Category Archives: Trusts

A Matter of Trust: Tips for Choosing Your Fiduciaries

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There are several key components to any estate plan.  A will or trust will describe who will be entitled to certain assets, how the assets will be held and when distributions will be made to the beneficiaries.  An equally important component is who will be in charge of administering the estate or trust.  These persons are commonly referred to as fiduciaries.

A fiduciary is a person who takes care of property or other matters for another person.  In estate planning, the three most common forms of fiduciaries are executors, trustees and guardians.  An executor is the person responsible for the administration of an estate of a deceased person.; a trustee manages and administers a trust for the trust’s beneficiaries; and a guardian cares for the personal and financial needs of another person who legally cannot take care of themselves (typically, minor children or persons with severe disabilities).

Selecting fiduciaries is often overlooked by estate planners and their clients as a secondary concern to who receives the estate or trust’s assets and how the assets are held.  But, choosing the wrong person to serve as a fiduciary can have severe consequences (litigation, wasted assets, etc.) for the beneficiaries and fiduciaries alike.

Fortunately, selecting the right people should not be difficult if you keep the following tips in mind:

1)    Make sure the nominated fiduciary is willing to serve-It is not uncommon for a person to be nominated for a fiduciary position and be unaware of their appointment.  This is especially true of appointments under wills where the actual work will not occur for many years.  During the drafting phase of any estate-planning document, clients should contact the people they wish to serve as fiduciaries and confirm their willingness to serve.

2)    Ensure that the nominated fiduciary is qualified to serve-Spouses typically name each other as their executor and trustee.  Alternatively, children are often nominated to serve as the initial or successor fiduciary.  While this is understandable, the nominated person must be aware of their responsibilities and be capable of carrying them out.  A fiduciary is held to a very high standard of care and failing to live up to their fiduciary duties has can lead to many headaches for fiduciary and beneficiary alike.

3)    Be mindful of a fiduciary’s relationship with the beneficiaries-The relationship between the fiduciary and the person appointing them is not the only one that should be considered.  While it may not be necessary or wise to get a beneficiary’s approval of a fiduciary, consideration should be given to how they will interact.  This can become especially tricky when issues of divorce and stepparents come into play.  If there is potential for conflict between a fiduciary and a beneficiary, appointing a co-fiduciary or even an alternate fiduciary is advisable.

4)    Understand how a fiduciary is compensated-Under New York law, fiduciaries are entitled to statutory commissions for their service to the estate or trust.  In some instances, a family member serving as a fiduciary will waive their right to commissions even though they are entitled to them.  If you choose a corporate fiduciary or a professional to serve, they will likely have a set fee schedule for their services.  This may be in excess of what the statute requires and, in the cases of attorneys serving, may be in addition to legal fees that they charge.

5)    Choose successor and co-fiduciaries carefully-When a fiduciary stops serving, the will or trust instrument typically has a named successor who will take their place.  In some instances, the will or trust creator names co-fiduciaries to ensure that one person is not overburdened. Both successor and co-fiduciaries will have to work with other fiduciaries and the beneficiaries and must be compatible with both.  Conflict between fiduciaries can snowball quickly and lead to protracted legal battles that may severely deplete the assets of a trust or an estate.

Once assets are transferred to a fiduciary or a person is put in their care, the responsibility to protect those assets/people becomes theirs.  Fiduciaries are held to the highest standards of care because they are given exclusive control over a person’s most important assets.  You should use the same level of care when choosing who your fiduciaries will be.

Please contact info@levyestatelaw.com for more information.

Special Needs, Special Planning

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As some of you know, I grew up in a family with a brother who has special needs.  Having a disabled relative poses many challenges to parents and siblings alike on an emotional, physical and social level.  It can also pose a financial challenge, a challenge, which can usually be met by applying for and receiving government benefits such as Supplemental Social Security Income (“SSI”).

The acceptance of SSI benefits comes with a limitation regarding what the disabled person can financially receive from other persons including their parents.  This poses a unique problem when preparing an estate plan for a family with a special needs relative.

Fortunately, in New York and many other states, parents and other relatives can establish a trust known as a special needs or supplemental needs trust for the benefit of their disabled child or relative.  Special Needs Trusts provide supplemental benefits to the disabled person beyond the benefits provided by the governmental assistance they receive.  In order to preserve their benefits, the trust must be structured in a specific manner.

There are two types of special needs trusts-trusts created with the disabled persons assets and trusts created by third parties including the disabled person’s parents.  The first type is created when the disabled person receives a direct payment from a settlement or a bequest under a will. The disabled person’s legal guardian serves as the Grantor of the trust and upon the disabled person’s death, the remaining assets are first used to repay any advancements made to Medicaid. Any additional assets remaining are distributed to the disabled person’s then living relatives.

The second and more common type of trust is created by a third-party, typically the disabled person’s parents.  During the parents’ lifetime or at their death, the trust is funded and the trustee of the trust makes payments of the trust assets on behalf of the disabled person.  Unlike the first type of special needs trust, upon the disabled person’s death, the remaining assets go directly to the named remainder beneficiaries without any reimbursement made to Medicaid.

Unlike most trusts, special needs trusts are limited with regard to the distributions it can make to its beneficiary.  In New York, there is a statutory requirement that the trust must only make distributions once all governmental benefits are exhausted.  Additionally, while many trusts are used for the health, education, maintenance and support of their beneficiary, a special needs trust can only be used to provide additional comforts to the disabled person.  This can include entertainment, an assistant for the disabled person and any other services not covered by government benefits.

In addition, the trust instrument must make clear that the disabled person can never have direct access to the trust’s assets nor can they have any discretion over the distributions made to him or her.  With all these unique restrictions, it is essential that the person selected to be the trustee is not only aware of how these trusts must be managed, but also must be willing to take a very hands on role in managing the trust for the disabled person’s benefit.

The care of a person with special needs is incredibly important to that person’s family.  Many families try to do everything they can to make their disabled relatives feel as normal and as much a part of the family as their other family members.  But, when it comes to their financial well-being and ensuring that they receive the best possible care, extra planning and extra precautions must be taken to ensure their main source of care is not threatened.

Please contact info@levyestatelaw.com for more information about special needs trusts.

Now or Later: Choosing Between a Will and a Revocable Living Trust

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A Last Will and Testament is the most essential part of any estate plan.  It explains who your assets will pass to, how they will pass (outright or in trust), who will be in charge of administering the assets and who will care for your minor children.  For many people, a properly drafted will is sufficient to allow their estate to pass as they wish.

In some circumstances, however, a will is secondary to another document known as a Revocable Living Trust.  A revocable trust is trust established and funded during the lifetime of an individual (the “Grantor” of the trust).  At the Grantor’s death, a short will known as a “pour over will” pays any remaining assets in the Grantor’s estate to the revocable trust.  Revocable trusts have become an extremely popular alternative to the traditional last will and testament plan.

So, which is the better fit for your planning needs?  Consider these ten factors:

  1. Probate-One of the main advantages of a revocable trust is the avoidance of the process known as probate.  During the probate process, a will is submitted to a court (in New York, the court is called the Surrogate’s Court) and the named executor under the will is granted the power to distribute the Grantor’s assets.  The process can take several months and may cost a significant amount in legal and court fees.  A properly drafted and administered revocable trust can minimize or eliminate the need for the probate process.  This is especially important for individuals with property in multiple jurisdictions.
  2. Funding-In order to ensure that a revocable trust works properly, assets must be transferred to the trust before the Grantor dies.  Any assets not in the trust at the date of death will have to pass through the probate process.  This negates one of the main benefits of a revocable trust. A will requires no lifetime transfers or retitling of assets.
  3. Administration-During the Grantor’s lifetime and after they die, a revocable trust must be administered in accordance with trust instrument.  A will requires no lifetime administration.
  4. Cost-An estate plan that includes a revocable trust will typically cost more up front than a plan that includes only a will.  However, the costs after an individual dies may be less for a revocable trust due to the limited or nonexistent probate costs.
  5. Privacy-Once a will is submitted to the court, it becomes part of the public record and the general public can access it. The trust instrument, unlike a will, is not submitted to a court and the beneficiaries of the trust can remain private.
  6. Tax Planning-One common misconception about revocable trusts is that they provide tax planning benefits over wills.  In reality, both wills and revocable trusts can be drafted to minimize or eliminate estate and other transfer taxes.
  7. Revocation and Amendment-Both wills and revocable trusts can be amended or revoked any time prior to the Grantor or individual’s death.  After the Grantor’s death, both become irrevocable and the fiduciaries of the estate or trust cannot change the terms of the will or trust.
  8. Disability-The trust agreement creating a revocable trust will include successor trustees who will serve if the initial trustees can no longer act as trustees.  It is also common to have a second person serve as a co-trustee with the grantor of the trust.  If the grantor becomes disabled or incapacitated, the remaining co-trustee or successor trust can administer the trust’s assets without applying for guardianship over the grantor.
  9. Ability to Challenge-While will contests are more common, it is also possible to challenge the validity of a revocable trust on the basis of a lack of capacity on the part of the grantor and the trust being created due to the undue influence of another party.
  10. Asset Protection-During the Grantor’s lifetime, a revocable trust provides no asset protection from creditor claims.  After the Grantor dies, the Trust can be structured to protect assets from creditor claims.  This is option is also available when drafting wills.

The choice between a will and a revocable should be well thought out and discussed with your advisors.  While a revocable trust does provide certain advantages to a traditional will, it must be properly drafted, funded and administered to ensure that you receive the maximum benefit.

Please contact info@levyestatelaw.com for more information about revocable trusts.

The ABCs of Trust Planning

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Estate Planning, like many specialty fields, has a language all its own.  For professionals involved in the field, short hand acronyms for various planning techniques are well-known and understood.  For the individuals and families seeking estate planning advice, however, it can leave your head spinning.

Fortunately, once explained, many of these techniques are fairly easy to understand and extremely helpful in achieving your estate planning goals.  This is especially true of a group of “alphabet soup” trusts that are common techniques used by most estate planners.

This is not exhaustive list of trusts or estate planning techniques, but these are some of the more commonly used trusts:

Charitable Lead Trusts (CLT)

How it works: The Grantor (the person who creates and funds the trust) contributes property to the trust and gives a charity or other exempt entity an income interest for a term of years.  Upon the end of the trust term, the remaining property passes to the Grantor’s descendants or other named beneficiaries.

Benefits: The Grantor receives a charitable deduction based on the present value of the income stream and the contributed property is removed from the Grantor’s taxable estate.

Charitable Remainder Trusts (CRT)

How it works: A CRT works exactly like a CLT except the beneficiaries are reversed.  The Grantor or a member of the Grantor’s family receives an income interest for a term of years.  At the end of trust term, the remaining property passes to a charity or exempt organization.

Benefits: The Grantor receives a charitable deduction based on the present value of the remainder interest and the contributed assets are removed from his or her taxable estate.

Grantor Retained Annuity Trusts (GRAT)

How it works: The Grantor contributes property to a trust and receives an annuity interest for a term of years.  At the end of the trust term, the property passes to the Grantor’s descendants or other beneficiaries.

Benefits:  By using the present value of the property and the Section 7520 interest rate, the value of the gift made by the Grantor is zero for gift tax purposes.  The remainder beneficiaries receive the remaining property without the Grantor incurring any gift tax.

Intentionally Defective Grantor Trusts (IDGT)

How it works:  By retaining certain powers over the trust (for example, the power to substitute trust property), a trust is considered a pass through for income tax purposes.  The grantor, rather than the trust, pays any income tax attributable to the trust property.

Benefits:  The income tax rates for individuals are typically more favorable than the tax rates for trusts.  Additionally, the Grantor reduces his taxable estate by paying taxes on the trust income.  IDGTs are often used in sales transactions between the Grantor and the Trust, which also allows the property to pass without estate or gift tax.

Irrevocable Life Insurance Trusts (ILIT)

How it works:  The Grantor contributes cash or cash equivalents to the trust which are used to purchase life insurance on the Grantor’s life.   Each year, the Grantor makes additional contributions to pay the premiums on the life insurance.  Upon the Grantor’s death, the death benefit of the policy(ies) is paid to the Trust.

Benefits:  The proceeds of the life insurance policy(ies) are outside the Grantor’s estate for estate tax purposes.  Additionally, the proceeds may be used to pay any estate taxes due on the Grantor’s estate and allows the Grantor’s estate to avoid liquidating assets such as real estate or business interests.

Qualified Personal Residence Trusts (QPRT)

How it works: The Grantor contributes his or her residence to the trust and retains the right to reside in it for a term of years. At the end of the trust term, the residence passes to the remainder beneficiaries, typically the Grantor’s descendants.

Benefits: Upon the contribution of the residence, the property is removed from the Grantor’s taxable estate.  The value of the gift made by the Grantor is reduced by the value of his or her interest in the residence during the initial trust term.

Each of these trusts is not without its disadvantages and complications.  Unless they are properly drafted and administered, the benefits discussed above may be thwarted.  Despite this, for those looking to reduce their taxes, to pass property to their descendants and/or make a charitable gift, they are well worth diving into the ‘alphabet soup’ to find the right transaction for you.

Please contact info@levyestatelaw.com for more information about these and other trust transactions.