remaining assets going to beneficiaries afterward.
Special Needs Trust
A Special Needs Trust is designed to provide for a beneficiary with physical or mental disabilities without jeopardizing their eligibility for government benefits like Medicaid or Supplemental Security Income (SSI). This trust ensures that the beneficiary can receive additional support without disqualifying them from these essential benefits.
Spendthrift Trust
A Spendthrift Trust protects a beneficiary from creditors and from potentially mismanaging the assets themselves. The trustee controls the distribution of funds, often giving the beneficiary regular payments rather than lump sums. This trust is commonly used when beneficiaries are young or lack the financial discipline to manage large inheritances.
Final Thoughts
For most people, creating a revocable living trust is the best course of action. However, what many people fail to do is actually title their assets in the name of the living trust. This does take some legwork, but it will save your beneficiaries a lot of time and trouble. Most good estate planning attorneys will provide you with a summary page that you can take to the various institutions at which you hold assets.
One of my main beneficiaries (my son) experienced his first high school Homecoming this past weekend. We as parents are quickly learning that this is not a process to be taken lightly! There are a lot of unwritten rules around the sometimes elaborate ‘asking to Homecoming’ process and who is supposed to wear what colors!
We hope our parents have titled all of their assets in a living trust!
*Probate is the process of settling an estate through the court system. Every state and sometimes county is different, and the process can be confusing, costly, and time-consuming. Here’s hoping you and your loved ones do not have to deal with probate anytime soon!