Understanding Trusts

Having a basic will is a good start to your estate plan, but you may want to consider additional documents, such as a trust, to lessen the burden on your family if you should die. A trust allows you to manage your assets during your life and after your death.

A trust is a legal document that allows a trustee to hold property for the benefit of others, known as beneficiaries. As the grantor, you would create the trust and instruct the trustee (either a person or organization you’ve designated) as to how you want your assets (investments, real estate, bank accounts, cars, boats and other valuable personal property) distributed to the people you name as your beneficiaries.

There are different types of trust documents to choose from depending upon your specific requirements, but the two basic categories are testamentary and non-testamentary.

Testamentary trust

You create your testamentary trust through a will and it goes into effect when you die. The trust is revocable which means you can change the terms of the trust at any time during your lifetime. A testamentary trust is often set up to establish guidelines for distribution of money and property to minor children or children with special needs. This type of trust allows you to determine when and how your heirs receive money and property. Because it is part of the will, it will need to go through the probate process before taking effect.

Non-testamentary trust

Grantors typically create non-testamentary trusts, or living trusts, to pass property or money to beneficiaries and avoid the probate process for assets titled in the name of the trust.

The two basic types of non-testamentary trusts are revocable and irrevocable.

Revocable trusts

A revocable trust, also known as a revocable living trust, is a legal document that allows you to put your assets in trust for you to use while you are living and then details how you want these items distributed when you die. Because the trust is revocable, you can cancel or change it any time during your lifetime.

A few of the reasons you might consider a revocable trust are:

· You have many assets.

· You own property in multiple states.

· You have extended family that might make things more complicated.

· You want to plan for mental or physical incapacity or disability.

· You want to address property that is not solely in your name.

The revocable trust is usually set up in the following way:

· As the trustee, you keep total control over your assets and have the ability to move them in and out of the trust as you wish. Your spouse or another person you name can be the co-trustee.

· You name a successor trustee who will be responsible for transferring your assets to the beneficiaries you’ve chosen upon your death, or if co-trustees, upon the death of both the trustee and co-trustee.

· If something happens and you become incapacitated, your successor trustee can step in and act for you, without involvement by the courts, to handle your financial issues and manage your assets per the guidelines you set when you created the trust.

Revocable trust benefits include:

· Management of assets: Transfers the responsibility of making investment decisions, maintaining records and distributing assets to the individual or institutional trustee you named if you die or are unable to manage the trust.

· Protection of assets for beneficiaries: Keeps your beneficiary’s creditors from accessing trust assets and also protects assets from the spouse or former spouse of the beneficiary in the event of divorce.

· Privacy: Protects assets, terms and conditions of a trust from public inspection so they remain a private family matter.

· Probate avoidance: Controls assets in the trust by trust terms you have set up and not by state probate law. In some states, avoiding probate can save time and reduce estate administration expenses.

· Multiple beneficiary provisions: Avoids conflicts by allowing discretion in making distributions when the trust benefits more than one beneficiary.

· Special needs provisions: Lets you name provisions to provide for the special needs of a beneficiary related to education, health, disability, etc.

· Tax planning: Allows your estate to take advantage of estate tax credits while assuring your surviving spouse has assets available to meet needs.

A revocable trust provides a lot of flexibility. You can easily modify it with a trust amendment, and you are able to cancel or revoke it at any time. However, the assets in your trust are still considered your personal assets as far as creditors and estate taxes are concerned, so the following may apply:

· A revocable trust does not offer creditor protection in case of a lawsuit.

· Medicaid considers your revocable trust as a countable asset for Medicaid planning purposes.

· Assets in your trust might be subject to both state and federal taxes.

· Your revocable living trust becomes irrevocable upon your death, because you’re no longer available to make changes to it.

Irrevocable trusts

An irrevocable trust is a type of trust that the grantor can’t change once the grantor signs the paperwork and funds the trust. Once your property is in the trust, you can’t remove it. You do not act as the trustee and no longer have the power to manage the assets in the trust. You step aside permanently once you have formed the trust.

There are a number of types of irrevocable trusts. Some of the more common include:

· Estate tax reduction — You give the assets of your trust to the trustee for your beneficiaries. This removes the value of the property from your estate so it isn’t taxed when you die.

· Asset protection trust — Your creditors can’t access assets and Medicare can’t count them, because you no longer have access to or control of the trust assets.

· Charitable trust — You can take a tax deduction the year you fund the trust if you are living; if assets transfer after your death, your estate receives the charitable tax deduction.

· Special needs trust — You can set up a special needs trust to improve the quality of life of a person with special needs, with the goal of not affecting that person’s eligibility for government benefits. The trust can be set up as either revocable or irrevocable, but it becomes irrevocable upon your death. There are special rules and regulations that apply, so make sure you fully understand all aspects of this type of trust.

Resources

As you can see, you have a lot to think about as you create your estate plan, so take advantage of the resources available to you. You may want to review FINRED’s Estate Planning for Service Members, an online webinar that provides overview information about estate planning. Other good sources of information include the FINRED estate planning blog and estate planning fact sheet. You can also find additional articles and information at Estate Planning on Military OneSource.

Take advantage of the no-cost assistance available at your legal assistance office to create your estate plan, review your will or trust, and update or change any of your estate documents.

The common recommendation is that you review your estate plan every three to five years or when your life situation changes. As a service member, you should also review each time you move to a new duty station and before you deploy.

Don’t wait — start today. Make a commitment to your peace of mind and your family’s well-being, and schedule your no-cost appointment with your installation’s legal assistance office to start creating your estate plan.

Follow the Department of Defense Office of Financial Readiness @DoDFINRED on Facebook, Twitter and Instagram for tips to keep you financially fit. Look for more on YouTube.