2019 – 11/11 

Will a trust make life easier for your heirs, reduce estate taxes, or provide other benefits when you die? In many cases, the answer is yes, and not just for the very wealthy.

While thoughtful estate planning is critical for people with substantial assets, even those with assets less than the estate exemption amount ($11.4 million in 2019) should explore the benefits of using a trust when making plans for their estate.

Staying out of probate

To better understand the advantages that a trust can offer, it is helpful to consider what happens when the estate plan relies exclusively on a will. If someone dies “testate,” this means they have made a valid will before they die. While this is certainly better than dying “intestate” (without a will), there is still a fairly complicated process, known as probate, that must be followed after death. As probate involves multiple legal and administrative steps prior to distribution of assets, avoiding probate via a trust can greatly simplify the process. 

Probate can be slow. It is a process that is carried out within the state courts. The named executor has up to four years to file for probate in Texas. This can potentially leave any named beneficiaries waiting for an extended period of time to receive asset distributions. And if the decedent held assets in multiple states, it may be necessary to file probate in additional states.

Probate can also be costly as it involves attorney fees and court costs. If there is conflict between beneficiaries, the fees can increase substantially. In addition, the probate process is public. This means that anyone who is interested has public access to the probate records, which may create unwanted scrutiny for the family.

Advantages of a trust

The use of a trust in an estate plan keeps some or all assets out of the probate process. Therefore it can be an effective tool to avoid delays, gain control of asset distribution, keep assets in the family, and avoid estate tax.

When a grantor sets up a trust, they can be very specific in how they want assets distributed. They may stipulate that assets be used for college tuition or health care.  They can also control the timing of distributions by setting predetermined intervals such as 20% at age 30, 20% at age 40, and so on. The grantor may also stipulate that the assets be distributed outright or placed in trust for the beneficiary. The latter is a particularly wise choice when there are beneficiaries with special needs. 

Achieving specific goals via trusts

The use of a properly created trust can also preserve retirement accounts when the grantor names the trust as the beneficiary of IRAs, 401(k)s, or other qualified accounts. This prevents a beneficiary from cashing the account out upon receipt. The beneficiary will be required to take distributions according to a required minimum distribution (RMD) formula over a number of years.

Establishing a trust can also insure that assets stay within the family. For instance, a QTIP (Qualified Terminal Interest Property) trust allows for trust assets to benefit the surviving spouse for the remainder of his or her life and then revert to beneficiaries that were previously named by the grantor. For example, when David dies, his trust assets benefit his wife Joanne. Joanne later marries Karl. When she passes away, the remaining assets in the QTIP trust flow back to David and Joanne’s adult children, not to Karl.

Estate tax considerations

For married couples with substantial assets, a revocable trust may be used to take full advantage of both spouses’ federal and/or state estate tax exclusions. When a spouse dies, the assets in a revocable trust can be used to fund a family trust – up to the amount of that spouse’s federal or state estate tax exclusion. The assets in the family trust can then continue to grow free from additional estate taxation when the surviving spouse dies. The balance of the decedent’s assets in excess of the exclusion amount can be transferred to the surviving spouse free of estate tax pursuant to the spousal exemption. When the surviving spouse dies, these assets would be included in the surviving spouse’s estate for purposes of estate taxes.

Revocability

Trusts can be formed as “revocable” or “irrevocable.”  A revocable trust allows the grantor the flexibility to contribute and remove assets, as well as the option to amend or revoke the trust altogether. The assets are still considered to be the personal property of the grantor, and thereby the trust does not offer protection of those assets from creditors. They are also considered assets for Medicaid planning purposes.

Alternatively, an irrevocable trust is just that. Once the grantor has contributed assets to the trust, they cannot reclaim them personally or revoke the trust. This protects trust assets from creditors. And because the assets have been contributed and the grantor no longer has ownership, an irrevocable trust is the type of trust used to reduce estate taxes.

Understand your options

A properly executed trust can offer many advantages in estate planning. The grantor can maintain greater control over their assets, potentially save on estate taxes, as well as have peace of mind knowing their wishes will be carried out in an efficient, timely and private manner.

As described above, a variety of trust vehicles are available, each with its own structure and purpose. To determine if the use of a trust could benefit and enhance your estate plan, please contact your Bland Garvey team. We’d be happy to work with a qualified estate attorney to design and implement an advantageous estate plan.

By Teresa Walker, CPA, CSA
Bland Garvey, P.C.
Suite 550
Richardson, TX 75080
972-301-9521

Similar Posts