A last will and testament is the most well-known type of estate planning document. However, it is not the only important estate planning document that you should consider. A trust is an estate planning document that has some features that are similar to a will, but also offers several unique benefits that may be critical to you reaching your overall estate planning goals. A trust is a legal entity that holds assets for the benefit of another person. It is managed by a trustee. The trustee makes decisions as to how to manage the trust assets to benefit the beneficiaries that you designate, consistent with the terms of the trust agreement. As you consider your overall estate planning needs it would be wise to consult an experienced Manhattan Trust Lawyer who will be able to explain to you the benefits of a trust and how a trust may fit into your overall estate plan.
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A trust is a legal agreement in which you as the grantor or trustor, transfer assets to the trust for the benefit of another person known as the beneficiary. You can transfer practically any type of property to a trust including cash, stocks bonds, other securities, insurance policies, real estate, antiques, and artwork. The type of property that you choose to transfer to a trust depends on your goals. The trustee is the fiduciary responsible for the day to day management of property owned by a trust. The trustee can be an individual, an institution, such as a bank or trust company. There are many reasons to establish a trust including probate avoidance, tax minimization, and to provide financial security for the trust beneficiaries.Probate Avoidance
An attractive feature of a trust that distinguishes it from a last will and testament is that a trust is not required to go through probate. This means that your beneficiaries will be able to gain access to the trust assets more quickly than if you left your beneficiaries assets in your will.
Probate is the legal process during which the New York Surrogate's Court validates your will and authorizes the distribution of your assets. There are several steps that are involved in probate. When you pass away the executor who you name in your will alerts the Surrogate's Court and files your will. The Surrogate's Court judge will review the will to determine whether or not it is valid. The court will make sure that the will was executed in accordance with New York law. For example, you must have signed your will in the presence of at least two witnesses. NY EPTL § 3-2.1(a)(4). If the judge finds anything that appears to be improper, then the judge may refuse to admit your will to probate.
If the judge determines that the will is valid then the executor may proceed with winding up your estate. To wind up your estate your executor will first inventory your assets and determine your estate's value. Then he or she will pay your creditors and resolve any claims. Ultimately your executor will distribute the remaining assets to your beneficiaries according to the terms of your will.
The steps in the probate process typically take a minimum of 9 months. Factors such as estate tax issues, missing heirs and probate litigation will significantly extend probate to up to several years. As a result, distribution of your property to your beneficiaries would also be delayed. With a trust, however, the property that is held in trust will not be held up by probate. Your beneficiaries will receive distribution of those assets relatively quickly after you pass away.Types of Trusts
There are several different types of trusts. The type of trust that you choose to set up depends on your goals. For example, you can set up a trust to provide for minor children or for elderly relatives. Some establish trusts for relatives who may need guidance in handling finances. A trust can also be set up to protect your assets should you become incapacitated. You can even set up a trust for the benefit of a pet.
Living Trusts v. Testamentary Trusts. There are 2 main categories of trusts: living trusts and testamentary trusts. The difference is when they are set up. A living trust is created and funded during your lifetime. If you choose to, with a living trust you are permitted to nominate yourself as the trustee and maintain control of the assets during your lifetime. The beneficiary of a living trust may receive the benefit of the assets in the trust while you are still living.
On the other hand, a testamentary trust is funded and effective upon your death. The beneficiaries will not be entitled to the assets in the trust until after your death. Testamentary trusts are often created for minor children and relatives with disabilities.
Revocable Trusts vs. Irrevocable Trusts. A trust can be revocable or irrevocable. Revocable trusts are very flexible in that they can be changed at any time. For example, if you would like to change the beneficiaries or add a successor trustee, you can. If you want to dissolve the trust, you can do that as well. A revocable trust becomes irrevocable upon the death of the person who creates the trust.
An irrevocable trust, on the other hand, cannot be changed or dissolved once it is created. You cannot remove assets, change beneficiaries, or change any of the terms of the trust. Irrevocable trusts have tax benefits that revocable trusts do not have based largely on the fact that once you create an irrevocable trust, you no longer have control over the assets.
Another benefit of an irrevocable trust is that such a trust can provide asset protection. Once you establish an irrevocable trust and transfer assets to it you no longer legally own those assets, and can no longer control how those assets are distributed. Due to this change in ownership of and control over the assets, a future creditor cannot reach the assets held in irrevocable trust. However, if you transfer funds in an effort to avoid current debts a court make determine that the transfer was fraudulent, and you may be face significant legal penalties.Special Purpose Trusts
Trusts can be set of for many different purposes. The legal requirements of establishing the trust, how trust funds must be managed, and when and how beneficiaries receive distributions depend on the type of trust established.
- Special Needs Trust. A special needs trust (SNT), also known as a supplemental needs trust, is a trust established for the benefit of a person with a severe and chronic or persistent disability. NY EPTL § 7-1.12. The assets in a SNT can be used to cover necessities as well as quality-of-life items such as special therapies, entertainment, education, and special equipment and vehicles including wheelchairs or accessible vehicles. SNTs are set up and managed to ensure that the beneficiaries to remain eligible for needs-based government benefits such as Medicaid and Social Security Income despite the existence of the funds in the SNT.
- Spendthrift Trust. A spendthrift trust is another type of specialized trust. A spendthrift trust is designed to provide for someone who is not able to responsibly manage his or her finances. It could be that you have an adult relative who has a track record of mismanaging money and racking up debt. A spendthrift trust would provide you a way to give that relative financial help without giving him or her control over the money or property that you give him or her. Instead, the trustee of the spendthrift trust would be responsible for managing the trust funds and distributing assets to or on behalf of the beneficiary according to the terms of the trust.
- Pet Trust. A pet trust is a trust that provides for the care and maintenance of your pets in the event your pass away or become disabled. N.Y. EPT. LAW § 7-8.1. Under New York law a pet trust will terminated upon the death of the animal or after 21 years. When setting up the trust and funding it, you must fund it only with an amount of money that is reasonable to care for the pet. The appropriate amount will depend on the type of pet, its age, and its health. Under New York law if you set aside an amount that is unreasonably high a judge will likely reduce the amount. After the trust is terminated the remaining assets will be distributed according to the terms of the trust, or will go to your estate as the trust grantor.
- Bypass Trust. A bypass trust is an irrevocable trust created by married couples to reduce estate taxes when the second spouse dies. Upon the death of the first spouse, ownership of most of his or her property is transferred to the trust with the surviving spouse as the beneficiary. This allows the surviving spouse to have access to the trust property without ever owning it. As a result, when the surviving spouse dies that property is not included in his or her estate, reducing the amount of estate taxes.
- QTIP Trust. A QTIP trust is a Qualified Terminable Interest Property trust. This type of trust is used by married couples to delay paying estate taxes until the second spouse dies. In order to receive the tax benefits of a QTIP trust, the surviving spouse must be a U.S. citizen, as the marital deduction does not apply to noncitizens.
- QDOT Trust. A QDOT is a Qualified Domestic Trust. It is similar to a QTIP trusts, but is used when one spouse is a noncitizen.
- Charitable Trust. A charitable trust is designed to provide property to a charitable cause and at the same time provide you tax benefits. Two types of charitable trusts include charitable remainder trusts and charitable lead trusts. A charitable remainder trust is an irrevocable trust designed to reduce taxable income by first dispersing income to the beneficiaries of the trust for a specified period of time and then donating the remainder of the trust to the designated charity. With a charitable lead trust you transfer assets the trust in order to make distributions to a charity over a designated period of time. At the end of the period the remainder goes to you or to your beneficiaries.
- Generation-Skipping Trust. A generation-skipping trust provides a way to minimize estate taxes. Instead of leaving property to your children, the trust would be set up with your children's children as the beneficiaries. As a result, you would avoid the estate taxes that would apply if the assets were first transferred to the your children.
- Life Insurance Trust. A life insurance trust is an irrevocable trust that lets you reduce or even eliminate estate taxes so that more of your estate can go to your loved ones. With a life insurance trust, instead of you owning the life insurance policy, the trust owns it. Since you do not personally own the insurance, it will not be included in your estate, resulting in a reduction in estate taxes. You, however, cannot be the trustee of the life insurance trust nor can you have any control over the policy once it is part of the trust. You can name anyone as the beneficiary of the policy.
- Grantor-Retained Interest Trust. A grantor-retained interest trust (GRT) is an irrevocable trust that you transfer property to while retaining an interest for a period of years. At the end of the period the property in the trust pass to your beneficiaries or to another trust for their benefit. There are several types of grantor-retained income trusts including grantor-retained annuity trusts, grantor-retained unitrusts, and qualified personal residence trusts. In each of these GRTs you would make a current gift of a future interest in the assets of the trust to your beneficiaries. The main advantage of a GRT is a reduction in estate taxes.
Because of the many different types of trusts that are available, it is a good idea to discuss your family's needs with a Manhattan Trust Lawyer who will be able to let you know the type of trust that will best help meet your estate planning goals given your personal situation. If your trust is not set up correctly, the goals of your trust may not be realized and the financial consequences may be severe. To ensure that your trust, will and other estate planning documents are properly drafted and executed, it is important for you to have experienced representation. The staff at Stephen Bilkis & Associates, PLLC will help you develop an overall estate plan that reflects your individual goals. Contact us at 800.696.9529 to schedule a free, no obligation consultation regarding your estate plan.