Grimaldi & Yeung LLP has drafted trusts to help countless clients throughout New York. Our extensive trust practice includes trust management and settling trusts. Let us show you how you can use this commonly discussed but often misunderstood legal strategy to protect wealth and benefit your loved ones.
The Growing Need for Specially-Drafted Trusts
No matter the size of your asset base, a trust can be a critical part of your plan. It allows savings and other assets to be managed during your lifetime – by yourself if you are able and by your designee if you are not. It also keeps the assets private and out of court governed probate after your death. Additionally, a trust can be an important tool to do special planning for taxes, for underage heirs and for family members with special needs or disabilities and finally for individual heirs who need help with managing their inheritances or are at financial risk.
We craft a number of different trusts targeted to each client’s unique needs. These trusts include:
- Revocable trusts
- Irrevocable trusts
- Irrevocable life insurance trust
- Supplemental needs trusts
- And more
During this process, we can help you understand some of the buzzwords and phrases you may have heard from friends and relatives, buzz phrases such as “irrevocable trust” and “revocable trust,” among others. We will dispel the myths surrounding these concepts and advise you whether and how they may be helpful to you in your own circumstances.
A Revocable Trust is created when an individual (the grantor) signs a trust agreement naming a person(s) such as a family member or a trusted advisor, a corporation (bank or trust company) or both, as trustee to administer the assets in the trust. In many jurisdictions, such as New York, the grantor and the trustee can
be the same person. In such cases, however, a co-trustee should also be named in order to ensure continuity of management in the even of death or disability. Naming a bank or trust company as trustee, rather than a family member or individual, ensures that a competent trustee will always be available to act in the grantor’s best interest. In many instances, banks have set a minimum balance to be deposited before accepting the role of trustee.
A Revocable Trust typically provides that property be managed for the grantor’s benefit. In most cases, the grantor retains certain rights over the trust during his or her lifetime. These generally include the right to instruct the trustee to pay over all or any portion of the trust property, as the grantor desires, and the right to change or revoke the trust any time. The trustee’s powers typically include the right to make discretionary distributions of income and principal to the grantor and, sometimes, to the grantor’s family, if the grantor becomes incapable of managing his or her own affairs. When a grantor dies, the trust acts like a will, and the property is distributed to the beneficiaries as directed by the trust agreement. While a trust may be funded upon the grantor’s death, it is generally preferable to fund it while the grantor is living. This ensures continuity of asset management and financial support of the grantor, should he or she become disabled.
Funding a trust during a grantor’s lifetime requires reregistering securities, real property and other assets in the name of the trust. Reregisteration of property is not required in trusts funded at death where the probate estate is simply “poured over” into the trust. However, funding a trust at death does not provide the desirable benefit of avoiding probate and probate will be required.
Advantages of Revocable Trusts vs. Wills
Continuity of Management During Disability
Creating a Revocable Trust is probably the best way to ensure that your property remains available to be used for your benefit should you become physically or mentally incapable of managing your own affairs. While continuity of management is also possible when a durable power of attorney is signed, third parties such as banks, brokers and transfer agents often have more difficulty in dealing with a power of attorney than with a trust agreement. And, if the designated attorney-in-fact is unable to act, the power of attorney may not be usable. As of September 1, 2009, powers of attorney are becoming more complex because the agent appointed under the powers of attorney will be held more accountable for their actions.
If you become disabled and you have neither a Revocable Trust nor a power of attorney, an expensive, lengthy, and potentially embarrassing court proceeding is generally required to appoint a guardian before your property can be used to benefit either you or your family. Even after a guardian has been named, continued court supervision over the management of investments and disbursements is usually required. This can include annual bond fees, annual accounts and additional legal and accounting fees.
Using a funded Revocable Trust may allow you to name unrelated, out of state individuals and out of state trust companies to act as the primary administrator of your property at death. Without a trust, many jurisdictions limit your flexibility in this regards. Also, it is usually easier to make amendments to a revocable trust than to a will.
Avoidance of Probate
Because probate can be costly and time consuming, the avoidance of probate is often cited as one of the primary benefits of a Revocable Trust. The extent of this benefit may vary from one place to the next. For example, avoiding probate may be a significant benefit if you own real estate in more than one state, because you avoid multiple probate proceedings. Since each jurisdiction’s probate process is different, it is necessary to consult local counsel to determine which if any, disadvantages of probate apply to you.
Availability to Assets at Death
Assets in a Revocable Trust at the grantor’s death are available to raise cash to pay estate taxes, administration expenses and debts immediately after death, without waiting for a probate decree or issuance of preliminary letters. If the trust is funded prior to death, the property in the trust remains in the trustee’s name before and after the death and is immediately available for liquidation should the need arise.
Lost or Destroyed Originals
When offering a will for probate, the original will must be provided to avoid a presumption that the will was revoked. Typically, only one original must be produced at death. Since Revocable Trusts are not probated, multiple originals may be signed and one original may validate transferred property held in the trust at death. Having a Revocable Trust, therefore, may simplify the transfer of property at death if the original will cannot be located or has been destroyed.
No Interruption in Investment Management
One of the primary benefits of creating a revocable trust is the ability to provide uninterrupted investments management should the grantor become disabled, as well as after the grantor’s death. Assuming the assets were previously transferred into the trust’s name, there is no need to reregister securities after death. In addition, depending on the case needs and investment objectives of the grantor’s estate, there may be no need to develop a new investment strategy.
Disadvantages of Revocable Trust
Trusts vs. Wills
There are a few disadvantages that may apply to using a revocable trust instead of a will. These arise from the different treatment of trusts and wills under certain property laws.
Reregistration of Property
As noted above, in order to be included in a revocable trust, property must be reregistered in the name of the trust. This required signing and filing a new Deed and may involved legal costs and filing fees.
May Not Automatically Adapt to Changed Circumstances
In many jurisdictions, wills change automatically upon divorce, marriage or the birth of a child. Most jurisdictions do not provide similar flexibility for revocable trusts. Therefore, when circumstances change, the grantor must be sure to make the necessary amendments to the provisions of a revocable trust.
Myths About Revocable Trusts
Myth: Revocable Trust Saves Taxes.
No, revocable trusts do not save income taxes, nor do the save estate taxes. In fact, during a grantor’s lifetime, property in revocable trust is treated as if it were the grantor’s own property for both income tax and estate tax purposes.
Myth: Heirs Cannot Challenge a Revocable Trust.
Revocable trusts, like wills, can be attacked by dissatisfied heirs. In fact, in those jurisdictions where it is easier to create a will than a revocable trust, for example, in New York there is no need for witnesses to the signature of a Trust, thus, a trust agreement may be more vulnerable to objections than a will.
Myth: Revocable Trusts Protect Assets from Creditors.
This is incorrect. Creditors may reach the assets during the grantor’s lifetime.
The primary benefit of creating a revocable trust is that is provides a prearranged mechanism that will ensure the continued management and preservation of your assets, should you become disabled. It can also set forth all of the inheritance provisions of your estate plan. Due to recent changes in the tax laws, most revocable trusts can now be treated as part of a decedent’s estate for federal income tax purposes.Consequently, a revocable trust is now afforded certain postmortem tax advantages that are enjoyed by an estate; including the ability to report income on a fiscal year basis, rather than a calendar year basis.
Revocable trusts are not for everyone. Whether a revocable trust is appropriate for you or your beneficiaries depends greatly on your specific needs and circumstances. Although the advantages of creating revocable trust usually out-weight the disadvantages, the decision to create a revocable trust is complicated and requires a thorough legal analysis considering all of the above factors as they affect each individual and family.
- The Irrevocable Trust has all the asset management and probate-avoiding qualities of the Revocable Trust but adds additional advantages, usually in exchange for the grantor relinquishing control of the assets in the trust. The terms of the Irrevocable Trust are “fixed” and made permanent upon signing. Generally, the assets placed in an Irrevocable Trust are no longer in the grantor’s control and are managed by a trustee. An Irrevocable Trust can be an invaluable tool when one of four goals is desirable:
- Protection of assets from creditors: Assets in an Irrevocable Trust are not available to creditors.
- Medicaid planning and eligibility: Irrevocable Trusts can be drafted to meet Medicaid guidelines. Medicaid will review a trust of this type to see if the grantor has access to the assets it contains; if not, they cannot be considered when determining Medicaid eligibility. Grimaldi & Yeung regularly works with clients to balance their broader purpose and wishes with the need to maintain Medicaid eligibility.
- Providing for Special Needs: An Irrevocable Trust is the type created when providing for Special Needs. It ensures that assets remain available to provide for the beneficiary under the careful direction of a designated trustee.
- Guarding against spendthrifts: Many people are concerned that their heirs will not manage assets appropriately — or that their own financial acumen will diminish as they age. An Irrevocable Trust guards against this by placing assets under the control of a trustee who makes distributions within the guidelines established by the trust.
Irrevocable Life Insurance Trusts (ILIT)
Life insurance is a vehicle which many people use to preserve wealth and provide financial security for their families. Favorable tax treatment makes life insurance payouts exempt from income taxes; however, proceeds from insurance can be subject to the estate tax. If the policyholder dies and the policy is in his or her name, the value of the benefit will be included in the taxable estate. For this reason, many people choose to transfer their life insurance policies to irrevocable life insurance trusts (ILIT). When properly drafted, an ILIT can remove life insurance policies from their estate, as the trust is the owner of the policies not the individual. When the person on whose life the policy is written dies, the trust receives the benefit and disburses it according to the rules of the trust, avoiding probate – and the estate tax. An ILIT will allow you to make gifts over a period of time, and can be structured to carry out your wishes after your death. As with all trusts, you designate one or more trustees who are obligated to follow your instructions. The costs of creating and maintaining an ILIT are minimal; however, the trust will significantly enhance your estate plan and benefit your heirs.
Supplemental (Special) Needs Trusts (SNT)
A Supplemental Needs Trust – sometimes called a Special Needs Trust – is an important and flexible tool when you are doing long-term planning for an individual with special needs. SNTs are commonly used for three things:
- To guard against the beneficiary’s inability to handle finances due to spendthrift propensity, lack of capacity to invest funds and pay expenses or limited judgment.
- To create or protect current eligibility for government benefits for persons with disabilities.
- To lay the groundwork for a future application for government benefits.