Trusts 101: Benefits of a Trust Before Death

by Jonathan A. Nelson

My previous post in the Trusts 101 series looked at benefits an estate planning trust provides in setting plans for after death, but there can be benefits before death and in certain circumstances it can be very helpful.  These include:

 1.       Incapacity Planning: To the extent assets have been transferred into the trust, a successor trustee is often able to manage finances more systematically and smoothly than someone using a power of attorney, as the trust covers contingencies the POA may not.  In the event of an unexpected incapacity, the authority and flexibility of a trust can be very helpful in both moving quickly and weathering the storm.

2.       Orderly Transitions:  With a gradually increasing incapacity, the trust can allow a cooperative and progressive transition using a co-trustee to make up for what the grantor can’t do at this moment, or anymore.  The trust and its separate recordkeeping also offer better protections against financial abuse, particularly in the event the incapacity interferes with the ability to see how the other person is assisting, versus a power of attorney.

3.       Complex Family Dynamics: Every family is different, and sometimes peace is best kept by addressing natural points of discord.  These may include children from separate relationships, spouses with different life expectancies, and interaction with extended family; or, before the grantor’s death, accounting for a loved one who is disabled, struggles with addictions, has litigious tendencies, or is manipulative (or vulnerable) where money is concerned.  For all of these, building provisions into the trust now can give the grantor peace of mind and free those relationships from being dominated by money concerns.

4.       Management of Business or Investment Property: There is significant overlap with post-death benefits of having a transition plan in place for a business or investment, but you can find improved ability to retain talent or attract investors when you have such a plan.

5.       Early Involvement of Professional Management: For some people, the amount of work or the needs of their survivors will push them toward having professional or corporate trustees after death. Where those trustees are already involved before death (such as if a grantor steps down as trustee or passes along the management of assets), it can make the transition smoother.

6.       Segregated Assets for Particular Purposes:  Not all estate plans call for a single trust to do everything.  Whether there are guarantees in a premarital agreement or legal or moral obligations from a prior marriage, a standalone trust or a subtrust with distinct assets can be a convenient way to earmark assets and provide specific instructions to a future trustee.

7.       Balanced Interests of Beneficiaries: Similarly, not all needs of future beneficiaries are known at the time a trust is set up, and sometimes the level of control provided by a trust can be useful in establishing a balance in access between current family members and a subsequent spouse, or account for significant lifetime transfers to be accounted for as between children.

8.       Some Protections against Creditors (Including Future Creditors of Beneficiaries): While true creditor protection trusts are set up very differently from most estate planning trusts, there is still an element of protection the trust can provide, including against predatory “inheritance advance” lenders.

Next in this series: When Would a Trust be Unnecessary or Counterproductive?

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Trusts 101: Why Use a Trust?

by Jonathan A. Nelson

Revocable living trusts are the most used trusts in our practice.  They are powerful and useful estate planning tools, but they aren’t right for everyone, and I don’t try to oversell them.  Trusts often require considerable customization by the attorney to meet the individual’s needs and circumstances, time and perseverance on the client’s part to fund the trust properly (if I prepare your trust, I provide you with some instructions for this), and a higher commitment for the Trustees to maintaining the assets and documents versus other types of estate planning.  Further, the documents are considerably longer (one local firm’s stock trust is 1.5 times as long as The Lion, the Witch, and the Wardrobe; mine are significantly shorter, but are still a lot of reading) and they require more work just to understand what is required by the document.

 Given the effort and cost involved, clients sometimes wonder what advantages a trust has over just having a will.  Bear in mind that with a will, a probate estate is opened with the court, and the executor’s three jobs, roughly speaking, are to gather the assets, pay the creditors, and distribute to beneficiaries.  For what happens to your estate plan after you pass away, a trust allows key differences, including:

1.       Probate Avoidance: Assets pass outside of probate, saving time and costs, including state and local probate taxes.  The Trustee still has an obligation to account for the assets, but instead of reporting to a court-appointed Commissioner of Accounts, the Trustee only needs to satisfy the beneficiaries that the accounting is sufficient.

2.       Unified Planning: A trust can unify and distribute all assets, versus the more splintered usage of beneficiary designations on death, reducing the chance of accidental inequity, unintended consequences (such as what happens if the only named beneficiary on the form has passed), and potential for abuse.  There are also better options to prioritize gifts in a different order than the law sets for estates, in the event there are unsatisfied creditor claims.

3.       Investment Goals: Trusts allow continuity and direction for labor intensive or time sensitive holdings, such as rental properties or small businesses, and allow the appropriate person to become (or remain) the manager, rather than throwing in all of the beneficiaries as partners.  In many instances, this is very helpful in avoiding liquidation of investments at a suboptimal time.

4.       Tailored Distributions: In most cases, distributions from a trust can be designed with more detail, more structured timeframes, and more flexibility for future contingencies than wills allow.  A distribution under a will is almost always the asset or cash being given to a beneficiary as soon as probate is complete, with no strings or oversight; a trust can change any aspect of that distribution, in many variations, including: 

a. A trustee can manage assets and expenses in the short or long term for a beneficiary who still needs to mature or has limitations.  This includes minors, special needs beneficiaries, or beneficiaries with substance abuse issues, but is sometimes used just to stretch out distributions over some years. That might be done to minimize tax liability, protect heirs from creditors, or even allow a  beneficiary to gain experience in financial management progressively before receiving the bulk of their inheritance.

b. The assets can be held for a specific amount of time and the income paid annually to a beneficiary, while the principle is held for or distributed to another person (for instance, a second spouse who is a lifetime income beneficiary before the principle passes to the prior children).  Alternatively, income and principle could be used for particular contingencies (such as care and veterinary costs during the life of a pet).

c. Gifts can be made contingent on future events (such as a child’s successful graduation from college) or future needs (like down payment for a beneficiary’s first home or a reserve fund for a parent’s elder care).

5.       Creditor Protection: The anticipated benefit under a will can be attached by a beneficiary’s creditor, included in the beneficiary’s divorce proceeding, or even contracted away inadvisedly by the beneficiary himself; a trust can provide protection against any of these.

6.       Charitable Giving: Some giving strategies, particularly ones that seek tax advantages by blending giving with gifts to beneficiaries, require using a trust to lock the plan into place.

7.       Reduced Taxes: Using a trust can provide exemptions or strategic timing of transfers or values used, thus reducing Federal and state tax obligations while ensuring the assets still serve their intended purposes.

Whether you are planning, administering, or benefiting from a trust, an experienced estate planning attorney can ensure you understand the outcomes, obligations, and processes involved.

Next time in Trusts 101: Benefits of a Trust Before Death

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.