What Are The Basic Items In An Estate Plan? What Does Each Item Do?
The first document is the trust and there are many misunderstandings about a trust. A trust effectively does two things, if properly drafted. It will avoid probate and it will be the document that directs where the assets of the decedent go, or if they are to be held for the benefit of a minor or a person who is disabled or ill. The second document is a pour-over will. Occasionally, people forget to put things into their trust or forget to change the title to their property.
The pour-over will says that any asset or property that is outside the trust goes to the trust. You only want one document to tell people what to do with your property. For real property, there should also be what is called a trust transfer deed, which takes a piece of real property out of the owner’s name and puts it into the trust. If you do not do that, there are a number of problems and it can result in that piece of property having to go through probate.
You will often see attorneys preparing other documents for people, such as a power of attorney or an advanced healthcare directive, which go towards helping the other family members with what to do if the testator is ill. Those are important to people’s life plans but technically are not part of your estate plan. However, estate planning is the right time to be contemplating becoming ill or being incapacitated and allowing someone else to have the authority to tell the doctors what to do. There are other documents as well. Sometimes, there are trustee certificates, which tell the brokerage firm, bank, or life insurance company that there is a trust, who is the trustee and the property is to be put into the name of the trust.
What Are Different Types Of Trusts? Can They Be Used To Protect My Assets?
There is a great variety of trusts but, mainly, they are split into revocable and irrevocable trusts. A revocable trust can be amended or completely cancelled and, generally, does not have immediate income tax consequences. An irrevocable trust is exactly that; it cannot be revoked, except in very unusual circumstances. There are circumstances where an irrevocable trust can be terminated by the court. That does not happen often and it is very expensive and time-consuming.
Many people think that because you have a trust, your assets are protected. A revocable trust, which is also called a grantor trust, does not protect your assets from creditors. If you own a home and a worker slips and falls in the backyard, that workman can sue you. If you put the house in a trust, the workman is still going to sue you. If you are in a car accident and you are sued, and someone is seeking damages that are greater than your policy, your assets in a revocable trust will be available to that creditor, if he or she gets a judgment. The revocable trust is not intended to protect you against your creditors. Since it is revocable, you keep control over those assets.
In order to get your assets beyond the reach of creditors, you have to put them into an irrevocable trust and a certain amount of time must pass. You cannot retain too many ways to manipulate the trust. You and your spouse cannot be the sole trustees of the irrevocable trust and you cannot have the unilateral power to appoint or reject the trustee of the irrevocable trust. You can set up a trust that will put money aside, typically for the benefit of someone else, like a child or grandchild. After a specified amount of time, those assets would be protected against your creditors and the creditors of the beneficiary, as long as the assets are in the trust.
Another misconception people have is that because their assets are in a trust, that the beneficiaries are insulated against liability. Once the assets have been distributed to a beneficiary, his or her creditors can come after that distribution. If you have a child who is 21, whom you do not want to have a significant amount of money in his or her hands, you may set it up so that every month, or three months for example, that child gets a check. The body of the trust is insulated against the creditors of the child but the payment that is in his or her hands is not.
Through a revocable trust or grantor trust, you are not going to escape liability to your own creditors and you are not going to escape income taxes. There are other trusts that involve special needs but that is really a variation on an irrevocable trust for the benefit of someone else. There are also charitable trusts. Charitable trusts do give you some tax advantages and allow you to get some income or even principal back from the trust. Those assets in the trust will be insulated against your creditors but at some point, the assets are going to go to some charitable or non-profit organization recognized by the IRS.
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