Making Smart Moves: Planning for Tomorrow to Reduce Worries Today

What can you do to prepare for most contingencies in your life and your children’s lives?

Suppose that you were headed towards a comfortable retirement, but wanted to provide something for your two children, one of whom happened to have autism. When the Orlandos first came to Grimaldi & Yeung they were particularly concerned about their younger child, a man in his early 20s. Although his autism was of the “high functioning” kind, he lived at home and relied on his parents for many things. In addition, their daughter had just gotten married and the Orlandos wanted to be sure that she had the freedom to raise her family. Although the Orlandos were in their 50s, they wanted to be prepared for any eventuality. We helped them:

Inventory their assets, including home, investments, retirement accounts, bank accounts and insurance policies.
Update their wills.
Issue Advanced Directives to ensure that their wishes for their own lives were carried out.
Set up a Special Needs Trust for their son.
Prepare a Letter of Intent documenting their son’s needs and preferences.
Develop a complete, flexible estate plan involving the whole family and the transfer of many of their assets into a revocable living trust.

The process of creating their family plan made the Orlandos an even closer family — and relieved a significant source of anxiety.

Trusts & Estates: Trusts

Trusts are a flexible tool for managing assets both during one’s lifetime and after death. Unlike wills, they facilitate transfer of assets to beneficiaries without the oversight of a probate court. Depending on how they are structured, they can protect assets from certain tax liabilities, preserve eligibility for Medicaid and other government benefits and shield assets from creditors. While there are many different types of trust, the broad categories used in estate planning are Revocable and Irrevocable Trusts, with Revocable Trusts being far more common. Your Grimaldi & Yeung attorney will help you evaluate the right legal option for you based on your specific situation and goals.

Revocable Trusts

Features

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, including 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 event 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 they will accept 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. When a trust is funded at death, it is not necessary to reregister assets; they are simply “poured over” into the trust. This does not avoid probate, however.

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. In recent years, New York State has made powers of attorney 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.

Flexibility
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 regard. 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.

Access 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, Testamentary documents must be provided to avoid a presumption that the Will was revoked or superseded. Typically, only one original should be produced at death. Since Revocable Trusts are not probated, multiple originals may be signed once the transferred property is held in the Trust it remains available at the Grantor’s 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.

Uninterrupted Investment Management
One of the primary benefits of creating a revocable trust is the ability to provide uninterrupted investment 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 and Misconceptions about Revocable Trusts

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.

Disadvantage: Reregistration of Property
As noted above, in order to be included in a Revocable Trust, real estate must be reregistered in the name of the trust. This requires signing and filing a new deed and may involve legal costs and filing fees.

Disadvantage: Lack of Automatic Changes to Match 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.

Misconception: Tax Advantages
A common myth is that Revocable Trusts save income and estate taxes. They do not. In fact, during a grantor’s lifetime, property in a Revocable Trust is treated as if it were the grantor’s own property for both income tax and estate tax purposes.

Misconception: Immunity to Challenge
Another common myth is that Revocable Trusts cannot be challenged. Revocable Trusts, like Wills, can be attacked by dissatisfied heirs. Some jurisdictions — including New York — require witnesses when a Will is created, but not when a Trust is created. This can make Revocable Trusts even more vulnerable to challenge than Wills.

Misconception: Protection from Creditors
Because assets in a Revocable Trust remain fully accessible to the grantor, creditors can reach them during the grantor’s lifetime.

Revocable Trusts — Conclusion

The primary benefit of creating a Revocable Trust is that it provides a prearranged mechanism to ensure 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 a Revocable Trust usually outweigh the disadvantages, the decision to create one is complicated and requires a thorough legal analysis considering all of the above factors as they affect each individual and family.

Irrevocable Trusts

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.