In Part I, we became familiar with what a trust is. Now, we’re looking at the question…who needs a trust?
The first threshold question in determining whether a trust is necessary, is discerning whether a will or trust is more appropriate as the foundation for the estate plan.
A will may be more appropriate for an individual who:
- Exclusively has assets that can be handled by nonprobate transfers. For example, an individual may have a home that can be handled with a transfer on death deed, an IRA and/or life insurance that can be handled by beneficiary designation, and financial accounts (such as checking, savings, or brokerage accounts) that can be handled by account designations (such as POD/TOD-payable on death and transferable on death or JTWROS-joint tenants with rights of survivorship). In this instance, a will can be a “boot strap approach” for handling any stray assets that may be missed by other designation, or to handle debts and/or other administration issues.
- Needs the most economical approach.
- Has a fluid asset base and does not want the administrative task of maintaining an inter vivos trust.
inter vivos trust may be more appropriate for an individual who:
- Has real property outside of Texas, since an intervivos trust can prevent the potential of probate in multiple jurisdictions.
- Has privacy concerns. An Inventory (which lists assets and values) is still required in Texas in some (but not all) instances. Even if an individual does not have asset privacy concerns or those concerns can be otherwise adequately addressed, he may not desire the beneficiary of his estate to be in the public record. Finally, an individual may wish to hold title to her assets in the name of a trust (unassociated with her name) so that the public does not cannot easily discern her ownership of the asset.
- Is the point man for the family assets, complicated ones in particular. This allows an individual to “front load” the administrative work while he or she is alive in order to sort through the details, instead of relying on someone down the line to have to sort through them (funding an inter vivos trust with minerals with a complicated history for example in lieu of punting the work to the executor who may be ignorant of the asset history).
- Has a diagnosis of dementia or a memory related condition. Placing assets in an inter vivos trust can provide continuity of management for such individuals.
- Wants a joint plan with his or her spouse. A trust is a good solution for the couple who wants a joint estate plan.
The second threshold question is whether the individual has circumstances or priorities for which a “special purpose trust” is appropriate. Some examples of special purposes for which a trust may be created are:
- To address blended families
- To designate a third party to make investment, management, and distribution decisions for beneficiaries under a certain age, for beneficiaries with spending or creditor issues, for beneficiaries with capacity issues, and for beneficiaries with negatively influential spouses or marital issues
- To centralize management of real property (such as a vacation house, farm or ranch, and minerals)
- To prevent disqualification from federal special needs programs
- To designate the beneficiary of any assets that may remain after the initial beneficiary’s death
- To provide for ongoing charitable gifts
- To protect beneficiaries from creditors and predators (like opportunistic significant others or caregivers)
- To minimize the impact of transfer taxes
- To preserve a lineal distribution of assets
- To administer retirement account distributions and prevent the redemption of the account or a change of beneficiary.
If an inter vivos trust is the appropriate path for the foundation of the estate plan, or if there are circumstances or priorities for a which a “special purpose trust” is appropriate, a trust may be a potential solution. Part III is the last of this three part series. In it, we look at some common misconceptions surrounding trusts, namely: who needs them, what can be accomplished with them, and how they operate.