This is the second of things I gleaned from the Annual AICPA Conference on Tax Strategies for the High-Income Individual. These are from a session by Martin S. Finn, JD, CPA, LL.M. of Lavelle & Finn, LLP, mailto:marty@lavelleandfinn.com) entitled "It’s a Matter of Trust: Ten Reasons Why Trusts Must Be Part of a Client’s Estate, Tax and Financial Planning" serve as reminders of things I need to remember.
In the interests of full disclosure, while I am an attorney and CPA, I have spent my professional career in CPA firms. As such while I will review, comment on, make suggestions to and translate them for clients, I DO NOT DRAFT DOCUMENTS. I am also a strong believer in the KISS (keep it simple, stupid), principle in estate planning. I am sure many of my colleagues have seen a plan that really works well for a $10 million estate superimposed on a $2 million estate. It is hard to explain why the administration of the trusts and estate issues created by such plans costs so much to beneficiaries who just want their share of the money.
Sometimes one must step back and consider the burdens and costs. On a $1 million estate with five children, is it really a good idea setting up five $200,000 trusts with corporate trustees? That aside, I do believe that trusts can be useful in estate and financial planning. I am not going to discuss all ten of Marty’s reasons as some of them are tax and some can be grouped together under a common theme.
There are many things one can accomplish by just drafting a will. Things like specific bequests, ("I leave to my good friend and CPA, Dave $100,000" or "I give my sterling silver flatware set to my granddaughter Jennifer"), charitable bequests ($100,000 to the SPCA) and overall remainder (rest and residual to). Most general tax planning (discount stuff requires gifts) can be done in a will.
There is just one problem with a will: The Statute of Wills, which every state has and requires steps be taken to be valid, like having witnesses. I have seen my share of wills where the decedent has wanted to change things by merely writing notes on the will and dating them. Revocable trusts can be modified very easily. This is one of my reasons why I think trusts are useful.
Marty Finn’s list of non- tax reasons can be summarized as follows:
Creditor and Predator Protection
Keeps Assets out of the Probate Process
Providing Resources Without Interfering with Government Benefits
Leaving Wealth to Family While Supporting Charitable Desires
Planning with Retirement Benefits
Protecting Beneficiaries from Their Own Inability to Manage Wealth
Creditor and Predator Protection. While self-settled trusts generally cannot protect assets from creditors, third party and inter-vivos trusts are still going strong. In the event of a health or mental disability of the beneficiary developing, Trustee management is much easier and cheaper than guardianship procedures.
Predators include the usual list of future ex-spouses, in-laws, out-laws, evil nieces and nephews, and etc. Such protections are not absolute as now some courts are considering trust assets when awarding child support and property settlements in divorces, (even if the court may not order transfer of those assets). To the list I add the current ex-spouse. One of my friends has custody of her children and gets along with her ex. While she has no issue with him getting custody if something happens to her, it will be a cold day in Hell before she will let him manage her assets in behalf of her children. A trust can do that.
Keeping Assets Out of the Probate Process. There are some good things about probate. So much hype is made about avoiding it completely. From my experience, that is easier said than done. But that is no reason not to use trusts in estate management planning. Some state legislatures are subjecting living trusts to some judicial oversight after abuses of them come to light. Even with such oversight trusts can avoid some delays in distributions as well as delays caused by will contests and locating potential heirs.
Providing Resources and Government Benefits. In addition to special needs trusts, consider Medicaid and Medicare. The laws may change, especially with self-settled trusts as rules may restrict shielding those assets. However, for the individual who has a parent with limited resources, trusts can be established to provide support in addition to government benefits.
Leaving Wealth to Family While Supporting Charitable Desires. Charitable remainder trusts (CRT) and charitable lead trusts can be really useful in this regard. The individual can always be able to substitute one charitable beneficiary for another before funding and distributions. In the case of lead trusts, the family beneficiaries may be given the ability to choose which qualified charity or charities get distributions.
Planning with Retirement Benefits. The general rule is to leave the retirement benefits to the surviving spouse. But what if it is the second spouse or there is no spouse? Some additional planning and steps should be taken as some of the largest pension administrators do not handle the naming of trusts very well. Best to name and then confirm a month later as to the named beneficiary as everything is kept electronically these days. A single individual with some charitable intentions and who has a significant retirement account might look at a CRT to maximize earning potential over the trust term.
Protecting Beneficiaries from Their Own Inability to Manage Wealth. Do you really think it is a good idea to leave $1 million of life insurance proceeds to your 22 year old son or daughter? I am just talking about the good kids and the smart kids. Most young adults are not money management wizards. Using a trust to manage wealth for one who has gambling issues is probably a good idea.
In summary, there are many good reasons to consider the use of trusts in one’s estate planning, whether for ourselves or our clients. Which reminds me, I need to check in with my attorney for a progress report on my personal plan.
Dave
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