Do I Need a Trust? Part 2: Planning Goals and Solutions

By David Wise

In our previous post, “Do I Need a Trust? Part 1”, we explored the benefits a trust can provide: control, probate relief, privacy, estate tax and creditor protection, among others. We also reviewed some potential drawbacks. If you’re looking to better understand whether you need a trust at all, that post is a good place to start. But now let’s walk through a few specific examples where a trust may help you accomplish your goals.

If you are a parent of minor children:

It’s hard to imagine your young child having to carry on without you. But if your little one is orphaned and inherits your estate, a minor’s trust can at least provide him or her with some financial protection. This type of trust would allow for a trustee (whom you choose) to use your estate to cover your child’s expenses. And when your child grows up, the funds can be transferred into his or her name individually. You can choose the age(s) when your child receives control of the funds, but it is fairly common to do this gradually, such as transferring portions at age 25 and 30, and full control at age 35. A minor’s trust gives you some helpful control over when or how your child would inherit your money.

If you have a dependent with special needs:

Similar to a minor’s trust, a special needs trust can be a valuable tool to ensure a child with a disability has the support needed to provide a lifetime of care. This trust includes special provisions that may help the trustee maintain eligibility for certain government benefits available to disabled individuals. Meanwhile the trustee can use money available for certain enriching expenses without forgoing eligibility for those benefits.

If you may need Medicaid benefits:

Because Medicaid is intended to cover needy individuals, you typically are required to spend your assets down to very low levels before you qualify for benefits. There is a special type of irrevocable trust, commonly called a Medicaid eligibility trust, that can hold legal title to your assets which helps you qualify for benefits without having to spend all your money.

The trustee, typically a family member or friend, may use the trust assets for your benefit with certain restrictions. This is an irrevocable trust, so you are not allowed unrestricted use of the money.

Medicaid rules vary from state to state, and this is a particularly thorny planning area. For example, there is a “look-back” provision on transfers – if you’ve given money away within the last 5 years, even to your trust, Medicaid may still ignore those transfers and determine that you are ineligible for benefits. Because of this, in addition to working with a specialized attorney to determine whether such a trust would be appropriate, you must work closely with your attorney and a planner to implement the trust properly after it is created.

If you have a blended family:

If you have children from a previous marriage, a trust can play a critical role to ensure that your estate passes to the heirs you intend. This can be a tough conversation to have with your new spouse, because no one wants to believe their new partner would disinherit their children, but the reality is this should be a concern for parents in blended families. If Cinderella’s father had done proper trust planning, the wicked stepmother might have had much less influence in Cinderella’s life.

 

There are many types of trusts, and each has its own legal and financial planning considerations. We’re only looking at the tip of the iceberg with this post. In addition to the uses above, you can use trusts to control your estate in just about any legally reasonable way, depending on the creativity of you and your attorney and your ability to pay the legal fees. In addition to the common uses above, there are also trusts that can help you:

  • Minimize estate taxes (if you have a very large estate)
  • Maximize your charitable legacy
  • Provide assets & income to multiple generations
  • Incentivize heirs to achieve certain goals
  • Provide for your pets
  • And many more

And remember, your estate planning does not stop the day you sign the documents. Executing your legal documents is the beginning, but you may need to also retitle your assets and rename beneficiaries on your accounts and insurance policies. Otherwise, you may have wasted the time and money you spent working with your attorney. We also recommend you work with a financial planner who will regularly review your estate plan and collaborate with your attorney to implement it properly.

 

Disclaimers

Hilltop Wealth Advisors does not provide legal advice. This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. 

The information contained herein is believed to be true as of the date of publication. It may be rendered out of date by subsequent legal or tax-rule changes, as well as variable economic and market conditions.