Many people have misconceived notions that trusts are only for multi-millionaires who have large inheritances to give to their children. Nothing can be farther from the truth. Trusts can be an invaluable financial tools for the estate plans of individuals regardless of wealth and income.
Trusts are simply an arrangement where one party holds property on behalf of another party. Holding property in this manner offers special benefits for the owners and beneficiaries such as favorable tax treatment and protections for minor children and vulnerable beneficiaries.
Some types of trusts that may be useful in estate planning are:
Trusts for minor children.
The protection of minor children is often the paramount concern for parents creating an estate plan. In order to ensure for the proper and prudent care of minor children, parents can employ children’s sub-trusts as part of a comprehensive estate plan. A children’s sub-trust ensures that trust assets are wisely spent towards support, education, medical expenses, etc. when the children are young. Parents can decide when their children can receive the assets outright such as upon turning a certain age or upon the happening of an event such as graduating from University.
Special NeedsTrust/Supplemental Needs trusts.
Special needs trusts are tools that enables an individual to leave property to an individual who receives public benefits. In order to qualify for public benefits, applicants are only allowed to have a certain level of income and assets. If a receipt of public benefits were to receive an inheritance, they may find themselves ineligible. With a special needs trust, an individual would be able to give money to an individual without affecting their eligibility for public assistance.
Martial trusts are important tools two main reasons: (1) taxes, and (2) asset distribution. In previous years, the estate tax exemption was low enough that marital trusts were essential to take advantage of estate tax exemptions. Although the estate tax exemption limits have been raised significantly and the implementation of other tools such as portability, married individuals should still carefully consider whether separate marital trusts offer added tax-savings and whether they should be planning for any significant changes to the estate exemption amounts. Marital trusts can also ensure that the wishes of each married individuals are carried out. For example, married individuals with children from previous marriages can create separate trusts to ensure that their children receive inheritances.
Irrevocable life insurance trusts.
Irrevocable life insurance trusts (ILIT’s) are tools that ensure that proceeds from life insurance do not become part of an individual’s taxable estate. Life insurance proceeds are part of an individual’s taxable state if 1) the estate recipient is the beneficiary of the policy or 2) the estate is not a beneficiary of the policy, but the owner of the policy had an ownership interest in the policy such as the ability to change beneficiaries, cancel the policy or borrow from the policy. In order to avoid the tax consequences of life insurance, an individual can purchase or transfer a life insurance policy into an Irrevocable Life Insurance Trust and name a third party as the trustee. Without the owner having any ownership interest in the trust, the proceeds will not be counted as part of the insured estate. With an irrevocable life insurance trust, individuals can increase their wealth without increasing their estate tax liability, provide liquidity to pay for estate taxes, and provide for the management of the proceeds pursuant to the terms of the trust.
Spendthrift trusts are tools individuals can use to protect the beneficiaries’ inheritances from both themselves and their creditors. These trusts usually have an independent trustee which has complete discretion over the distribution of assets of the trust. Although there are many types of Trusts and components to an estate plan, the attorneys at Nguonly & Veracruz will undergo a full analysis and evaluation of your individual circumstances to determine what estate plan is right for you and your family.