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What is a Testamentary Trust, and why is it useful?

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Many people may be interested in obtaining a testamentary trust but may not be sure what they are. In simple terms, this is a legal document that is most often drafted for young adult children or minor children to help distribute funds should the parents die. These funds may come from the sale of the estate, life insurance policies, or the sale of other valuable assets. A testamentary trust is generally drafted after the death of the parents. It involves appointing someone to act as a trustee whose duty it is to look after the trust for a certain period of time. Normally, the trustee relationship is in effect until the minor reaches the age of 25 or has graduated from college. These terms, however, can be flexible and customized to meet the parent’s wishes.

While the cost of setting up one of these documents is usually reasonable, it is always best to get the services of a qualified attorney to do the actually writing of the document. This can help prevent confusion and possible litigation later on should some family member wish to contest the document. In addition to providing for minors, a testamentary trust can also be used to provide for those who have disabilities or are unable to provide for themselves. Generally, this type of legal document is used when there is a large amount of money or assets to pass on. There is a reason for this. The trustee, who may be a lawyer, will have to go to court on a periodic basis to prove the testamentary trust is being handled correctly. They do not do this for free. The longer the trustee has to handle the document, the more he or she is likely to charge for this service. This can end up being very expensive. These fees are normally taken out of the trust itself, thus reducing its value.

Another option is to use a revocable living will, which is usually less expensive to administer and is often a better choice for those who only have a fairly reasonable amount of assets to pass on after death. You should also ask your lawyer whether choosing an irrevocable income only trust, or a dynasty trust would be more beneficial for you or not.

While it was just mentioned that attorneys can be named as trustees, this is not a hard and fast rule. Other family members can be appointed, the court may appoint someone, and even friends of the parents can be appointed as trustees. Parents can be very helpful in this regard if they appoint the trustee before they die. It should be noted that with a testamentary trust the trustee actually inherits the assets and administers them until the conditions for disbursement are met. Until that time, the trustee has a great amount of control and power over the assets and how they are disbursed. The court will only oversee the administration of the process, which means it is important to make sure the person appointed as the trustee is someone who can be trusted for the long term.

Another reason to hire a qualified attorney is to provide, in writing, any special instructions the deceased may wish to pass onto to the trustee or the beneficiary. This can be especially important if there is also a will. Even though a legal will can clarify your wishes regarding how the money is to be spent by the trustee, the trustee, if the court approves, does not have to honor those wishes unless they have been properly spelled out, by an attorney, in such a way as to all but force the court to obey those wishes. This is something most people should not attempt to do on their own.

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Categories: Legal Articles - Tags: attorney, creating a testamentary trust, inheriting assets, life insurance policies, testamentary, testamentary trust, testamentary trustee, trustee, young adult children

The Advantages of Creating a Dynasty Trust

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A Dynasty Trust is a type of trust fund that is designed to allow its grantor to pass their wealth from generation to generation.

The beneficiaries of the trust are the descendants of the grantor. In addition to existing children and grandchildren, this would include generations and persons not yet born.

The terms of the trust will be specified by the grantor and, as with most trust funds, a trustee is retained to handle the daily operations of the fund. The trustee’s role will also include the handling of all investments and distributions. It is not recommended that any beneficiary of this type of fund be assigned as trustee.

This type of trust fund is irrevocable, just like an irrevocable income only trust. Once funded, the grantor no longer has control of the assets and will not be able to access the assets or amend the trust terms.

All distributions of the trust fund are solely governed by the original terms set by the grantor. Distributions usually include funds required by a beneficiary for health, education and or maintenance and support. The designated trustee is responsible for assessing the needs of each beneficiary and making the appropriate distributions.

In theory, this type of trust is intended to last indefinitely or until the grantor has no further descendants. However, the trust is not required to last forever. In some cases, date limitations will be established by the grantor. If there is a balance remaining at the end of the time period, the trustee will distribute the funds as initially established by the grantor. These final distributions are often assigned to one or more charitable organizations.

A key feature of the Dynasty Trust is its term. The trust is intended to last in perpetuity or as long as the grantor of the trust has descendants. The unrestricted term is important since it provides a major incentive for the grantor in funding the trust as opposed to selecting other, shorter-term techniques.

There are several tax benefits to establishing a Dynasty Trust. These include the exemption of transfer taxes (including estate and gift taxes) and the Generation Skipping Transfer Tax (GSST). For complete details on the tax benefits, you would need consult with a tax expert.

Another appealing benefit is the protection this type of trust offers in regards to creditors. Once this type of trust has been established, creditors must wait until a beneficiary actually receives a distribution before they may attach any claim.

A Dynasty Trust has many advantages, not the least of which is establishing a legacy for your future descendants.

For complete details regarding this, or any other type of trust fund, you should consult with your legal professional.

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Categories: Legal Articles - Tags: advantages of dynasty trust, creating a dynasty trust, creditor, dynasty trust, Generation Skipping Transfer Tax, grantor, transfer taxes

The Advantages of Creating An Irrevocable Income Only Trust

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An often discussed mechanism in medicaid/nursing home planning is the IIOT, an Irrevocable Income Only Trust.

Aside from nursing home issues and look-back periods, we need to first ask about financing issues. Consider whether the Trustee might ever need to obtain financing on the realty, perhaps for a new burner or roof. Most Lenders will not mortgage realty owned by any Irrevocable Trust. Would deeding realty into an IIOT make a pre-existing mortgage due and payable?

If the sale of realty after it is deeded into the IIOT is a possibility, we can structure the IIOT as a Grantor Trust. If an Elder Trustmaker later moves into Assisted Living or into a Nursing facility, there is no spouse at home and that realty is sold by the Trust, we want the Trustmaker to be able to elect the $250K capital gain exclusion.

To that end I insert a testamentary power of appointment allowing the Trustmaker to appoint Trust property by Will to a class of persons described in the IIOT. I do not include a lifetime power to appoint because it may be considered too much power in the skeptical eyes of Medicaid caseworkers especially in this era of recession. Their position might be this would render the IIOT a “Medicaid qualifying trust.” It can be overcome but do we want to go into the trial Court to refute their arguments?

The Trustmaker should have no power to appoint trust principal to himself, his creditors, his estate or his estate’s creditors. The ultimate goal of an IIOT is for Trust owned assets to be non-countable, and the less the IIOT contains for “escape mechanisms,” the more certain our objective becomes.

Provide An Escape Hatch

We do provide an “escape hatch” in the IIOT in case the look-back period is not met to avoid the worst of both worlds (i.e. principal that is “countable” for Medicaid purposes, but which cannot be accessed by the Trustmaker). Provide for appointment of a Trust Protector who could be a corporate fiduciary, Attorney, C. P. A. or an individual who is not related or subordinate to a transferor or any Beneficiary within the meaning of Section 672(c) of the Internal Revenue Code.

The IIOT may provide that during the Trustmaker’s lifetime the Trust Protector may, in writing, direct the Trustee to pay to or apply for the benefit of the children or grandchildren of the Trustmaker or their spouses, so much of trust principal as the Trust Protector in its sole discretion deems advisable.

To preserve Grantor Trust status then, along with the testamentary POA and “Trust Protector escape hatch,” we need to add a so-called Designating Person who can add a class of Beneficiaries. The class might consist of children, grandchildren, spouses, or charities. The Trustmaker, the Trust Protector, any Beneficiary of the IIOT (including any person who may be added as a Beneficiary) any so-called “adverse party,” as defined in Section 672(a) of the Code, or any so-called “related or subordinate party,” as defined in Sect. 672(c) of the Code should not be appointed to serve as a Designating Person.

Who Should Serve As A Trustee?

Can the Trustmaker(s) be Trustee? There appears to be no express prohibition against that, but with the current government deficits and budget cuts, why risk a higher level of scrutiny? If we have decent prospects as Trustee, it may be safer to not have the Trustmaker in the position of power as a Trustee.

We all know the number of potential Adult Child/Trustee pitfalls that can develop. Will the existence of the Trustmaker’s testamentary POA be enough to keep an Adult Child/Trustee in line if he can be “disinherited” from the very Trust that Child administers?

Include a provision allowing the Trustmaker to remove any Trust Protector or Trustee with or without cause at any time to allow the Trustmaker some much needed control in the event a relationship with a fiduciary sours in the future. Is that too much power for Medicaid? Can a client afford not to have such removal powers?

Many practitioners are now acting as Trustees or Trust Protectors for their Clients’ IIOTs knowing they’ll never act in a manner contrary to the Trustmaker’s best interests.

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Categories: Legal Articles - Tags: beneficiary of the iiot, grantor trust status, iiot, irrevocable income only trust, lawyer, medicait, poa, trust protector, trustee, trustmaker