Probate avoidance is a good reason to create a trust, but suppose avoiding probate is not a concern to you? Even if you are able to avoid probate using one of the methods described in chapter 2 of this book, a trust may be necessary for other reasons due to your family circumstances.
1. Minor Children
If you have no trust but have minor children, at the death of the parents any sizeable inheritance going to the children will be managed by a court-appointed conservator and the balance turned over to the child upon attaining the age of majority, usually age eighteen. This is not a result most parents hope for. A trust, on the other hand, would allow you to put a person of your choice in charge of the money without courts, and would allow you to specify at what age and under what conditions the money would ultimately be given to the child.
2. Disabled Beneficiaries
The type of disability is the concern here. If it is just a manageable physical disability with no public assistance involved and the person is of age, then no special trust provisions would need to be made. However, mental impairment could require that someone other than the heir manage their money for them. If they are also receiving need-based governmental assistance such as Medicaid, leaving the money directly and immediately to them could disqualify them for their benefits and require that they use up the inherited money for their medical care and then reapply for those same benefits when the money is depleted. It won’t take long. As explained earlier, a special-needs trust will allow the money to be used for the beneficiary’s benefit without affecting his or her existing benefits. Any money left over after the beneficiary’s death can be directed to another named beneficiary.
3. Spendthrifts
Even non-disabled adults may need someone to manage their money for them. I have had a few clients whose attitudes were that if an heir blows their share of the money left to them, then that is their problem and they are not going to try and control people’s lives from beyond the grave. Okay, that’s a choice. But most clients opt to set up a plan for those likely to need it. Perhaps their share continues to be held in trust for their lifetime but can be used at the discretion of the trustee for ordinary living expenses with some sort of regular allowance provided. It’s your money and you can set up any plan you like. Heirs are not required to accept the gift in trust and can disclaim it if they choose. People sometimes set up stringent and even unusual requirements for beneficiaries. They may require graduation from college or trade school or passing intermittent drug tests, or going on church-sponsored missions. It’s all up to you.
4. Unmarried Couples
The law does not provide the same rights and privileges to unmarried couples as it gives to those who are married. And surviving families are often not sympathetic to the surviving non-spouse. If you want your partner to be able to continue to live in your house and use the furniture, vehicles, and maybe the vacation condo and bank accounts, you have to provide a legal apparatus to be sure that happens. Putting everything in trust with specific instructions as to what rights the surviving partner may have in the assets in your name is critical. And be sure the partner is named on a medical power of attorney, since some medical care facilities will only allow ICU visitation or medical decision-making by family members if not otherwise specified.
5. Blended Families
It is very common nowadays that people with children remarry someone who has their own children, and the couple might even then have more children together. Without proper trust planning, it becomes a gamble as to who gets what share of the family assets at the death of one partner or both.
Let’s say you have two adult children and your spouse has three. Then the two of you have another child. Unfortunately, you die before the youngest reaches adulthood. Let’s assume all assets are jointly owned and that you and your spouse are each other’s beneficiary. At your death everything goes to your partner, and at your partner’s death everything goes to his or her children with the share of the minor child being held in a court-ordered conservatorship. Your adult children receive nothing. If your spouse dies before you, the same result, except her adult children receive nothing.
When I explain this to people, they invariably say that they would never cut off the children of their spouse. Who would do that? The fact is that at the death of one the survivor is likely to remarry, probably with someone with his or her own children, and the former stepchildren are soon forgotten. Happens all the time. Making a trust can eliminate this unwanted result. It is helpful to have answers to all the what-if scenarios.
6. Separated Couples and/or Separate Assets
Often, particularly in second marriages, each partner will have his or her own set of assets that are not jointly owned. They may not agree on how these assets are to be distributed at their deaths and so a joint trust will not work for them. Especially if a couple are separated but not divorced, they may prefer to do their own estate planning separate from their spouse. This is perfectly appropriate and they often do make some provision for their partner, with the balance going to heirs of their choice. A trust is the best way to do this, since with a will, or no will at all, probate court laws give a surviving spouse statutory rights to elect against a will, homestead allowances, spousal shares, and exempt property rights. Community property laws in a few states further complicate their estate planning situation. With a trust or two trusts, they can coordinate their estate plans and, depending on state law, all or most of those rights do not apply, keeping their intentions intact.
(To be continued...)
This excerpt is taken from “How to Avoid Probate for Everyone: Protecting Your Estate for Your Loved Ones” by Ronald Farrington Sharp. To read other articles of this book, click here. To buy this book, click here.
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