Trusts 101: Kinds of Trusts (Part 1)

by Jonathan A. Nelson

We have written in some detail in this series about using trusts for estate planning, with a particular focus on post-death planning.  But the concept of a trust is very useful in a lot of contexts.  What are some kinds of trusts, and what do some of the funny sounding names mean?  The following list is not exhaustive and is meant to be very high level.   Particular pieces may be treated in more detail in future posts.  Estate tax planning is a specialized enough field that the trusts associated with it will be discussed in a separate post as Part 2 of this topic.

What is a Trust?

 At the most basic level, a trust occurs any time a person (called the Grantor or Settlor) conveys an asset to a person (the Trustee) subject to terms that benefit a person (the Beneficiary).  Even though the Trustee has legal title to the asset, the law holds the Trustee to fiduciary duties (a high degree of ethical conduct discussed here), to ensure that the asset is used pursuant to the terms of the trust. The law also protects the asset from the Trustee’s creditors because it isn’t really the Trustee’s asset.

 A trust is not a legal person in the same way a corporation or an LLC is, however.  It can only sue or be sued in the person of the Trustee, and the death or incapacity of the Trustee can lead to automatic succession, whereas an LLC may require a member meeting or even go through probate if the succession is not established beforehand.

Trusts Outside Estate Planning

Trusts can be useful in many contexts.  In a divorce, a trust may be an effective way to make sure that college tuition or life insurance benefits the children without just giving money to the ex.  Most people buying a house will sign a Deed of Trust in which they irrevocably appoint a Trustee to keep them from defaulting on their mortgage by selling the house and paying off the bank if they do not make their own payments on time.  There is an interesting line of cases in Virginia dealing with that Trustee’s fiduciary duties to the homeowner, since the homeowner is both the Grantor and a Beneficiary of the trust.

 A small business may be more efficiently run if one active Trustee holds the voting power of a group of less involved shareholders.  (In fact, pooling voting power is so useful that Virginia allows a ‘Business Trust’ to register as a legal entity, in an exception to what I said about legal persons above.)  A ‘Land Trust’ holds land and can aid in conservation or land use management, governing a group of investors, reducing premature disclosures while development plans are in the works, or providing continuity for a particular operation like a farm.

Trusts for Asset Protection

One clause frequently used in trusts is a ‘spendthrift clause’.  This is a direction to the Trustee to prevent payment to a beneficiary’s creditors, and is important to protecting the trust from downstream anticipation of benefits invading the benefit (or asset) meant for the beneficiary alone.

Where the Grantor and the Beneficiary are the same person, however, the question is whether the trust can in fairness be interposed to avoid paying creditors.  Although self-settled spendthrift trusts can be created and used effectively, they are intentionally cumbersome and difficult to control to reduce the temptation for overuse.  For example, they usually need to be in place for five years before they provide any protection, and the Trustee must be true third party.

A particular application of this is the Medicaid Planning Trust.  Here, one’s assets are sufficiently removed from personal ownership and direct control in order to qualify for long term care through Medicaid.  For the reasons above, these are difficult to set up correctly and benefit from a high degree of attorney involvement in the creation and administration.  In addition, it is a lifestyle decision, and checking which local facilities take Medicaid before setting up such a trust may be helpful in deciding whether it will be advisable for you.

Trusts for Estate Planning

A trust can be created by a will (called a Testamentary Trust); in Virginia, these tend not to be used heavily since they occur inside probate and can significantly increase the time and expense of probate.

As hinted at above, the Grantor, Beneficiary, and even the Trustee can be the same person unless otherwise prohibited by law. This combination allows the major use of trusts as an estate planning tool – the revocable living trust whereby the Grantor retains essentially unfettered control of his or her own assets, but can still avoid probate with very little paperwork.  There are many variations possible.

A joint revocable living trust allows a married couple to create a unitary estate plan that is less dependent than individual wills on the happenstance of which spouse dies first.  For spouses with separate resources or beneficiaries, options exist on how those are treated in individual or joint trusts, and can include a Qualified Terminable Interest Property (“QTIP”) provision that provides care for a surviving spouse but not the ability to invade the eventual inheritance.

Some trust terms are self-descriptive.  A Trust for Minors is exactly that.  A Pot Trust holds family resources in a common pot for use according to need, in a sort of rough facsimile of your having lived longer, and it is only later that the unused portion is divided into individual shares.  A Pet Trust provides resources and oversight to ensure beloved animals live out their days in the manner you desire.  The term Legacy Trust tends to be used to describe a long-running trust, often holding assets through at least one generation, in an attempt to build wealth rather than facilitate spending, and the term Dynasty Trust typically refers to trusts holding assets for more than one generation, often (but not always) involving estate tax planning, discussed in the next post in this series.

Trusts Which Intersect With Estate Planning

Special Needs Trusts (sometimes called Supplemental Needs Trusts) are designed to keep challenged or medically vulnerable beneficiaries from being accidentally disqualified from the public benefits they may depend on.  If any of the beneficiary’s assets went into the trust, Medicaid can require reimbursement of lifetime expenses from the trust, so a special needs trust intended to administer an inheritance and then pass the unused portion to other family has to be careful about the sources of funding.

Finally, a Totten Trust is more commonly called a transfer-on-death or payable-on-death designation, but it involves the asset holder acting as a trustee for your instructions to transfer the asset as directed.

This post runs through a lot of detail quickly, but the most important thing to understand is that these tools are right for certain jobs, but there are no one-size-fits-all solutions.  Talking through the pros and cons with an experienced estate planning attorney will help make sure you are taking the correct steps to handle your assets in ways that best meet your goals, handle your foreseeable challenges, and benefit those you care about.

Next time in Trusts 101: Kinds of Trusts (Part 2)

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Trusts 101: When Not to Use a Trust

by Jonathan A. Nelson and Christopher S. Woodruff

Trusts are rightly the centerpiece of many estate plans because they provide great tools for setting complex strategies, avoiding uncertainty for some matters where timing is important, and building in flexibility by deferring some decisions until they need to be made (even if after death).

But trusts aren’t right for everyone – sometimes they are more trouble than they are worth, sometimes the benefit doesn’t justify the expense of creating and setting them up, and sometimes they are the wrong tool for the job.  What are some indicators that a trust may not be advisable?  We have run into a few:

 1.       Straightforward assets: Whether the dollar amount is modest or the type of assets are as efficiently dealt with outside a trust, in some cases a trust simply does not add a lot of value.

2.       No need for significant contingency planning:  If a couple has one responsible 35-year-old child with no descendants and wants charities as the backup beneficiaries, the trust may not do a whole lot that can’t be done in other easier ways.

3.       High likelihood of major estate planning changes in future: To young parents, the most important aspect of estate planning is often selecting the guardian for their minor children, and this is done through a will. It is perfectly reasonable to have basic estate planning documents (wills, powers of attorney, and medical directives) put in place first, and, if not needed now, reconsider a trust down the road when more particulars of the assets and family needs are known.

4.       Cost: Trusts are labor intensive to create and maintain, and cost significantly more up front than wills. While trusts usually save money in the long run, some clients prefer for that money to be spent later in life or after they pass.

5.       Records won’t be kept or the trust won’t be maintained: Trusts generally require more lifetime work than other plans.  If a client’s personal strengths or lifestyle indicate leaving the paperwork to someone else would be more likely to meet the client’s goals, a trust may not be the best solution.

6.       Public oversight is preferable:  One of the usual upsides of a trust is its privacy and that any disputes are just between the parties to the trust, unless one of them asks a court to resolve something.  In some instances (such as where there are dominant personalities with a potential for abuse, beneficiaries without the means or ability to defend their interests in the trust, or conflicts already anticipated to boil over into litigation), that privacy may end up being counterproductive.  There are some creative solutions possible within a trust, but sometimes the court’s active oversight of probate meets the client’s goals better than avoiding probate.

7.       Significant creditor issues: An executor has powers to deal efficiently with creditors which a trustee does not.  Whether it is bad business debt, an unresolved dispute with the IRS, or difficulty paying student loans, sometimes the fact that the estate will require significant probate involvement to deal with creditors anyway means a trust will not add efficiency – or will add efficiency that benefits creditors rather than your family.

These are complex issues, and an attorney experienced in administering trusts and estates is invaluable in advising where you are – and aren’t – benefiting from sophisticated estate plans.

Next time in Trusts 101: Kinds of Trusts (Part 1)

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

Christopher S. Woodruff is a member of the Virginia State Bar and has been licensed to practice law since 2016. Mr. Woodruff’s practice focuses on estate planning and the administration of trusts and probate estates. A passionate advocate for children and families, Chris brings extensive experience walking with people who are experiencing grief, trauma, and complex family situations. He provides patient, insightful, and tailored solutions to his clients.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Trusts 101: Benefits of a Trust Before Death

by Jonathan A. Nelson

My previous post in the Trusts 101 series looked at benefits an estate planning trust provides in setting plans for after death, but there can be benefits before death and in certain circumstances it can be very helpful.  These include:

 1.       Incapacity Planning: To the extent assets have been transferred into the trust, a successor trustee is often able to manage finances more systematically and smoothly than someone using a power of attorney, as the trust covers contingencies the POA may not.  In the event of an unexpected incapacity, the authority and flexibility of a trust can be very helpful in both moving quickly and weathering the storm.

2.       Orderly Transitions:  With a gradually increasing incapacity, the trust can allow a cooperative and progressive transition using a co-trustee to make up for what the grantor can’t do at this moment, or anymore.  The trust and its separate recordkeeping also offer better protections against financial abuse, particularly in the event the incapacity interferes with the ability to see how the other person is assisting, versus a power of attorney.

3.       Complex Family Dynamics: Every family is different, and sometimes peace is best kept by addressing natural points of discord.  These may include children from separate relationships, spouses with different life expectancies, and interaction with extended family; or, before the grantor’s death, accounting for a loved one who is disabled, struggles with addictions, has litigious tendencies, or is manipulative (or vulnerable) where money is concerned.  For all of these, building provisions into the trust now can give the grantor peace of mind and free those relationships from being dominated by money concerns.

4.       Management of Business or Investment Property: There is significant overlap with post-death benefits of having a transition plan in place for a business or investment, but you can find improved ability to retain talent or attract investors when you have such a plan.

5.       Early Involvement of Professional Management: For some people, the amount of work or the needs of their survivors will push them toward having professional or corporate trustees after death. Where those trustees are already involved before death (such as if a grantor steps down as trustee or passes along the management of assets), it can make the transition smoother.

6.       Segregated Assets for Particular Purposes:  Not all estate plans call for a single trust to do everything.  Whether there are guarantees in a premarital agreement or legal or moral obligations from a prior marriage, a standalone trust or a subtrust with distinct assets can be a convenient way to earmark assets and provide specific instructions to a future trustee.

7.       Balanced Interests of Beneficiaries: Similarly, not all needs of future beneficiaries are known at the time a trust is set up, and sometimes the level of control provided by a trust can be useful in establishing a balance in access between current family members and a subsequent spouse, or account for significant lifetime transfers to be accounted for as between children.

8.       Some Protections against Creditors (Including Future Creditors of Beneficiaries): While true creditor protection trusts are set up very differently from most estate planning trusts, there is still an element of protection the trust can provide, including against predatory “inheritance advance” lenders.

Next time in Trusts 101: When Not to Use a Trust

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.

Trusts 101: Why Use a Trust?

by Jonathan A. Nelson

Revocable living trusts are the most used trusts in our practice.  They are powerful and useful estate planning tools, but they aren’t right for everyone, and I don’t try to oversell them.  Trusts often require considerable customization by the attorney to meet the individual’s needs and circumstances, time and perseverance on the client’s part to fund the trust properly (if I prepare your trust, I provide you with some instructions for this), and a higher commitment for the Trustees to maintaining the assets and documents versus other types of estate planning.  Further, the documents are considerably longer (one local firm’s stock trust is 1.5 times as long as The Lion, the Witch, and the Wardrobe; mine are significantly shorter, but are still a lot of reading) and they require more work just to understand what is required by the document.

 Given the effort and cost involved, clients sometimes wonder what advantages a trust has over just having a will.  Bear in mind that with a will, a probate estate is opened with the court, and the executor’s three jobs, roughly speaking, are to gather the assets, pay the creditors, and distribute to beneficiaries.  For what happens to your estate plan after you pass away, a trust allows key differences, including:

1.       Probate Avoidance: Assets pass outside of probate, saving time and costs, including state and local probate taxes.  The Trustee still has an obligation to account for the assets, but instead of reporting to a court-appointed Commissioner of Accounts, the Trustee only needs to satisfy the beneficiaries that the accounting is sufficient.

2.       Unified Planning: A trust can unify and distribute all assets, versus the more splintered usage of beneficiary designations on death, reducing the chance of accidental inequity, unintended consequences (such as what happens if the only named beneficiary on the form has passed), and potential for abuse.  There are also better options to prioritize gifts in a different order than the law sets for estates, in the event there are unsatisfied creditor claims.

3.       Investment Goals: Trusts allow continuity and direction for labor intensive or time sensitive holdings, such as rental properties or small businesses, and allow the appropriate person to become (or remain) the manager, rather than throwing in all of the beneficiaries as partners.  In many instances, this is very helpful in avoiding liquidation of investments at a suboptimal time.

4.       Tailored Distributions: In most cases, distributions from a trust can be designed with more detail, more structured timeframes, and more flexibility for future contingencies than wills allow.  A distribution under a will is almost always the asset or cash being given to a beneficiary as soon as probate is complete, with no strings or oversight; a trust can change any aspect of that distribution, in many variations, including: 

a. A trustee can manage assets and expenses in the short or long term for a beneficiary who still needs to mature or has limitations.  This includes minors, special needs beneficiaries, or beneficiaries with substance abuse issues, but is sometimes used just to stretch out distributions over some years. That might be done to minimize tax liability, protect heirs from creditors, or even allow a  beneficiary to gain experience in financial management progressively before receiving the bulk of their inheritance.

b. The assets can be held for a specific amount of time and the income paid annually to a beneficiary, while the principle is held for or distributed to another person (for instance, a second spouse who is a lifetime income beneficiary before the principle passes to the prior children).  Alternatively, income and principle could be used for particular contingencies (such as care and veterinary costs during the life of a pet).

c. Gifts can be made contingent on future events (such as a child’s successful graduation from college) or future needs (like down payment for a beneficiary’s first home or a reserve fund for a parent’s elder care).

5.       Creditor Protection: The anticipated benefit under a will can be attached by a beneficiary’s creditor, included in the beneficiary’s divorce proceeding, or even contracted away inadvisedly by the beneficiary himself; a trust can provide protection against any of these.

6.       Charitable Giving: Some giving strategies, particularly ones that seek tax advantages by blending giving with gifts to beneficiaries, require using a trust to lock the plan into place.

7.       Reduced Taxes: Using a trust can provide exemptions or strategic timing of transfers or values used, thus reducing Federal and state tax obligations while ensuring the assets still serve their intended purposes.

Whether you are planning, administering, or benefiting from a trust, an experienced estate planning attorney can ensure you understand the outcomes, obligations, and processes involved.

Next time in Trusts 101: Benefits of a Trust Before Death

Virginia attorney Jonathan A. Nelson uses his extensive legal knowledge and trial experience to resolve conflicts, negotiate settlements, navigate compliance matters, and vigorously advocate in the courtroom in order to achieve the best possible outcomes for his clients. He practices in estate planning, probate, trust and estate administration, corporate law, and civil litigation related to these fields.

The attorneys of Smith Pugh & Nelson, PLC, offer the experienced counsel, personal attention, and customized legal services needed to address the many complex issues surrounding estate planning, probate, and trust administration. Contact us at (703) 777-6084 to schedule a consultation.