An irrevocable trust is used in rare circumstances. Most trusts are revocable living trusts, you can change them. Irrevocable trusts are special and not used as much because they are irrevocable, which means it is unchangeable. One of the most common irrevocable trusts is a life insurance trust. It allows someone to take a life insurance policy, put it into the trust and keep the IRS from ever taxing the death benefits of that life insurance policy. Without an irrevocable life insurance trust the death benefits from the life insurance policy are fully taxable for estate tax purposes. Another common irrevocable trust is a charitable trust. Most charitable trusts are set up to allow people to give money to charity, maybe get some income and tax benefits during their lifetime, but to leave money to charity after they die. But most charitable trusts that are set up are irrevocable. The most common irrevocable living trust that we see is the Medicaid irrevocable trust. This trust allows you to set up a trust, transfer the title to your assets into the trust, you can be the trustee of your trust, you can continue to receive the income from the assets in the trust, but if it is set up at the right time and in the right way, you can protect all of the assets in that trust from future nursing home expenses.
Should You Put Your Special Needs Trust in Your Revocable Living Trust or a Stand Alone Trust?
The benefits of putting a special needs trust in your revocable living trust is that it is more flexible and it is changeable. We don’t know what the law is going to be in 20 or 30 years, we don’t even know what it is going to be next week. If the law changes in the future and your special needs trust is in your revocable living trust it is very easy to change the terms of that special needs trust, keep your child eligible for SSI and Medicaid, and still have the benefit of all the money you put in the special needs trust for them when you die.
The benefit of a standalone special needs trust is that it is irrevocable which might not sound like a benefit, but it can definitely be a benefit in certain circumstances. For example if someone wants to give a gift or leave an inheritance to the special needs individual, they can just gift or leave that inheritance to the standalone special needs trust without having to go to the trouble of setting up a separate special needs trust or perhaps inadvertently giving the special needs individual an inheritance that disqualifies them from SSI or Medicaid. This way other people can give money to the special needs individual and they are still eligible for their benefits. Now if there are changes in the law in the future, the best way to protect against that and allow some changes to be made to the special needs trust is to appoint a trust protector. A trust protector is someone who isn’t a relative, but is a trusted member of a wider circle of friends, it keeps the trust it as flexible as it can be, but will allow some changes to be made so that if the law changes the trust can still be in compliance so that the special needs individual can continue to receive benefits.
What is a Special Needs Trust?
A special needs trust is designed to help families with developmentally disabled children or other adults in the family who have suffered some type of injury that doesn’t allow them to make their own decisions. Someone in this situation can’t control their own money. Someone in this situation will be eligible for SSI and Medicaid. To be eligible for SSI and Medicaid when you are over the age 18 you can’t own more than $2000 worth of anything. With a few exceptions. If you own more than 2000 worth of anything you get disqualified from SSI and more importantly you get disqualified from Medicaid. Medicaid is the government sponsored insurance that will pay virtually all of the medial bills of the disabled person. An estate planning attorney can create a special needs trust, which is a device that, when someone passes away the inheritance for the special needs person goes into the trust and the assets in this trust will not be counted against that $2000 limit that the government has placed on eligibility. In other words, someone who inherits through a special needs trust has no limits on the amount they can inherit and still qualify for SSI and Medicaid. They can have millions of dollars in a special needs trust to help supplement their care and provide other luxuries and they can still qualify for SSI and Medicaid.
Should married couples consider re-marriage protection?
From our perspective the answer is yes. People get remarried pretty frequently after they lose a spouse. The only statistics we have seen show that 1 out of 9 widows remarry and 9 out of 10 widowers remarry. And my experience with men is that they are concerned about their wife remarrying and giving everything they have got to a new husband, but from a practical standpoint, when the wife dies first, we see the husband come in and remarry between 3 months and 18 months after the wife dies. It is very common for men to fall for a new woman and, unless you get remarriage protection in your estate plan, the new spouse can get everything the original couple owned, disinherit the children of that couple and all of the property goes to someone else. So it is very practical to make sure that your trust provides protection for your children. If there a remarriage, maybe that is a good thing for the spouse, but you don’t have to have the entire estate up for grabs by that new spouse who ultimately may be a predator, who inherits the entire estate of the original couple and then leaves it all to their own children. Effectively disinheriting the children of the original couple.
Can You Divorce Protect Your Child’s Inheritance?
Can you divorce protect your child’s inheritance? The answer to this is yes. Should you divorce protect your child’s inheritance, I think you should. I have for my children and I think you should consider it for your children too. One out of two marriages end in divorce. I have practiced law a long time and I have seen inheritances lost to an in-law. It doesn’t have to be lost to an in-law, but often times it is because Mom and Dad either didn’t want to do it the right way or didn’t get good counsel from an attorney on how to do it the right way. It is very easy to divorce protect your child’s inheritance and the easiest way to do this is through a special type of trust that we call a spendthrift trust. This type of trust not only divorce protects your child’s inheritance, it also lawsuit protects it and bankruptcy protects it too. Rather than leaving your children their inheritance in cash you leave it to them in a trust and, if they are good with money, they can even be their own trustee. But the money in the trust can be invested any way they want to, spent almost any way they want to, but can never be taken from your child in a divorce. You will never have to worry about your child losing the money you left them. It will be safe if you leave it to them in a spendthrift trust.
When should I begin planning my estate?
The problem with estate planning is that you never know when you are going to die. I just came from a meeting with a client and they said well, next year we are going to do this and the next year we are going to this other. And I said that is all well and good as long as you are alive. The fact of the matter is you could have an accident today. You probably aren’t going to have an accident today, but accidents happen all the time, that’s why you have life insurance, fire insurance, car insurance. Because accidents can happen. You need to make sure that you have quality estate plan in place at all times in case something happens and you die so that your family is not left in this lurch, and it will be a horrible lurch if you have no estate plan in place. Money may not go to the people that you want, expense to lawyers will eat up a large part of your estate. Your spouse and children may need all of the money you have, but with money going to lawyers, taxes and courts, there may end up not being enough left for your loved ones to live on if you don’t plan properly. A qualified estate planning attorney can help you put a plan in place and work with you as your circumstances change throughout life to make sure that your estate plan is always current and up-to-date. At Thomas Walters we offer a program called our Lifetime Lawyer program for just that purpose…
Why Choose a Revocable Living Trust over a Last Will and Testament?
Many people now prefer an estate plan that uses a revocable living trust over a will as the primary estate planning document. Here are four reasons why:
A properly prepared and funded revocable living trust plan avoids probate at death, including multiple probates if you own property in other states. A will must go through probate, and if you own property in more than one state, your family could face multiple probates, one in each state. Avoiding the cost of probate is often a factor when choosing a living trust, but many people are just as interested in avoiding the court process altogether, along with its delays, lack of privacy, loss of control and emotional stress.
A properly prepared and funded living trust avoids court interference at incapacity. Most people prefer to have their care and assets managed privately by people they know and trust, instead of being placed in a court guardianship, which is costly, time consuming, public and stressful. A will is of no help if you become incapacitated because a will can only go into effect when you die.
A living trust brings most of your assets together under one plan with one set of instructions, making it easier to provide fair and equal inheritances to your loved ones. On the other hand, a will can only control those assets titled solely in your name, and provides no control over jointly owned assets or those for which you have named a beneficiary (like life insurance or 401k plans).
A properly prepared and funded revocable living trust is more private than a will and is not as easily contested. Because probate is a public process, disgruntled heirs and other interested parties are invited to submit claims and contest your will, and unwanted solicitors may be able have gain knowledge about your family’s personal and private financial information. A revocable living trust does not have these pitfalls.
What, then, is a properly prepared and funded living trust? “Properly prepared” means the documents are written correctly according to the law and your desires. This is best accomplished by having an experienced estate planning attorney such as those at Thomas Walters prepare your trust. “Properly funded” means you all assets are properly titled in the name of your revocable living trust and proper beneficiary designation forms are completed naming your revocable living trust as beneficiary. Your revocable living trust only controls the assets that have been transferred to it. If you forget to put an asset into your trust, it will have to be added to your trust after you die through probate before it can be distributed along with your other assets according to your desires as set forth in your revocable living trust.
Myths and Misunderstanding about Revocable Living Trusts
People often hear things about living trusts from friends, family members and the media, and just assume they are true without taking the time to check them out. Here are some common myths and misunderstandings:
1. A living trust is expensive. A well-drafted living trust will have a higher initial cost than a will. But when comparing costs, the true cost of a will should include the costs of probate when you die, the costs of a conservatorship if you become incapacitated and the costs of a guardianship if you leave assets to a minor child. There may be some costs associated with transferring your assets to your trust when you set it up, but there are frequently similar costs associated with properly titling assets when a will is used as the primary estate planning document. Properly titling assets is essential to either a well-drafted living trust plan or a well-drafted will centered estate plan. When you compare the total costs of both plans, the living trust centered plan is usually less.
2. Trusts are for wealthy people and I do not own that much. Trusts have been around for hundreds of years, but became known as a tool for the wealthy because they were used mostly by those needing special estate tax planning. In recent years, however, the benefits of a revocable living trust for all size estates have become more popular. Generally speaking, costs for probate and court conservatorships/guardianships (which a living trust can avoid) take a higher percentage from smaller estates, which can least afford it, than from larger ones. In addition to the cost savings, most people choose a living trust because they want to spare their loved ones the hassle of dealing with lawyers, judges and courts.
3. Most people end up going through probate anyway so a living trust is a waste of money. If your living trust is properly prepared and assets are properly titled, your assets will not go through probate. If you have a living trust, there are only three reasons why your assets would go through probate: 1) you did not transfer all of your assets into it; 2) your trust is not properly written (you need the services of an experienced attorney such as those who work with Thomas Walters to do that); 3) you do not have a revocable living trust. A trust that is part of your will is not a living trust and will not avoid probate; it can only go into effect after your will is probated.
4. I would have to give up control over my assets. If you are your own trustee, as most people choose to be, you will be able to do anything with your assets that you could do before they were in the trust: buy/sell, change your trust or even cancel your trust. If you name someone else to be your trustee, you (and, generally, your beneficiaries later on) can replace the trustee if you are not satisfied. Trustees must follow the instructions in the trust or they can be held legally liable. You decide when your loved ones will receive their inheritances; your trustee can make periodic distributions, but assets that remain in your trust are protected from irresponsible spending, creditors, even divorce proceedings. Bottom line: a living trust lets you keep full control over your assets while you are living, if you become incapacitated and after you die.
5. I would have to pay trustee fees. As long as you are your own trustee, you do not pay any management fees. Successor trustees are entitled to receive a fee, but family members often do not take one. If you choose a professional trustee, they will only charge a fee when they start to act for you; usually it is a small percentage of the trust assets and, given all the services they provide, most people find the fee to be reasonable.
6. I would have to have a separate tax ID number and file a separate tax return. While you are living, you continue to use your own social security number and file your normal tax return. (The IRS considers a living trust to be a non-event because it can be canceled at any time.) Only if your trust will continue after you die will it then need a separate tax ID number and tax return.