March 2015< Back to View All Publications
When it comes to creating an estate plan, careful thought and consideration must be given to designing the trust to best fit the needs of your family. The revocable trust (also known as the “family trust” or “living trust”) is the foundation of a proper estate plan and governs how you will pass your estate on to your beneficiaries. This month’s newsletter will explore three common designs for the revocable trust.
When it comes to creating an estate plan, careful thought and consideration must be given to designing the trust to best fit the needs of your family. The revocable trust (also known as the “family trust” or “living trust”) is the foundation of a proper estate plan and governs how you will pass your estate on to your beneficiaries.
The main reasons people set up revocable trusts are to avoid probate and to give their kids (or other beneficiaries) their inheritance on specified terms. Estate taxes are also a consideration, but with this year’s federal estate tax exemption level set at $5,430,000 per person this means fewer and fewer families are being impacted by estate taxes.
When it comes to designing a trust, there are three common methods to pass an inheritance. Each will be briefly described below. Keep in mind that you can integrate each of these design options for separate beneficiaries under your trust. Further, I always tell my clients that we can come up with a creative way to address any specific wishes they have in regards to their estate plan.
Starting Point: Specific Bequests
First off, keep in mind that you can include “specific bequests” or gifts to certain people or charities in your estate plan. Once those bequests are made, the balance of the trust assets (or the remainder) is usually divided into equal shares or certain percentages for other beneficiaries.
Many clients choose to leave specific bequests of certain property or dollar amounts. These gifts can be left to family members, friends or charities. For example, you could decide to leave your grandfather’s watch to your brother, your classic Chevrolet Chevelle to your best friend, $10,000 to your church, and $5,000 to your favorite charity.
Distribution of Remainder
Once the specific gifts are made, the trustee is then tasked with dividing the remainder based on the terms you design. There are three common trust designs: outright, staggered distribution, and continuing trust.
The traditional way that inheritances have been passed for hundreds of years is outright. This is the way that most people think of when they are faced with receiving an inheritance. Outright means that the inheritance is given to the beneficiaries all at once and the beneficiary then takes ownership of the assets in their own name. Often times assets are liquidated and then divided up to all the named beneficiaries. Each beneficiary would get a check that they can deposit in their own account.
There’s nothing wrong with this approach – as I mentioned above it’s the way estates have been passed going back to the start of time. It’s simple and easy to administer a trust this way – especially if the inheritance is going to mature, trustworthy beneficiaries.
Some people have concerns with giving a beneficiary their entire inheritance all at once. For these people, a staggered distribution design may achieve their goals. Let’s say you have children in their teenage years. It may be hard to wrap your mind around leaving these kids large sums of money until they are significantly older. In this situation, some people choose to give a portion of the inheritance to the beneficiary at various ages or life milestones.
For example, I have worked with clients who like the idea of passing an inheritance at three stages. A common design that I see is to leave 1/3 of the inheritance to the beneficiary upon reaching age 25, half of the balance at age 30 and then the entire remainder at age 35. You could choose to stagger the distributions in four, five or even more stages.
Some people have the first distribution occur right immediately upon their death, the next distribution five years later, and the entire remainder another five years later. Others have set the first distribution to be timed with graduating college. The possibilities are almost endless with the staggered distribution design.
An increasingly popular and sophisticated way to pass an inheritance is via a continuing trust. Choosing this option means that there is no mandated date or age whereby the trustee is required to distribute assets out of the trust to the beneficiary. The concept here is to keep all of the assets in an ongoing trust for the benefit of the beneficiary.
Depending on the beneficiary’s maturity, many people opt to allow the beneficiary to become a co-trustee or sole trustee of their trust at a certain age. This allows the beneficiary some level of control over their inheritance even though it is held in a continuing trust. When the beneficiary is allowed to act as trustee of their own trust, they are allowed to make distributions out of the trust to them self for health, education, maintenance and support.
The advantage to the continuing trust is that it allows you to give an inheritance to your beneficiaries in an asset protected environment. The continuing trust protects the inheritance from the beneficiary’s creditors and even future spouses. Many parents are choosing the continuing trust for the simple reason that they have no idea who their children will marry someday and the trust essentially gives the kids a prenup in and of itself.
Ready to talk about the right trust design for you and your family? I invite you to give me a call (725 777 3000) or email (email@example.com).
Cordially, Kristin Tyler