What is a trust?

What is a “trust”?  What does it do?

There are three parties involved in a trust.  First is the person who makes the trust, called the settlor or grantor.  Second is the person who is to benefit from the trust, called the beneficiary (or beneficiaries).  Third is the person who manages the trust, called the trustee.  A trust is a contract, with terms determined by the grantor to govern how the trustee manages the trust, terms to decide how the assets in the trust are to be distributed to beneficiaries, terms to govern who is included in the class of “beneficiaries” if the beneficiaries are not clearly defined, terms to decide when the trust should terminate, among others.  Because a trust is a private contract, the settlor or grantor can decide upon whatever terms and conditions he or she wants in the trust, unless they are illegal or against public policy.

Essentially, a trust is a way for someone to control his or her assets “from the grave.”  For comparison, with a last will and testament, assets are distributed once the deceased’s debts are paid by his estate.  The administration timeframe with a will is usually no longer than thirteen months.  With a trust, the trust holds assets (typically by re-titling or re-deeding an asset) and the trustee makes distributions according to the terms of the trust, which could be at staggered ages (25, 30, 35), or to pay for college, etc., and could last for years.

There are several different types of trusts used for several different purposes.  Most of my clients use trusts to provide for children or grandchildren (pay for college, provide distributions at key ages in life), or they have a child or grandchild with a disability and they want to leave assets to their disabled loved one to maintain their quality of life, without jeopardizing government benefits.   Other common trusts include credit shelter trusts, life insurance trusts, domestic asset protection trusts, firearms (“gun”) trusts, pet trusts, IRA trusts, among many others.

Trusts have certain benefits that clients find attractive.  Unlike wills, which are public documents and can reveal private information including finances, a trust is not a public document.  Privacy can be a big concern for those wishing to keep certain things private, such as business owners and their finances.  Trusts, if properly funded, avoid the probate process.  In some situations, trusts can protect assets from creditors.  Particularly important for many of my clients (as mentioned above), trusts permit someone to control the distribution of their assets from the grave, often for years.

This blog post is a very general and condensed explanation of the benefits of a trust.  If you are interested in learning more about how a trust might benefit you, email me at julie@juliemillslaw.com or contact me via http://www.juliemillslaw.com.

Trustees for special needs trusts: “You must choose, but choose wisely.”

There are special considerations when choosing a trustee for a special needs trust.  As with any trust, the trustee should be responsible and trustworthy.  If the trust is for the benefit of someone with a disability, you have added issues to factor into your choice that are critical to family relationships, safeguarding assets in the trust, and maintaining the beneficiary’s eligibility for government benefits.

In my practice it is typically the parents or grandparents of a child with a disability who creates a special needs trust.  The natural choice to my clients for a trustee is someone who knows and cares about the child–usually a family member.  Oftentimes, however, the family member is unaware of what is involved with administering a trust for a disabled person, which could lead to legal and financial problems for the trust and the trustee.  Professional trustees (financial institution, etc.) are viewed with skepticism because the child often has specific, individual needs unfamiliar to someone who doesn’t know the child, and their fees can seem excessive.

ISSUES TO CONSIDER

  1.  Trustee will need to learn about government benefits, trust taxation, money management.  There are rules and regulations that the trustee will need to know.  Government benefits are complex, and maintaining them requires diligence.  Certain actions can jeopardize the beneficiary’s receipt of government benefits.   There are tax rules for trusts, and assets in the trust that need managed.  Your trustee should prepare to become very knowledgeable in unfamiliar areas of government benefits, trust taxation, and trust asset management.
  2. Trustee can be held liable.  A trustee of any trust can be held liable for “wrongdoing,” even for mistakes.  With a special needs trust, mistakes from a well-meaning family member serving as a trustee could result in the loss of crucial government benefits for the disabled beneficiary, most notably, medical insurance (Medicaid).  Unfortunately, family-member trustees often do not purchase trustee liability insurance, making them vulnerable if they make an improper distribution that jeopardizes receipt of benefits, or if they fail to file taxes or submit accountings correctly. (I highly recommend trustee liability insurance for trustees.)
  3. Family relationships might become strained.  If Uncle John is serving as the trustee of his niece Jane’s special needs trust, it is John who decides whether a distribution should be made.  If Uncle John and Niece Jane have always had a good relationship, and suddenly he is in a position of having to disappoint Jane by deciding against her request for something, their relationship might become strained.  Additionally, if John is a future beneficiary in the trust if Jane dies, an inherent conflict could also strain relationships.  Perhaps John is declining Jane’s distribution requests so as to keep as much money in the trust as possible for him if Jane dies?  Whether true or not, such a conflict has the potential of creating familial tension.
  4. Cost.  One of the main complaints with professional trustees is their fee.  For some financial institutions, annual trustee fees can range from 1-5% of the value of the assets of the trust.  This might not be excessive when you consider costs associated with a family member serving as trustee.  Due to liability and time concerns, it is advisable for the trustee to hire an attorney to advise on government benefits and maintaining eligibility.  A CPA is advisable due to tax filings and tax considerations with trusts.  An investment professional is suggested to meet the trustee’s fiduciary obligation to maintain trust assets.  The family-member trustee can be compensated a reasonable fee for his or her services as trustee.  It’s the trust that pays for these services.  A professional trustee’s fees might be comparable to the cumulative fees associated with having a family member serve as trustee–if so, then I suggest factoring in other considerations above when choosing a trustee.

There is a middle ground.  For clients who want the personal involvement of a family-member trustee, but want the expertise of a professional trustee, I recommend designating the family member as “trust protector” and a professional trustee as the trustee of the trust. The trust protector safeguards the financial and other interests of the beneficiary, and can take legal action on behalf of the beneficiary if there are problems with the trustee.  The professional trustee has the financial ability to compensate the trust if mistakes are made, and the expertise to reduce the chance of making mistakes.

If you have questions about special needs trusts, special needs planning, choosing a trustee, or the role of a trust protector, please contact me by email at julie@juliemillslaw.com, or visit my website for other ways to reach me.  Planning for the future of a loved one with a disability is both critical and complex!

 

 

 

Trusts–4 things they do that you might not know

A trust is an estate planning tool where the grantor (person who creates the trust) transfers assets to the trust to be managed by someone they choose as a trustee.  Transferring assets to a trust is accomplished in many ways, but largely by re-deeding or titling.  For example, John Doe transfers the deed to his house from “John Doe” to the “John Doe Trust.”

Here are 4 things trusts do that you might not know:

  1. Protect beneficiaries. Children and grand-children are typical beneficiaries in estate planning to protect their futures. Trusts can preserve assets to children by distributing certain amounts at certain ages, such as distributing one-third of the assets at age 25, another chunk at 30, another final chunk at 40 or any age.  Staggering distributions to a child ensures they are taken care of to an extent through a certain period in their life.  If you have only a will, assets go to beneficiaries once they reach 18.
  2. Provide for beneficiaries with special needs. People with special needs often need government benefits such as Medicaid and Supplemental Security Income (SSI) for healthcare and necessities. Special needs trusts ensure that a disabled beneficiary can have assets without disqualifying him or her from receiving government benefits.
  3. Provide for pets. Trusts can ensure the care of your pets by naming people (a caregiver) to care for your pets, and providing funds to ensure that your pets receive care.  The Humane Society of the United States estimates that over 100,000 pets are taken to shelters each year after an owner dies, and in areas with large elderly populations, half the pets in shelters end up there due to their owner’s death.
  4. Encourage certain values. Trusts can provide incentives for pursuing a post-secondary education, encourage community service or productivity, support home ownership, encourage long-term savings and planning.  You cannot condition distributions to beneficiaries on anything that violates public policy, but providing matching funds or financial support in certain circumstances can be a way to reward values that are important to you.

Contact me at julie@juliemillslaw.com to discuss setting up a trust.

Do you have a child with special needs? Avoid these 5 planning mistakes

Mistake #1:  Not preparing a stand-alone special needs trust that is in effect immediately.

Some attorneys incorporate a special needs trust for a disabled child into the parent’s estate plan, to take effect when the surviving parent dies.  This mistake can be costly.  If the child was to receive an inheritance from a relative when the parent is still alive, that gift would go to the child, and would become an asset that might interrupt the child’s receipt of benefits.

Mistake #2:  Naming the child individually instead of his or her trust on retirement and insurance beneficiary designations.

Naming the child individually on your beneficiary designations, instead of the child’s special needs trust, will result in the eventual inheritance going to the child outright instead of the child’s special needs trust.  The inheritance will then become a countable resource that will likely cause the child to lose certain benefits.

Mistake #3: Not telling family and others that a special needs trust exists.

For family (especially well-meaning grandparents) and others  who might include your child in their estate plan, they need to name the child’s trust as the beneficiary, and not the child.  They will not know to do this unless they are informed that a special needs trust exists.  As with Mistakes #s 1 and 2, any inheritance left outright to a child who receives benefits might jeopardize receipt of those benefits.

Mistake #4:  Opening a 529 plan.

Not to pick on grandparents again, but it is common for grandparents to open and fund 529 plans for their grandchildren.  This could be costly for a child with special needs.  If the child  does not go to college, and needs SSI or other benefits at age 18, assets in a 529 plan will likely disqualify the child from receiving benefits, at least until the assets in the plan are spent down.  The child would then have to reapply for benefits.

Mistake #5: Leaving no Letter of Intent.

A Letter of Intent is a comprehensive guide that you prepare for when you are unable to care fr your child, either due to your death or incapacity.  The guide is for the child’s caregivers to ensure a smooth transition in every aspect of their day and life after the surviving parent passes.  Change in routine is very difficult for many kids, particularly those with special needs.  Grieving the loss of a parent makes this transition even more difficult.  The Letter of Intent advises the caregiver of the child’s daily routine, activities, likes and dislikes, among many other things to ease a tough transition.

If you would like to discuss planning for your child with special needs, contact me at julie@juliemillslaw.com.

Disabled loved ones? Avoid this inheritance mistake

A real-life fact pattern with a client was that Grandma and Grandpa wanted to provide something in their wills to provide for their two grandsons who are disabled.  They decided they were going to leave them the farm.  The thought was not that their grandsons would live on and run the farm, but that it would be sold after their deaths and the proceeds would go to their grandsons who were both disabled.  Grandma and Grandpa had very good intentions, particularly since just the land alone had a fair market value of close to $10,000 an acre.  Great, right?  No.

This blog post is for families that include a loved one with a disability.  It is for parents, certainly, but also for extended family who choose to provide a bequest (personal property) or devise (real property, such as house and land) for a disabled family member.  The good intentions of family members in leaving money or property to a person with a disability might do more harm than good.

First, it is almost never recommended to leave an inheritance to a person with a disability unless there is a special needs trust for that person in place (I include Ohio’s “wholly discretionary trust” when I use the term “special needs trust”).  People with disabilities often receive benefits such as Medicaid, or Social Security Income, that could be jeopardized.

Second, the need for such a trust to be in place is the subject of this blog post—the critical mistake I’ve encountered with clients is that they have a special needs trust plan, but it has a certain type of special needs trust that only takes effect at death, called a testamentary trust.  There are trusts that are in existence now and are not funded until death, but that is not a testamentary trust.  To the contrary, with a testamentary trust, the trust itself actually comes into existence at death.  (Most of the situations that I have seen involve testamentary “supplemental services” trusts.)  If testamentary special needs trusts are valid and enforceable, what is the problem?  The problem is the real-life scenario in the top paragraph.

The last of the Grandma-Grandpa unit dies and leaves the 10-acre farmhouse and farm to disabled grandsons “Johnny and Joey.”  However, Johnny and Joey’s parents are still alive, and have a testamentary supplemental services trust (special needs trust), where the special needs trust does not come into existence until Johnny and Joey’s parents die.  In this scenario, there is no special needs trust in existence now, when it is needed.

Except in rare circumstances, I prepare stand-alone special needs trusts that are in existence immediately after they are executed (signed and witnessed).  If the boys’ parents or grandparents had a trust prepared that was already in existence, Grandma and Grandpa’s inheritance could have been left to the boys’ trusts, as well as  inheritances from others.  Because parents might not be the only people who choose to leave an inheritance for a person with a disability, their testamentary special needs trust is not the recommended choice in special needs planning.

If you have questions or would like to begin estate planning with a disabled loved-one in mind, email me at julie@juliemillslaw.com.

All I want is a simple will.

Legal resources for handling your own legal matter should be made more readily available for the public since the cost of hiring an attorney can be too expensive for too many.  In some situations, handling your legal matter yourself can be done if you are diligent about researching what you need, what is available, and what is required.  Unfortunately, the trap of “you don’t know what you don’t know” can ruin the best-laid plans, particularly estate plans.

“All we want are simple wills.”  This statement is followed by the direction that the couple (let’s assume they’re married) wants to leave everything to their spouse first, then the kids.  That does sound simple:  Mike and Carol Brady’s will would leave everything to each other then to their kids.  What could go wrong?

A popular do-it-yourself-will website posted an article that shows the reader how easy it is to write your own will.  First, name your executor.  Second, name “guardians for young children.”  Third, describe how assets will be divided and distributed.  Fourth, sign in front of two witnesses, then have them sign.  This is great too—again, what could go wrong?  This does sound easy.  Who needs an attorney!

Let’s examine the Brady’s “mirror wills” (they mirror each other—all to spouse, then to kids equally).  The first red flag is that the Brady’s have children from other relationships, and like most blended families, the kids aren’t adopted.  In most states, stepchildren do not inherit (unless specifically named).  Here, a typical will would state “I leave all my assets to my wife Carol; if she predeceases me, then to my children in equal shares.”  Mike dies, and all of his assets go to Carol.  Carol dies, and her mirror will states “…all of my assets to Mike; if he predeceases me then to my children equally.”  At Carol’s death, she had inherited all of Mike’s assets from when he died.  Since Mike predeceased her, then all of her assets, including from Mike, go to Marcia, Jan and Cindy.  Those are her children.  Greg, Peter and Bobby are her stepchildren.  What do the boys get?  Nothing under this standard, simple will!

Now let’s examine the do-it-yourself article.  Name your executor—not too hard, although the article did not mention naming successor executors, but most people would know that.  However, “Name guardians for young children.”  I name my brother John Doe and his wife Jane as guardians because they know and love my kids.  What if they divorce—now my kids might be in the middle of a custody fight because both were named guardians.  What if my brother John is killed in a car accident—does my sister-in-law keep my kids?  She would if both are named.  Or at brother John’s death would I then want my kids to go live with my sister so my kids remain with a family member?

The best (insert a little sarcasm) advice is “describe how assets will be divided and distributed.”  That appears easy to do—divided evenly among my 3 kids.  I see that phrase often in wills, “to my children equally.”  Dad dies, Kid 1, Kid 2, and Kid 3 each get an equal share of his estate.  But what if Kid 3 died before Dad?  An attorney would counsel you, and prepare accordingly, whether you want your estate divided between Kid 1 and Kid 2, or if you want one share to Kid 1, one share to Kid 2, and one share to go down to the children of Kid 3 (Dad’s grandchildren).

Most people who do their own wills and estate plans think the documents are good, but they don’t know what they don’t know, and they definitely won’t know because they’ll be dead when any problems are discovered (“oops, Dad disinherited his grandkids”).  Simple wills are not that simple in many instances.