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Your Custom Trust: Advantages of a Trust and Questions We Ask When We Write a Trust
By Jonathan C. Reed
Some of our clients ask, "Do I (or we) really need a trust? Can't we just make everything payable on death to our children?" The answer depends on your situation and on how much you want to plan for various events that may be unlikely.
Here are potential advantage of a trust, elaborated in most cases in more detail below:
1) The trust avoids probate, along with other will substitutes.
2) Their is no discrimination against a successor trustee who is not a Nevada resident whereas there is discrimination against a successor will Administrator (but non Executor) who is not a resident of Nevada.
3) You can provide for your own potential disability.
4) You can provide for unlikely situations such as one of your children dying before you do.
5) You can control distribution of money to a young person, rather than giving them a great deal of money as soon as they turn 18 and thus are legally an adult.
6) If real estate is passing under a trust (or a will) to a person not your spouse or child the real estate transfer tax is avoided. (It is also avoided under Nevada's Transfer on Death Deed.)
7) If real estate is passing under a trust and the heirs intend to sell it immediately, a title insurance company may not issue title insurance until it is satisfied that no creditors of the decedent (the person who died) have a claim on the property. In this case NRS 164.025 would allow the new trustee of the Trust to publish a Notice to Creditors giving them 90 days to make a claim after which no claims could be made a against the property. This is somewhat faster than a probate proceeding and much cheaper.
Provision for Minors and Young Adults:
If your trust or will provides that when you die your money will go to a child or grandchild and provides nothing further, the child or grandchild will receive the money when he or she is 18 or when you die whichever is later. In many cases giving an 18 year old hundreds of thousands of dollars is not the brightest idea.
A trust (or even a will that contains what is called a testamentary trust) can provide that your successor trustee (the person who manages the property after you die) will hold money for a minor or young adult until that person reaches a certain age. Some of our clients like the idea of distributing money to a young person in two or three installments at different ages, so that if the young person wastes the first installment, hopefully, they will be wiser about the second or third distributions. Some of our clients provide for distributions to young people after certain achievements such as graduating from an accredited four year college, or getting a professional degree. If money is held back from young person older than 18 our clients usually specify that the trustee can disburse money to the young person for educational and medical expenses, and, perhaps, for support.
Who Will Be the Successor Trustee?
After you die (or after both you and your spouse die) the successor trustee may have the job of immediately distributing all of your assets to the beneficiaries, or the successor trustee may have the job of keeping assets for a young person as discussed in the above paragraph. Do you want person to be successor trustee or do you want two or more people to share that responsibility? Keeping in mind that the unexpected may happen, can you name back-up successor trustees in case the person you want to be successor trustee cannot or will not do the job?
Investment Guidelines for the Successor Trustee:
If the successor trustee may have to hold property for young people to reach a certain age, what investments guidelines do you want to set out for the successor trustee? Should the successor trustee be restricted to investing only in government gauranteed debt such as treasury bill or FDIC insured certificates of deposit? Or do you want to give the successor trustee more discretion to invest?
Who Gets the Money When You Die?
Most clients have a simple answer such as "our children." But, as lawyers we have to ask you to consider the unpleasant an unexpected: what if your child does not survive you? Who would get the money in that case?
Planning for Your Own Mental Disability?
Almost all of our clients want their trust to make them the original trustee (person in charge of their financial assets). In the simplest situation, the trust doesn't mention a successor trustee until the original trustee(s) die. However, some peoples' brains fail before their bodies. If there is no trust provision for disability, the original trustee(s) (the person or couple who set up the trust) will remain in charge of their assets unless their relatives (or the state) petition a court to appoint a guardian of the person's assets on the grounds that the person is no longer mentally able to handle their own affairs. This can be a humiliating process.
Therefore, some of our clients, typically those in their sixties or older, provide in their trust for a simpler process. A typical case is a couple with three children. the couple might decide that while both are alive collectively they will be able to manage their own affairs. But they might decide, for example, that after the first to die does in fact die, their three children, by a majority vote, may replace the survivor with the successor trustee (who would typically be one or all of the children). Or they might require the children to get one or medical medical opinions that the survivor cannot manage his or her own affairs. In this way the successor trustee can step in without the unpleasantness and expense of a court guardianship proceeding.
Will my Trust Protect Against Creditors?
The trusts we do are designed to protect your heirs (the people you give your money to after you die) from their creditors prior to their receiving the funds (with respect to the money you give them), but not you. See Asset Protection.
What About Income and Property Taxes?
Your income taxes remain the same whether or not you have a trust of the type we do. As far as the IRS is concerned you own the assets whether or not they are in a trust. Nevada's governments will tax your real estate the same whether or not it is in a trust.
What About Estate or Death Taxes?
Nevada does not tax your estate when you die. As of this writing in July of 2010, the federal estate for people dying in 2010 does not exist but will be re-instated for people dying in 2011 and later. The tax is steep and applies, under current law, to estates over one million dollars. It is expected that Congress will raise this amount before the end of the year. For example, for people dying in 2009 the first $3,500,000 of an estate was tax free. Our firm does not design trusts to minimize the federal estate tax or give advice on other ways to minimize the federal estate tax. Expect to pay thousands of dollars for trusts designed to accomplish this expect to pay for expensive annual reviews and amendments as the tax law keeps changing. If you are concerned about federal estate taxes we will be happy to recommend an excellent law firm.
Should I "Put" my IRA in the Trust?
Typically when you set up your IRA or 401(k) or other retirement plan you filled out forms listing a primary and secondary beneficiary. For example, a couple is married and has 3 adult children. Each spouse probably listed the other as primary beneficiary on their IRA and the 3 adult children in equal shares as the secondary beneficiary. For many people leaving this arrangement alone even after writing a trust makes good sense. The designation of the primary and secondary beneficiaries means that when you die your IRA won't have to go through Probate (unless your primary and secondary beneficiaries predecease you.)
But, suppose the primary beneficiary is a minor, for example, you are a single parent with minor children and a large IRA. And, suppose, also, that you would not want this minor to receive the entire IRA amount at age 18. In that case you could name the trust as the beneficiary. That would allow for your successor trustee to dole out the money to minor according to guidelines you set up as discussed above in "Providing for Minors and Young Adults." But see the section below:
What are the Tax Implications of My Trust?
At Reed & Mansfield we don't give tax advice. However, there are 3 basic tax issues to be aware of:
1) The trusts we write don't affect your income tax situation. As far as the IRS is concerned, your assets are your assets whether they are in a trust we write or not.
2) Money in an IRA (whether regular or Roth) has special tax status, for example, investment income earned in the IRA is not presently taxable. In addition, there is tax owed when there is a distribution from a regular IRA. If an IRA is left out of a trust and you die your beneficiary MAY be able to roll over your IRA into theirs, or take the money out of the IRA over time. But if your trust is named as a beneficiary of the IRA this potential tax benefit disappears.
3) "Wealthy" people have traditionally used complicated trusts to minimize or avoid the federal estate tax in transferring money from themselves to their children or grandchildren. These complicated trusts cost much, much more than we charge for a trust and probably tie you into expensive annual updates with your trust attorney. Are you a "wealthy" person who should spend all of this extra money to avoid federal estate tax when you die? See Death Transfer Fees.