Amy & Dan Smith's Planning for Life: Trusts

A common estate planning device is the trust. A trust is simply an agreement between two people: the person who establishes the trust, who may be called the Settlor, the Grantor or the Trustor, and the person or institution who agrees to fulfill the terms of the trust, called the Trustee. There can be multiple Settlors, as, for example, a married couple; and there can be more than one Trustee. Quite often in estate planning the Settlor(s) and the Trustee(s) are the same person(s), as when a married couple creates a joint trust.

There are many different types of trust, too many to describe in the space of this article. In estate planning a “Revocable Living Trust” (RLT) is very common. This is a trust established during lifetime which the Settlor(s) can continue to change during lifetime. Usually the Settlor(s) and the Trustee(s) are the same person(s).

The RLT has several advantages. First, the RLT avoids probate for the assets with which it is properly funded during lifetime (for an explanation of probate, refer to our prior article on “Probate”). It is easier to change than a will. It provides a measure of privacy after death because, unlike a will, it is not recorded in the public records. (Beneficiaries, however, are entitled to a copy of the trust after the death of the Settlor.) It can provide lifetime management of assets for a Settlor who wants to turn that responsibility over to another person.

Contrary to popular belief, the RLT does not avoid estate tax. The RLT does avoid probate tax, but that tax is minimal. However, estate tax is not an issue for most Virginia residents. Unlike D.C. and Maryland, Virginia has no state estate tax. The federal government imposes an estate tax, but the current exemption is $5,430,000 per person.

Attorney fees are generally higher when an RLT is part of an estate plan because the trust is an additional document. Wills are still needed, although they are simple wills that “pour over” assets into the RLT at death. Do-it-yourself will and trust kits quite often lead to significant problems after death and are not recommended.

In order for an RLT to be effective in avoiding probate, it must be properly funded. This means that assets which would otherwise pass under the will (and thus go through probate) must be transferred to the trust during lifetime. It is common and most unfortunate for a Settlor to spend money to create a well-drafted trust but fail to fund it properly.

The RLT can provide for on-going trusts after the death of the Settlor. For example, a married couple may include a provision in their joint RLT that, if they are both deceased, a separate trust will be created for each child. A Trustee will be named for the trust, and the terms of the trust will be set forth. For example, the Trustee may be authorized to disburse for “health, education, support and maintenance” of the child and to disburse, say, half the balance of the child’s trust at 25 and the remaining balance at 30.

While the RLT can be very helpful in an estate plan, the need for an RLT can be overstated by advisors. There are many situations in which a simple will is quite sufficient. Each situation is different and should be reviewed with a competent advisor.

From "Amy and Dan Smith's Planning for Life" column appearing monthly in the Blue Ridge Leader, Loudoun County, VA.

The foregoing article contains general legal information only and is not intended to convey legal advice.  For legal advice regarding estate planning, the reader should contact his/her lawyer.

Daniel D. Smith is a partner in the law firm of Smith & Pugh, PLC, 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176. (Tel: 703-777-6084, www.smithpugh.com).

Amy V. Smith Wealth Management, LLC is an independent firm.  Amy V. Smith, CFP, CIMA offers securities through Raymond James Financial Services, Inc., member FINRA/SIPC.  Her office is located at 161 Fort Evans Road, NE, Suite 345, Leesburg, VA 20176.  (Tel: 703-669-5022, www.amysmithwealthmanagement.com). Any opinions are those of Amy and Dan Smith and not necessarily those of Raymond James.  Raymond James does not guarantee that the foregoing material is accurate or complete and does not provide legal advice.  Dan Smith is not affiliated with Raymond James.