During a recent client meeting I was discussing the relative merits of a Trust-based plan over a Will-based plan given the circumstances of these particular clients. The clients said something which I have heard a lot over the years in various versions—“we are not wealthy people like Warren Buffett or Bill Gates, we don’t need Trusts like they do.”
My response to them is that we are not talking about the same kind of Trusts that Mr. Buffett or Mr. Gates, or the many family Trusts you hear about on National Public Radio, rather we are talking about Trusts for the purpose of providing a means for financial and life management while you are alive, even if you are disabled, as well as a means for an orderly, private, and quick distribution of your assets to your loved ones, to charities, or to whoever you choose, after your death, with the ability to provide additional protection for minor beneficiaries or those with special needs for years after you are gone.
I just received a very nice discussion of the many uses of Trusts for the average family from my friends at the Alaska Trust Company. Rather than try to improve on their excellent product I am including it in this blog post for your consideration.
Trust Situational Checklist
The client has concerns about family members or beneficiaries who cannot manage their financial affairs. In this situation the estate plan can contain a trust that will prevent beneficiaries from squandering their inheritance and protect them from creditors, lawsuits and divorces. In some cases, you may even be protecting the heir from other family members and friends who want to borrow money. The trust can be written in a way that will pass assets on to the beneficiaries immediately upon the client’s death, or the client can designate distribution over time in what amounts and even for reasons that they specify.
The client is on their second (or later) marriage and/or has a blended family. Families with second marriages and blended families present some additional estate planning challenges due to the various relationships involved. A potential hurdle is figuring out how to divide an estate when each spouse has children from a previous marriage. For example, in a blended family, the husband may use a trust to make sure that his biological children are the beneficiaries of his life insurance benefits. Without a trust in place, it is possible that his current wife receives the benefits and when she dies, that money would pass to her biological children, leaving the husband’s children with nothing.
> The client is concerned about privacy. Unlike a Will, which is public information, trusts are confidential. For this reason, people who want to protect their privacy can benefit from a trust. This can be helpful for clients who wish to maintain privacy over how and to whom their assets are distributed.
Your client is in a relationship without specific legal status. Unmarried couples miss out on the biggest estate tax break there is: the unlimited spousal exemption. The couple might assume that each will leave the other everything. While this is possible, the first to die will pay an estate tax and then the inherited assets will be Included in the estate of the second person, who will then have to pay an estate tax on the same assets. Ideally in this situation they should leave property in a trust for the other to avoid paying taxes on the same money twice. Unmarried couples also need to beware of the consequences of unintended gifting during life. Rules about transferring property freely between husband and wife do not apply in this case.
>The client has a disabled child. In this case, a special needs plan should be carefully designed to make sure the disabled child continues to receive their government benefits. Inheriting even modest assets from any source can cause them to lose important benefits such as health care and housing. A Special (or Supplemental) Needs Trust (SNT) can be created to ensure that they will be taken care of once your client is gone.
The SNT has two main benefits:
1. The beneficiary can enjoy the assets that were intended for their benefit without disqualifying them from important governmental benefits.
2. If the beneficiary lacks the mental capacity to handle financial affairs, the trust can be administered by either a family member and/or by a trustee who can look out for their best interests, giving your clients peace of mind.
>Client is a professional in a high risk occupation. Assets that are transferred through a trust can be protected from creditors, which may be an attractive feature for people in professions that carry a substantial amount of risk such as business owners, doctors, architects and lawyers.
>The client has a business or holds an interest in such a business. Passing the family business intact from one generation to the next is one of today’s most challenging estate planning problems. Especially, in situations where your client is trying to give the company over to one child who is active in the business while maintaining proportionate distributions to others who are not. Using a trust, you can help your client keep the family business in the family for years to come.
> Couples without children. Clients without children may be concerned about who will look a5er their financial interests later in life. By setting up a trust, they can appoint a trust company to serve as a financial fiduciary giving them peace of mind in case they are ever in a position where they cannot manage their own finances. Adapted from, and courtesy of, the Alaska Trust Company.