stock paperwork

Trusts can be a good option for people looking to designate their assets to family, friends and organizations after they die. They may ensure a smoother transition and an easier process of settling the deceased person’s estate.

Jennifer Hallos, principal at McCarthy, Lebit, Crystal & Liffman Co., LPA, and Lori Kilpeck, partner and co-chair of the trust and estate practice group at Brouse McDowell LPA, both in Cleveland, explained what trusts do and how attorneys can help clients set them up.

“Legally, it’s a contract that explains how you want your assets handled that are inside the trust during your lifetime and at death but, simply put, I think of it as just a set of instructions,” Hallos said.

This set of instructions details how a person wants their assets managed and distributed upon their death, she elaborated.

When searching for an estate planning attorney, Hallos recommended people look for someone who has an attention to detail, as a lot of estate planning is very tax-focused and statutorily-focused. So, it is important to be aware of those details because, if something is missed, that can have negative tax or probate consequences.

“One of the benefits of a trust is avoiding probate and, a lot of times, I see that lawyers miss properly retitling the assets to avoid probate,” she said. “So, if you have a trust and you don’t title the assets appropriately to be either owned by the trust or payable to the trust, then really it’s just a piece of paper.”

If done incorrectly, all of those assets will need to go through probate in order to get to the trust, which is a very arduous process, she added.

When searching for an attorney to help draft a trust, Hallos recommended that people seek one who specializes in the estate field. Many attorneys dabble in estate planning because there is a perception that the documents are straightforward but, unless one works in estate law each day, they may not be familiar enough with the process and possible complications and how to deal with them.

“I tell people if you have a broken bone or you’re having a heart attack, you’re not going to go to your primary care physician,” she said. “You’re going to go to an orthopedic surgeon or a cardiologist. Estate planning, and specifically the tax planning aspects, are the same. Generally, someone who spends every day working in these matters is more knowledgeable of the ins and outs and possible traps.”

Potential clients should inquire about an attorney’s succession plan, especially if they are a sole practitioner or at a smaller firm because, depending on the client’s age and health, their estate plan may be around for decades, she said. So, if something was to happen to the attorney or they were to retire, there should be a plan in place for what will happen to the client’s file.

A trust may own most types of assets, including after-tax investments and real property, and may be a beneficiary of a life insurance policy or a retirement account.

“It’s important to know that the trust can be a beneficiary of those retirement accounts, but it can’t be the owner,” Hallos said. “The individual has to remain the owner due to IRS rules.”

While most assets may be owned by a trust, a question that people should ask themselves is whether it makes sense for them to be owned by the trust or whether they should be paid to the trust upon death, she noted.

“For example, bank accounts can be owned by the trust but, (for) most of my clients, I don’t recommend that they are because most clients, one, don’t want their checks to have their trust’s name, they want to have their original name; but also, if you move your bank account to a trust account, it’s going to generate a new account number and you’re going to have to re-do every automatic transaction,” Hallos explained.

A common misconception about trusts is that they are reserved for ultra high net worth individuals to avoid or minimize estate taxes, she pointed out, but there are many other types of trusts. Some are simple trusts consisting of 10 pages worth of documents while others are more sophisticated, consisting of 50 to 60 pages worth of documents.

There are many benefits of trusts that people are unaware of, Hallos said. In addition to avoiding probate and dealing with estate taxes, trusts offer asset protection and help with income tax planning.

“A trust is a legal document that a grantor, who is the creator of the trust, puts together for the benefit of beneficiaries,” Kilpeck explained. “They designate a trustee to oversee the assets that are held in the trust. The grantor can also be a current beneficiary of the trust. A lot of times, it’s used as an estate planning tool.”

When setting up a trust, people should have an understanding of what their assets are and who they want to be beneficiaries, she noted. Then, they typically meet with an attorney to go over what their current estate plan is and what their objectives are.

An attorney will evaluate their assets and look at who the beneficiaries will be, such as family, friends and charitable organizations, she noted. After gathering that information, they will put together a trust agreement for the client. The owner being a beneficiary on their own trust means they can receive any assets of theirs that they transfer into the trust while they are living, and then the trust will take over upon their death to distribute their assets to the other beneficiaries, per the owner’s wishes.

“The great thing about a trust is that it provides an umbrella for almost any of the assets that a person may have,” Kilpeck said. “You can include your real property, such as your home. If somebody has second homes, a lot of times we use trust agreements. If they have property, maybe here as well as Florida or they have multiple properties, it’s all under the umbrella of the trust… You can even title automobiles into the name of a trust.”

When drafting trust agreements, it is important for attorneys to work with any financial advisors or accountants who the client may be working with, she advised.

“One of the things you can not put in a trust while you’re living are retirement benefits,” she said. “A trust can’t hold title to an IRA, but you can name the trust as a beneficiary of those accounts. You can also name life insurance policies as a beneficiary of the trust, depending on the circumstance. So, pretty much any assets can flow through a trust to the beneficiaries.”

Trusts can be useful when a person has a blended family and wants to protect their children and their current spouse, she pointed out. They can provide for a beneficiary who has special needs and is not able to receive the assets outright, or for someone who is not responsible enough to receive an outright sum of money.

“With minor beneficiaries, if you have young children, you can include set ages out into the future as to when those children would receive distributions,” Kilpeck explained. “Beneficiaries of a trust can be charities. Sometimes, somebody is charitable inclined, and you can name those charities as beneficiaries of your trust.”

Another purpose of a trust is privacy, she pointed out, because they are not public record. Assets that do not have a beneficiary and do not go through a trust will go through probate, which is a matter of public record.

One of the biggest misconceptions about trusts is that trusts protect assets from being collected to compensate for long term care, she said.

“They’re still considered your assets and so I think that’s a whole other area of estate planning and trust planning, that you just can’t dump your assets into a trust and then have creditor protection and you would qualify for Medicaid,” she explained.

Trusts can be revocable or irrevocable, Kilpeck noted. Revocable allows, in most situations, the ability to change, update and amend the trust with the passage of time. Irrevocable means that, once the assets are in the trust, it is very hard to undo or change.

It is important to be sure that the attorney and financial advisors one is working with have completed the proper titling and beneficiary designations to follow through with their estate plan, she pointed out.

“When somebody is doing estate planning, they need to really think about what their wishes are and who they want to see as their beneficiaries and who they feel is appropriate to be named as a trustee, to step into that fiduciary role.” Kilpeck said.

“The great thing about a trust is that it provides an umbrella for almost any of the assets that a person may have.” 

Lori Kilpeck

How do you feel about this article?

Choose from the options below.


Recommended for you