Chapter 5 Trusts

• Library: Estate Planning for Same-Sex Couples (ABA) (2015 Ed.)

Chapter 5 Trusts

This chapter provides an overview of trusts. A complete discussion of trust issues that encompasses all of the intricacies inherent in drafting trusts is beyond the scope of this chapter.

Trusts comprise a separate facet of an estate plan for lesbian and gay clients. Trusts can provide the protection and privacy that many clients seek. It is more difficult to contest a trust than a will. And, since trusts are private, they are not subject to the jurisdiction of probate court.

Revocable joint living trusts for married same-sex couples will become more common with the extension of marriage rights throughout the country. The introduction of marriage to the LGBT community creates new opportunities for using trusts in estate planning. However, lawyers need to understand the unique situations that long-time same-sex couples may present. These couples, which have not been able to marry, will have joint and separate assets that need to be considered.

Same-sex couples living in community property states also present different scenarios than their counterparts in common-law states. Likewise, couples living in states that have tenancy by the entirety statutes may have opportunities that were previously denied them.

Trusts come in many forms and can range from simple to complex. The more complicated the client's assets and situation, the more complex the trust. Because there may be tax implications, lawyers with limited experience in drafting trusts are well served in collaborating with a more experienced lawyer. Or, in some cases, it may be best to refer the client outright.

Basic trusts often used in estate planning are testamentary trusts (especially when minor children are involved), living trusts, and irrevocable life insurance trusts.

A trust is a relationship between three parties: grantor, trustee, and beneficiary. The purpose of the trust is to transfer property owned by the grantor into the trust where the trustee manages it for the benefit of a beneficiary. The grantor can also be called the "settlor," "donor," "grantor," or "creator."

Legal title to the property resides in the trust with the trustee being responsible for managing the assets. The beneficiary has equitable title to the property.

There can be multiple grantors, trustees, and beneficiaries. Generally, it may be better to entrust management of the trust assets to a single trustee. Multiple trustees can create problems if they disagree on how to manage the assets. The grantor can also be a trustee and a beneficiary.

A trustee may be an individual, more than one individual, or a legal entity like a bank or other financial institution. Trustees are responsible for managing the trust assets. This may include investing assets as well as protecting and preserving those assets. State law may allow a trustee to be paid for administering the trust. The trustee has a fiduciary duty to the beneficiaries, which means the trustee is personally liable if the trust is mismanaged.

The trust provisions govern its administration. The trust terms must specify the property to be transferred into the trust. The grantor decides when the trust begins, what assets are placed in the trust and when, how the trust is managed, how much power the trustee has, and when the trust ends.

Trusts can be revocable or irrevocable. The latter should be considered carefully. Irrevocable trust cannot be changed once they are established and funded.

The grantor continues to have the power to amend, revoke, or terminate a revocable trust. There are, generally, no gift, income, or estate tax benefits because the grantor retains control of the assets. The grantor must pay ordinary income taxes on the trust assets. Some people believe having a trust allows them to avoid paying taxes. While there may be tax benefits for some types of trusts, this is not true for all trusts.

Irrevocable trusts are permanent when established, and the grantor relinquishes all rights to alter, amend, revoke, or terminate the trust. The grantor may retain certain administrative rights. However, once established, the trust remains in effect under the trust provisions and the trustee's supervision.

Some individuals with large estates may want to divest themselves of property during their lifetime and a trust can be an appropriate vehicle to do so.

While a trust is a standalone creature, it is a part of a comprehensive estate plan. Clients also need a will to cover any assets the grantor/testator may forget or overlook when funding a trust.

A. Transfer of Assets

Drafting a trust document is just the first step. Equally important is transferring assets into the trust. Trusts that are not funded have no effect on a person's assets. Many people have paid considerable sums for what amounts to an expensive pile of paper because they failed to fund the trust. Including a "pour-over" clause in the client's will allow the executor to transfer assets into the living trust that may have been overlooked. Assets left out of the living trust may be probate assets and, if there is no will, are controlled by the state's intestate succession statute.

Section 2035(a) of the Internal Revenue Code (IRC) deals with the transfer of a property interest within three years of death. The IRS considers such transfers to be made in contemplation of death. The transfer is ignored and the value of that property must be included in the decedent's gross estate. This applies only to property that would be included in the decedent's gross estate under the IRC had the interest been retained.

Attorneys can advise clients on what property to transfer into the trust and to assist the client in effecting the transfer. Clients also need an annual reminder to transfer recently acquired property into the trust.

B. Living Trust

Living trusts are established during the client's lifetime. The grantor sets up the trust. She can also be referred to as the settlor. For most people, the primary purpose of a living trust is to avoid probate. A living trust does not avoid federal or state estate or inheritance taxes.

While a trust is not subject to probate, it is also not protected by the probate court because trusts are conducted in private, without judicial oversight.

Living trusts can be an appropriate vehicle to protect assets, maintain privacy, and avoid potentially negative family interaction when one of the partners dies.

The trust beneficiary cannot contest the grantor's action but the trust provisions may allow the beneficiary to challenge trustee actions.

The grantor is often the trustee during his lifetime and relinquishes that position on death or disability. The trust terms specify when a change in trustee occurs.

Most people use a living trust to avoid probate because they fear a protracted court battle. The grantor transfers all property into the trust, including property owned at the time the trust is established and other property accumulated during the grantor's lifetime. Anything not placed into the trust is potentially a probate asset.

Probate is less onerous than in the past and there are other avenues available to avoid probate that do not require the expense of establishing a living trust. These include payable on death accounts, transfer on death deeds, and joint accounts.

These trusts can be used to meet the unique needs of same-sex couples with no statutory legal resource in the estate-planning area. A living trust gives the parties privacy because the trust will never become a public record. The trustee has considerable power and is not required to answer to anyone other than the grantor.

In some situations, beneficiaries may regret the lack of judicial oversight and legal protection. Should the trustee abscond with the trust assets for an island in the Pacific, the beneficiaries may have little recourse, especially if the grantor does not require the trustee to post a bond.

A trust can be set up to begin making distributions to the beneficiary soon after the grantor's death. This differs from probate where it can take months to distribute assets.

Placing real estate into a trust can provide another advantage, particularly if the real estate is located in different states. In probate, this situation would require an ancillary proceeding for real estate located outside the decedent's residence state. That action needs to be filed in the state where the real estate is located. A trust precludes the need for such a hearing.

A living trust can also benefit the grantor if she becomes incompetent during her lifetime. The successor trustee continues to manage the grantor's affairs and property. The existence of a trust may also preclude the need for a guardian because the grantor's estate is being managed. If a guardian is appointed the trust is not affected and the guardian would be responsible for the grantor's person not her estate.

Creditors can access assets in a revocable living trust but not from an irrevocable living trust. A bona fide irrevocable living trust precludes creditors from attaching any assets because the grantor has no authority over the trust.

Trust assets may be included in a decedent's taxable estate.

If the trust assets are valued in excess of the current federal exemption level federal estate tax will be due on the amount that exceeds that amount. State inheritance or estate taxes may also be levied against the trust assets.

A living trust should not be the only tax-planning tool. Clients with large estates should consult a tax planner or CPA to take advantage of all available tax benefits. Lawyers who are not well versed in tax law should collaborate with a competent tax professional to assist the client.

Living trusts provide lesbian and gay clients another avenue to protect their assets and their relationship from inquiry by courts and the public. The trust can hold both shared and individually held property. This makes the setup and administration easier. However, if the couple's primary goal is to...