Informal Trust
An informal trust is just another way of saying that all assets have a beneficiary designated on the accounts or the titles of all assets as transfer on death (TOD) or payable on death (POD). This type of trust is simple as there is no actual trust involved. Informal trusts are free and effective only in the event the owner dies. All other possible life events that could leave the owner unable to conduct life, health, or financial transactions are unaccounted for.
Trusts
Trusts are drafted and held on file by an attorney to cover all scenarios that could potentially happen including incapacitation or death of the owner. They provide legally binding requirements for what is to be done with assets under many different life scenarios. For this reason a Trust should be put into place sooner rather than later and updated annually. For a trust to be enforceable, without a court order, the assets must be listed in the trust AND the trust must be listed on the title of the assets. Trusts contain many additional documents within them such as Power Of Attorney’s (POA) and Wills.
The following roles are commonly listed on all Trusts.
- Grantor; Creates and funds the trust
- Normally the Grantor is also the Trustee and Owner of the trust initially
- Trustee; Manages the assets
- Successor trustee / executor: Manages trust after the Trustee stops
- Beneficiary: Inherits the assets of the trust after the death of the Trustee
- Guardian: Substitute parent that manages minors or protected individuals
- Custodian: Handles inheritance of minors or protected individuals
Revocable Living Trust
Revocable Living Trust can be altered and managed by the owner during the life of the owner. The Revocable Living Trust becomes an Irrevocable Trust upon the death of the owner and can not be altered.
Irrevocable Trust
Grantors of an Irrevocable Trust transfer all of their ownership rights of assets funding the Trust to the Trust itself. This is why Irrevocable Trusts can not be altered by the Grantor without the permission of the beneficiary. This helps protect assets from creditors and lowers the Grantor’s asset bases to aid in qualifying for government programs like Medicaid. The Grantor can not be the trustee of the Irrevocable Trust without having the irrevocable trust considered a grantor trust in the eyes of the IRS.
AB Trust
With an AB Revocable Living Trust the property contributed to the trust by each of the grantors goes to the beneficiaries each grantor identified. Neither grantor can change the beneficiary designation of the other grantor.
Property That Should Not Go Into A Trust
Not all property at all times should go into all trusts.
IRA’s – Removing your name and placing the asset into a trust is considered a taxable event and distribution of all funds. Making the trust as primary beneficiary removes the beneficiaries flexibility of timing the distributions.
Life Insurance – Depending on the state and the size of the estate the only trust that life insurance should go into is an irrevocable trust. It is state law dependent if creditors have rights to go after life insurance policies but more than often they can not.
Health Savings Account (HSA) – Removing your name and placing the asset into a trust is considered a taxable event and distribution of all funds.
Uniform Gifts to Minors (UGMA) – These accounts can not be retitled into any other name. The minor is the owner of the account. A successor custodian should be named in case something were to happen.
Motor Vehicle – Some states allow for the transfer of a Motor Vehicle with the presentation of a Death Certificate of the owner. This is state dependent. Transferring a motor vehicle into a trust is considered a sale of the vehicle and creates a taxable event.
Will
Wills are in no way an effective method of avoiding probate court. Wills are provided to the probate court informing where the property was intended to go assuming the Will can be found and legally authenticated as real. Wills should be considered a supplement to a trust as a means of a catch all for any property that was mistakenly not placed in the trust. Wills are near useless but you should have one.
Power of Attorney (POA)
General Durable Power of Attorney (POA) is a means that a third party can act on behalf of the grantor on Financial, Medical and all other decisions during the grantor’s lifetime. POA ceases upon the death of the grantor.
Power of Attorney can also be limited in scope only allowing for a specific aspect being covered by the terms or the POA. Generally specific POA’s cover financial decisions only or medical decisions only. A POA should be designated on accounts just in case the owner of the account becomes incapacitated.
Beneficiary Letter
Note: If you are the executor of someone’s estate, it would be wise to have that person put together a Beneficiary Letter that is reviewed annually. This letter identifies where all assets and debts are located along with how to access them. This way upon death the executor of the estate is not searching for where and how things were kept. Ensure every year the executor has access to and knowledge of the Annual Beneficiary Letter, Trust, Will and any keys associated with hard assets in addition to legal access to all assets post death or incapacitation.
Annual Beneficiary Letter: The contents of this letter should mirror a Trust and Will with the addition of a How To Guidelines
- Identification of the Executor(s)
- What should be done upon death
- What should be done upon incapacitation
- Where Assets and Debts are held, where keys are kept to access the Assets
- How to access the Assets and Debts, ensure they have legal access
- How to divide the Assets
- File The Final Tax Return for the deceased individual(s)
- File The Final Tax Return for any businesses
- Most accounts will NOT need to be closed right away as many transactions will need to clear via these accounts including the final tax return for individuals and their businesses
- Estates typically take a minimum of one year to consolidate and close, this is due to filing the final tax returns and sale of hard assets.
Estate and Wealth Transfer
1031 Exchange – IRC Section 1031, this tax provision permits a tax-deferred exchange of like-kind properties held for investment or business purposes.
Charitable LLC
Charitable Remainder Trust
Grantor Retained Annuity Trust
Intentionally Defective Grantor Trust
Deferred Sales Trust