You don’t need to be a millionaire with lots of assets to start a trust.
There are lots of different kinds of trusts and they can serve all kinds of different purposes. This is an often-confusing topic for that reason. I hope to resolve some of that in Episode 13 as we tackle some of the differences in trusts – and talk about whether a trust is a good option for you – whether it’s for long term planning for an older adult or someone with a special need or just a vehicle that you want to avoid probate.
What is probate?
Probate is court-administered estate administration. That usually involves a will, and you can even have trusts in wills, believe it or not. I told you this can be confusing stuff.
First – What is trust and how does it work?
Trusts are created under the law where you live. Tennessee has a Uniform Trust Code that governs such trusts which is part of our state laws. Other states have similar laws in place – and those can vary from state-to-state which you need to be very aware of.
If you have a trust that is created in Tennessee, and you move to Georgia, well – unless you change the controlling law of that trust – it is going to continue to be controlled by Tennessee law. It works the same way around… so if you’re one of those folks that has moved here to Tennessee and you had a trust created in another state – your trust will continue to be governed by that state’s rules, unless you amend the trust. That’s something you want to think carefully about because that can get extremely complicated – especially if it involves a complex trust. I may tackle the details of more complicated trusts in future episodes but today – we are just talking about trusts generally.
There are all kinds of trusts. There are revocable trusts – just like it sounds you can revoke it; however, there may be limits as to how long you can do that AND if you die your survivors may be limited and unable to. There are also irrevocable trusts – so those cannot be revoked – except for a few exceptions but I’m not touching on that today either. For the most part an irrevocable trust is like a locked box. You put your assets in it and there should be no expectation of taking those out.
There are also special needs trusts – designed to meet special needs – disabilities, long term care, etc.
There are marital trusts that are designed to help with the passage of large estates between spouses.
There are trusts known as asset protection trusts or Medicaid asset protection trusts and the primary planning purpose of those is to manage your assets in the event you find yourself in a nursing home. Those are IRREVOCABLE meaning essentially when you establish the trust, you must transfer control of your assets away to someone else acting as Trustee – forever.
That’s not attractive to a lot of folks and I understand that. I’m of the opinion there are a lot of better options for you rather than planning to be in a nursing home – if you can avoid that and have another strategy – I always think that’s a better way to preserve your quality of life. That’s just my opinion. Sometimes we are not able to do that, unfortunately but if we can – that is always something I think is worth taking a good look at as part of planning, especially as we boomers age out – the pressure on institutionalized care – including nursing home care is expected to be intense. I have a plan to make it more practical for you to stay at home with the support you need.
But – don’t cross trusts off the list if you’re not a millionaire with a lot of assets. It still may be a good option for you. And that’s where I am going to focus today’s discussion because that’s where most of us find ourselves, right. I think that’s the most practical for our discussion on trusts and its where I find most of my clients making decisions in favor of trusts. Either separately created trusts or those trusts that are created inside Last Will and Testaments. Are you confused yet? I hope not. We are going to tackle that topic next and I hope to give you a better handle on those simpler trusts and what they may be able to help you with as you plan for your future.
REVOCABLE TRUSTS and TESTAMENTARY TRUSTS
In my opinion these are some of the most practical types of trusts and usually the ones I see my clients opting for after considering the wide range of options. We touched on some of that before the break AND I promise we will tackle some of those more complicated trusts in future episodes. I’m trying not to confuse you here.
So, what are REVOCABLE TRUSTS and TESTAMENTARY TRUSTS and why would you use them? Hey well I’m glad you asked. I’m gonna tell you why.
So first REVOCABLE TRUSTS – we’ve already talked about those some and the fact that they can be created and terminated. You can also put assets in these trusts and pull them out. AND you as the creator or GRANTOR of the Trust are the TRUSTEE or the one in charge of managing the trust and the assets inside or titled in the TRUST.
These REVOCABLE TRUSTS are sometimes also known as REVOCABLE LIVING TRUSTS or INTER VIVOS TRUSTS (which is a fancy word for LIVING TRUSTS because they help you manage your assets while you’re alive and help with direct and special distributions when you die – so in other WORDs you as the creator are able to maintain some control over your assets even after your pass away.
These offer a lot of really great benefits, and they don’t have to be complicated.
A REVOCABLE TRUST is created by a “TRUST AGREEMENT” it’s a type of contract that you enter into as the creator or GRANTOR. In the agreement, you decide how you want your assets to be held in the TRUST and how you want them to be managed for your benefit while you’re alive.
That same agreement – has a second part to it as well and provides for what happens to your assets after you die. All in one document – You get to decide AND all without the Court intervening as this is meant to be an agreement made outside of the control of a probate administration. That’s a great benefit too, in my opinion.
You avoid probate. In doing that you avoid exposing your estate to your creditors in your probate. For that reason, you protect those inheritances as to what you want to happen to those assets after you’re done using them and you die.
You can also make plans in a REVOCABLE TRUST for your care, in the event you become incapacitated. Remember I talked before about options other than a nursing home. This is a wonderful opportunity to plan for at-home care and support. Maybe you have a child that has agreed to be your caregiver – you can provide for how that care will be done and you can also make arrangements to pay that child for the time they put in to care for you at that time.
So that’s cool because remember we talked about IRREVOCABLE TRUSTS where you need to transfer away all of the control from you. Well in these trusts you don’t do that. You are the creator and you are the TRUSTEE over the trust. You manage the day-to-day operations of the trust. It is also identified by your SSN. So you don’t need to file separate tax returns etc.
Want to take this information with you on the go? Download my Understanding Types of Trusts (PDF).
And if you’ve got the time for long term care planning a REVOCABLE TRUST can basically achieve the same results as an IRREVOCABLE TRUST because your assets will pass directly to the beneficiaries of your TRUST without having to wait through probate administration and away from creditors. Incidentally – probate is the only place TN’s Medicaid program TENNCARE can collect against benefits that may have been provided to you or your spouse – typically through nursing home care. This is their limited opportunity here in Tennessee. Other states have more expanded recovery options. Remember I talked about the importance of controlling state law. Here’s an example of that.
I really like these REVOCABLE TRUSTS for all of these reasons. If you’ve got time for planning, these are worth consideration.
I also wanted to touch on something known as TESTAMENTARY TRUSTS.
What are those? Those are trusts that are created inside of your Last Will and Testament. So Wills are not effective until you die. For the same reason, a TESTAMENTARY TRUST is not effective until that same time. Maybe you don’t need a trust now – but your heirs may benefit from a TESTAMENTARY TRUST for any of the following reasons:
Maybe your heirs will be minors? Did you know that minors can’t receive inheritances? That’s one reason why you might need a TESTAMENTARY TRUST. If a minor is set to receive a bequest from your Will, then the TESTAMENTARY TRUST will allow for somewhere for that inheritance to go and be managed for the minor, until they reach a certain age. PLUS the Trustee of such a TESTAMENTARY TRUST can make distributions for that minor’s benefit until they become an adult. It’s a really good option for a lot of folks.
Want to take this information with you on the go? Download my Understanding Types of Trusts (PDF).
Here’s another reason TT’s might be a good option for you. Maybe you have a family member that is not-so-good with money and maybe they have creditors. You don’t want that inheritance to be gobbled up by those creditors, do you? Well, you can give such a bequest in trust to that person and the monies will be managed by the Trustee for their benefit rather than going directly to the heir and his/her creditors.
Here’s another scenario where TT’s come in handy – say you have a beneficiary who has a disability. You don’t want to interfere with their benefits by giving them a big inheritance. Maybe you want to offer some help with other items that aren’t covered by those benefits. A TESTAMENTARY TRUST can help direct that. It can also provide for care for a surviving spouse after the first spouse has died – maybe there’s a plan for them to receive income and reserve the remaining assets.
There are a lot of good options with these trusts that are contained inside your Wills. Important to note though – if you have a Will as the vehicle for your estate – you are going to need to have your will administered in probate. Remember that. This is not a way to avoid probate, but it is a good way to protect sensitive bequests.
So that’s REVOCABLE TRUSTS and TESTAMENTARY TRUSTS. And like I mentioned there are lots of other kinds of trusts out there designed to do all kinds of things. Some more complicated that others. This is designed to be an introduction to these two trusts.
I’m sure this has generated some questions. Remember you can reach out to me at nancycogar.com.
I want to finish our time together with a word of encouragement. Estate planning is important. Take the time to get it done. If you don’t then you are leaving your family and your belongings in the hands of the government. Don’t do that.
So, here’s some encouragement about planning – more specifically estate planning. Wise words from a few folks.
“Always plan ahead. It wasn’t raining when Noah built the ark.” — Richard Cushing
“If you do not have a Will or plan for your estate, then the government has one for you.” Shez Christopher
“Do something today that your future self will thank you for.” — Sean Patrick Flanery
“We make a living by what we get, but we make a life by what we give.” — Sir Winston Churchill
“By failing to prepare, you are preparing to fail.” — Benjamin Franklin
“If it’s not in writing – it’s not enforceable.”
Resources mentioned in this podcast:
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