Understanding trusts

| June 26, 2014

Note from the author: This article is intended to provide general information on trusts.  It is not a replacement for detailed advice by legal counsel and a tax advisor.  Trusts should be prepared by legal counsel.

If you’re transitioning to a civilian career or retiring, it’s important to prepare ahead of time for the changes to your benefits and overall financial picture.  Additionally, depending on your age and situation, you may need to consider estate planning and asset protection.

While the federal gift and estate tax exemption of $5.25 million became permanent earlier this year, there are still many valid situations in which trusts can be beneficial.  Even with the seemingly large exemption, everyone, not just the wealthiest of people, should understand the important role that a well-drafted trust can play.

While there are still tax reasons for using trusts, this article will focus on non-tax reasons trusts are important in estate planning.  These include planning for disability, maintaining control over estate assets for a spouse or children, and asset protection.

Planning for a disability

The creation and funding of a revocable living trust provides for the ongoing management of assets for an individual who may become mentally disabled and unable to continue to manage assets on his or her own.  The trust can provide for a successor trustee to step in, thus avoiding the potential for a court-appointed guardianship.  And, a trust provides a mechanism for ongoing management of assets in the event you simply no longer wish to maintain this responsibility – you can simply resign as trustee in favor of the successor.

Helping to ensure your intentions are carried out

Another important role of a trust is to allow for control of assets in certain situations.  Here are a couple of examples:

  1. If you have had multiple marriages and have children from a prior marriage, you might benefit from a trust.  A trust helps ensure that the present spouse will be provided for, but without giving that spouse total control over the assets.
  2. If you have children, particularly young children, you may want to consider leaving assets in a trust for those children to help assure that the assets will not be frittered away by an immature child.  The trust can permit outright distribution of assets when a child has reached a more responsible and mature age – 25 or 30, rather than at age 18.

Protecting assets from lawsuits, creditors

If you are concerned about asset protection for your children, you may want to establish trusts for the lifetime benefit of your children, so that the assets held in trust will never become subject to the claims of the children’s creditors.  This is especially useful in situations where the child is in a high risk profession, such as a physician, and could be subject to malpractice claims.

Please be advised that Revocable Living Trusts come with possible homeowners insurance issues. If you re-title your home into the name of the trust, you should contact your insurance agent because some insurers require the trust be added to the homeowner’s insurance policy as an Additional Named Insured in order to provide coverage in the event of a loss.

Selecting a trustee

As you consider the establishment of a trust, one of the most important things to determine is who to name as trustee.  The choice of a trustee can significantly influence whether your estate plan is administered as intended. If you have a modest estate and your trust is fairly simple, you or another individual you designate may be fine serving as trustee. But if your estate is larger, has a variety of assets, includes tax planning, or if you doubt your relatives’ capabilities or intentions, you should consider a corporate trustee that is subject to regulatory and internal corporate oversight, experienced in handling fiduciary authority, and prepared to devote the time required to effectively manage your trust.

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