A well-crafted estate plan accomplishes multiple objectives. First, the plan ensures that your property and money (your “assets” or “estate”) go to the persons you want, transfer in the way that you want, and are received at the time you think best for your beneficiaries. Secondly, a solid estate plan will include strategies for asset protection for you (as permitted under state law) and for your beneficiaries. Thirdly, your estate plan should include mechanisms for tax minimization for you and your beneficiaries.
Trusts
Estate planning attorneys typically recommend a revocable living trust to clients who have assets beyond their retirement accounts, bank savings accounts, and their primary residence. If you own a business, or an investment account, or investment properties, a trust is the preferred vehicle for management of your property if you become incapacitated and, ultimately, for transferring your assets when you pass away.
A trust maintains family privacy, transfers property ownership in a smooth and efficient manner, and allows a trustee to manage the property for the beneficiaries over time. The “Trust Agreement” (also known as the trust document or trust instrument) provides the rules to guide the trustee in managing and distributing those assets. When you create a trust, you and your lawyer create the “Trust Agreement” together, to ensure that the rules set forth in the Agreement accomplish your intent as the creator of the trust. Then, together with your attorney and financial advisor and/or CPA, you transfer the appropriate assets into the trust, which we call “funding the trust.”
- Important issues such as taxes, insurance, and asset protection are addressed in your Trust Agreement.
- Together, you and your advisors make the best decisions for the benefit of your future beneficiaries.
When it comes down to it, putting together an estate plan is truly about protecting your family at the time of your death or incapacity and preserving their future when you are gone.
Target Ages
Many, if not most, Trust Agreements provide that assets left to your children will be given to them outright and free of trust once they reach a certain age, or in partial distributions as they reach progressive “target” ages. Today, however, best practices in estate planning no longer include this type of arrangement. Why not?
When money or property are distributed to beneficiaries outright, or even become available to the beneficiaries to be withdrawn if they choose to take them from the trust, those assets arguably can become reachable to the beneficiaries’ creditors. If your child has debts or a creditor has secured a judgment against the beneficiary, the creditor can argue in court that he, she, or it should be able to step into the debtor’s shoes and take whatever property is available to that person. Even your child’s divorced spouse can obtain a judgment and reach for the assets you left in trust for that child.
For that reason, most estate planning attorneys today recommend that the trustee have sole and absolute discretion as to when to distribute money out of a trust to a beneficiary. If the beneficiary has no right to demand a distribution out of a trust, the creditor will have a much more difficult time claiming he, she, or it should be able to get to those assets.
What Next?
If your Trust Agreement includes target ages for distribution, consider taking the document back to your attorney for a review and update. Perhaps an amendment to the document is in order, to protect your hard-earned assets from distribution outside the family. If you have any questions or concerns, please reach out to me at Flagship Law.