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Show Your Kids You Love ‘Em with a Testamentary Trust

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love in lights

Valentine’s Day is coming up quick and while I think the commercialized messages of “this is love” can get a little cheesy, I’m a full supporter of a day that celebrates love. Be it love for your spouse, a celebration of the fact that you are awesome, or showing even more adoration for your furry best friend, the world could always use a little more love. In this important addition to the #PlanningForLove series, let’s talk about ways you can show love to your children through your estate plan.

Gordon Fischer Law Firm’s Valentine’s Day Gift Guide

I’ve discussed the importance of guardianship quite a bit on this blog. It’s important that anyone with minor children establish guardianship so that if something were to happen to you as a legal guardian that your minor children (under age 18) would be immediately placed in the care of someone you know, trust, and most importantly, choose. Just as establishing guardianship is a powerful gift that your children will hopefully never have to actually know about or experience, a testamentary trust can also continue to provide and support your children if something were to happen to you.

There is an almost endless number of different kind of trusts and you can put just about any asset in a trust. Testamentary trusts are one of the most common kinds of trusts I establish for my clients. You may recognize the first word of the type of trust from “last will and testament.” Indeed, a testamentary trust is a trust written into your will and provides for the distribution of a portion or all of your estate.

(Legal) Word of the Day: Trust

Sounds simple enough, but you’re thinking, “What does this have to do with my kids?”

Different from an inter vivos trust, which is established during the settlor‘s lifetime, the testamentary trust kicks in at the completion of the probate process after the death of the person who has created it for the benefit of their beneficiaries.

Typically testamentary trusts are created for minor children or others (such as a relative with some kinds of disabilities) who may inherit a large amount of money if you (the testator) were to pass away. The general thinking is that you may not want a minor child, or even a young adult, to have uninhibited access to their inheritance until a certain age (and presumed level of maturity) is reached. (I can imagine what I would have done with an inheritance at, say, age 18 and it surely wouldn’t have been the smartest use of money!) The testamentary trust then terminates at whatever age you choose, at which point your beneficiaries receive their inheritances outright and can use the funds in any way they choose.

child with red heart

The testator can choose the distribution to be distributed in percentages such as 25% at age 18, 25% at age 22, and the remaining 50% at age 25. Or, the trust funds may be distributed in full at a single age. (All at age 25 is the default if the testator doesn’t choose otherwise.) Distributions can also be made immediately upon your passing if all beneficiaries are legal adults (age 18 or older). The testamentary trust could also be set-up for disbursements around milestones, such as a percentage or full disbursement when the beneficiary graduates from an accredited two- or four-year college institution.

Testamentary Trustee

With a testamentary trust, you also need to designate a trustee. The trustee is responsible for managing the trust property according to the rules outlined in the trust document and must do so in the best interests of the beneficiary (for example, a minor child). Generally, I advise the appointed guardian also be the trustee of a child’s testamentary trust.

Testamentary Trust Options

In my Estate Plan Questionnaire, I offer clients three main options for testamentary trust organization. (Note that there can be more than one testamentary trust created in one will.)

  • Option 1: Separate trust fund for each beneficiary. Each beneficiary’s inheritance to be held by the trustee in a separate fund. Whatever is left in each beneficiary’s trust fund, if anything, will be distributed to that beneficiary when they attain the age(s) indicated in the following section. This option ensures that all of your beneficiaries are treated equally, regardless of needs.
  • Option 2: Single trust fund for multiple beneficiaries. The entire inheritance will be held by the trustee in a single trust fund for the benefit of multiple beneficiaries (such as multiple children). The trustee may make unequal distributions during the term of the trust if a beneficiary needs additional assistance. Whatever is left in the trust, if anything, will be distributed equally when your youngest beneficiary attains the age(s) indicated in the following section. This option will allow the trustee to accommodate a particular beneficiary’s needs by distributing more of the inheritance to that beneficiary during the term of the trust. (Recommended with younger beneficiaries.)
  • Option 3: No delayed distribution. Beneficiary’s inheritance may be made directly to the beneficiary or a court-appointed conservator if the beneficiary is a minor/incapacitated. Funds will be distributed directly to the beneficiary at the age of 18.

Mom and daughter hugging

The important takeaway from all of this is that a testamentary trust can be entirely personalized to fit your wishes. For example, most folks want the testamentary trust written in such a way that their beneficiaries may have access to funds to pay for higher education costs like tuition, room and board, books, and fees, on top of the necessary funds needed for an adequate standard of care, protection, support, and maintenance of the beneficiary.

Estate Plan Revisions & Updates

If you already have an estate plan review it. Estate plans never expire, but major life events or a change in estate planning goals can necessitate changes. For example, if your family welcomed a new baby or adopted a child then it’s definitely time to update your estate plan to include them! Maybe something changes in the future with one of your beneficiaries and you want to change distribution percentages or ages? Simply contact your estate planning attorney and let them know your wishes.

A Lasting Love

hearts on a string

The love for your children knows no bounds and without a doubt, you want to make certain you can still provide for them if something unexpected were to happen to you. There’s no day like today (or Valentine’s Day!) to get your ducks in a row just in case. The best place to begin is with my Estate Plan Questionnaire or by contacting me.

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In Trusts We Trust: Everything You Need to Know to Get Started

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If you’re unsure of what a trust is and how it works, you probably don’t have one. And, if you don’t have a trust, you’re not alone. About 57 percent of U.S. adults don’t have an estate planning document like a will or a trust even though they believe having one is important.

What Is a Trust? How Does It Work?

If you haven’t stopped to consider how a trust might help ensure that your wishes are followed and your assets are handled, you could be making a critical estate planning mistake.

A trust is simply a legal agreement among three parties—settlor, trustee, and beneficiary—that provides instructions on how and when to pass assets to the trust’s beneficiaries. Let’s look at the role of each of these three parties, and then delve into how trusts work.

Settlor

A settlor—sometimes called the “donor, “grantor,” or “trustor”—is the person who creates the trust and has the legal authority to transfer assets into it.  

(Legal) Word of the Day: Settlor (AKA Donor or Grantor)

Trustee

The trustee is the person who agrees to accept, manage, and protect the assets delivered by the settlor. The trustee has a fiduciary duty to administer the assets according to the trust’s instructions and distribute the trust income and principal according to the rules outlined in the trust document and in the best interests of the beneficiary.

A trustee can be one, two, or more people. A trustee can also be what is known as a “corporate trustee,” such as a financial institution (like a bank) or a law firm that performs trustee duties and charge fees for their services. There are no formal requirements for being a trustee and nonprofessionals frequently serve as a trustee for family members and friends.

What Is a Trustee & What Do They Actually Do?

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person or entity or multiple parties. Also, trust beneficiaries don’t even have to exist at the time the trust is created (such as in the case of a future grandchild or charitable foundation that has not yet been established).

Trust Beneficiary: Break it Down

Trust Property

A trust can be either funded or unfunded. “Funded” mean that the settlor’s assets—sometimes called the “principal” or the “corpus”—have been placed into the trust. A trust is unfunded until the assets are in it (failing to fund a trust is a common estate planning mistake). 

Trust Assets

Trusts can hold just about any kind of asset: real estate, intangible property (like patents), business interests, and personal property. Common trust properties include farms, buildings, vacation homes, stocks, bonds, savings and checking accounts, collections, personal possessions, and vehicles.

“Imaginary Container”

Think of a trust as an “imaginary container” that holds and protects your assets. After the trust is funded, the trust property will still be in the same place before the trust was created—your land where it always was, your artwork on the wall, your money in the bank, your comic book collection in the den. The only difference is the asset will have a different owner: “The Jane Jones Trust,” rather than Jane Jones.

Estate Planning: What About Trusts?

Transfer of Ownership

Putting property in a trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has what is called “legal title” to the trust property and, in most instances, the law treats trust property as if it were now owned by the trustee. Each trust has its own taxpayer identification number, just like an individual.

But trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as directed in the trust agreement and as allowed by law. The beneficiaries retain what is known as “equitable title”—the right to benefit from trust property as specified in the trust.

Assets to Beneficiary

The settlor provides terms in a trust agreement directing how the fund’s assets are to be distributed to a beneficiary. The settlor can provide for the distribution of funds in any way that is not against the law or against public policy. The near-limitless flexibility of trusts is a primary advantage for setting one up.

Calling all Word Nerds: 9 Terms to Know About Trusts

Types of trusts

A joke among estate planners says that the only limit to trusts is the imagination of the lawyers involved.  It’s true, though, that the number and kind of trusts are virtually unlimited.

Let’s start by taking a look at the four primary categories of trusts:

Inter vivos and Testamentary Trusts

Trusts that are set up during the settlor’s lifetime are called “inter vivos” trusts. Those that arise upon the death of the settlor, generally by operation of a will, are called “testamentary” trusts. There are advantages and disadvantages to both types of trusts, and how one decides depends upon the goals and purposes of the settlor.

Revocable and Irrevocable Trusts

Inter vivos and testamentary trusts can be broken down into two more categories: revocable trusts and irrevocable trusts. A revocable trust can be changed at any time during the settlor’s lifetime. Second thoughts about a provision in the trust or about who should be a beneficiary might prompt modification of the trust’s terms. The settlor can alter parts of the trust or revoke the entire thing.

Show Your Kids You Love ‘Em with a Testamentary Trust

Irrevocable Trust

An irrevocable trust is a type of trust that can’t be changed by the settlor after the agreement has been signed and the trust has been formed and funded. The terms of an irrevocable trust can’t be modified, amended, or terminated without the permission of the settlor’s beneficiary or beneficiaries.

A revocable living trust becomes irrevocable when the settlor dies because he or she is no longer available to make changes to it. But a revocable trust can be designed to break into separate irrevocable trusts at the time of the grantor’s death for the benefit of children or other beneficiaries.

You might wonder, “Why make a trust irrevocable? Wouldn’t you want to maintain the ability to change your mind about the trust or its terms?”

Not necessarily.

Irrevocable trusts, such as irrevocable life insurance trusts, are commonly used to remove assets from a person’s estate and thus avoid them being taxed. Transferring assets into an irrevocable trust gives those assets to the trustee and the trust beneficiaries forever. If a person no longer owns the assets, they don’t comprise or contribute to the value of his or her estate and so they aren’t subject to estate taxes upon death.

Revocable living trusts

There is no “one size fits all” trust—different kinds of trusts offer different benefits (and drawbacks) depending on a person’s circumstances. Age, number of children, health, and relative wealth are just a few of the factors to be considered. The most common trust my clients use is a revocable living trust, sometimes referred to by its abbreviation, “RLT.”

What the Queen of England can Teach us about Trusts

A revocable living trust—created while you’re alive and that can be revoked or amended by you—has three advantages over other kinds of trusts:

 1. Money-Saving

Establishing a revocable living trust helps avoid costly probate—the legal process required to determine that a will is valid. Probate generally eats up about two percent (2%) of an estate, which can add up to a chunk of change you’d probably rather see go to your beneficiaries.

Avoiding probate also means avoiding other fees, such as court costs, that go along with it.

2. Time-Saving

A revocable living trust not only eliminates the costs of probate, but the time-consuming process of probate as well. Here in Iowa, probate can take several months to a year, or sometimes even longer, leaving beneficiaries without their inheritances until the very end of the probate process. The transfer of assets in a trust is much faster.

3. Flexibility

Don’t want your 16-year-old niece to inherit a half-million dollars in one big lump sum? I agree it’s probably not a good idea.

A revocable living trust offers flexibility for the payout of an inheritance because you set the ground rules for when and how distributions are made. For example, you might decide your beneficiaries can receive certain distributions at specific ages (21, 25, 30, etc.), or for reaching certain milestones, such as marriage, the birth of a child, or graduation from college.

last will and testament

Drawbacks

Despite the significant advantages of establishing a revocable living trust, there are drawbacks people should be aware of

For starters, trusts are more expensive to prepare than basic estate plan documents such as wills. However, the costs associated with sitting down with a lawyer and carefully putting in place a trust is, in my opinion, greatly outweighed by the money your estate will save in the end.

Creating a trust can also be an administrative bother at the start of the process because assets (farm, business, stock funds, etc.) must be retitled in the name of the trust. But, all things considered, this is a small inconvenience that is greatly outweighed by the smooth operation of a trust when you pass away.

You Can Trust me to Talk About the Best Trust(s) for You

Interested in learning more about trusts or questioning if you need one? Feel free to reach out at any time by email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077. If you want to simply get started on an estate plan (everyone needs at least the basic documents in place!) check out my estate plan questionnaire, provided to you free, without any obligation.

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Calling all Word Nerds: 9 Terms to Know About Trusts

coffee-book-table-word-nerd

In the past I’ve written about specific “legal words of the day” where we take a deep dive into terms that can be confusing, misleading, or unknown. A few of the favorites? Breach of contract, subpoena, and inclusion rider. But, if you’re a word nerd like me, one word or phrase per blog post is not enough! Read on for nine important words related to a key estate planning tool you should know about—trusts.

Trust

To begin, what’s a “trust” itself? No, a trust is not like “I trust you to care for my dog while I’m on summer vacation.” Think more “trust fund kid,” except know that trusts are definitely not just for the wealthy. Trusts can be key to helping you achieve your estate planning (and charitable giving) goals.  At its most basic, a trust is a legal agreement between three parties: the settlor (or grantor), the trustee, and beneficiary. Let’s look at the meaning of these three parties, and then delve more into words which explain how a trust works.

When is a Trust Not a Trust?

Grantor

All trusts have a grantor, sometimes referred to as the “settlor” or “trustor.” The grantor creates the trust and has legal authority to transfer property to the trust.

Trustee

The trustee is the person who receives the property and accepts the obligation to hold the property for the benefit of the beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document and must do so in the best interests of the beneficiary. A trustee can be one, two, or many persons.

Corporate Trustee

There is a specific type of trustee called the corporate trustee. Many banks, other financial institutions, and even a few law firms have trust departments to manage trusts and carry out duties of trustees. These are professional trustees (so they should be very good at their roles) and charge fees for services rendered.

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (true also of grantor and trustee). Multiple trust beneficiaries do not have to have the same interests in the trust property. Also, trust beneficiaries do not have to even exist at the time the trust is created (such as a future grandchild, or charitable foundation that has been set up yet).

101 Assets You Could Place in a Trust

Concurrent Interests or Successive Interests

In cases of multiple beneficiaries, the beneficiaries may hold concurrent interests or successive interests. An example of concurrent interests is a group of beneficiaries identified as grandchildren of the grantors, who all receive distributions after their grandparents’ deaths. An example of successive interests is a trust in which one beneficiary has an interest for a term of years, and the other beneficiary holds a future interest, to become possessory only after the present interest terminates.

Principal, or Corpus, or Res

A trust can be either funded or unfunded. By funded, I mean that trust property has been placed “inside” the trust. This property is called the “principal,”  “corpus,” or “res.”  A trust is unfunded until property is transferred into the name of the trustee of the trust.

Inter Vivos Trusts and Testamentary Trusts

One common way to describe trusts is by their relationship to the life of their grantor. Those created while the grantor is alive are referred to as inter vivos trusts or living trusts. Trusts created after the grantor has died are called testamentary trusts.

Show Your Kids You Love ‘Em with a Testamentary Trust

Probate

A major benefit of trusts is avoiding “probate.” Probate is a court process that involves filing the will and a petition in probate court, followed by an inventory, property appraisal, totaling of owed debts and taxes, and payments of court costs and attorney’s and executor’s fees. After all of that is finished what’s left goes to the grantor’s beneficiaries. The estate of any decedent, whether s/he had a will or did not have a will, has to go through probate. A funded living trust can be a smart way to have your estate avoid the probate process. How does this work? Upon death the trustee simply distributes the assets within the trust as directed by the grantor. The caveat is that the property must be transferred to the trust.

Language lesson done for the day!

Beyond these important words, you should also know that trusts can have great utility in estate planning.

Among many other benefits, trusts have the advantages of:

  • saving money, including probate costs and other taxes and fees;
  • being extremely flexible;
  • efficiently moving assets to your heirs and beneficiaries; and
  • privacy.

Do you have an estate plan? Have you thought about a trust? I offer a free one-hour consultation,  please always feel free to email me at gordon@gordonfischerlafirm.com or call me at 515-371-6077.

What’s the most interesting estate planning-related word you’ve learned? Share it in the comments below!

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The Kids are Alright: Guardianship for Children

Calling All Parents

In your role as a responsible parent you most definitely need an estate plan. One of the most critically important features of an estate plan is establishing guardianships for any minors (i.e., children under the age of 18) in your care. The ability to establish guardianships through your will is one of the (major) reasons I give for stating that estate planning is just as important for young people – arguably even more important – than it is for older folks.

couple with child at beach

What if a child’s caregiver is in an accident resulting in disability or even death? It’s tragic and uncomfortable to think about. If the child/children are younger than 18, the question will immediately be, “Who cares for them now?” And I say, immediately, because children can’t wait hours (let alone days, weeks, or months) for the adults around them to sort out an answer—kids need help, care, and support ASAP.

Establishing Guardianship Can Best Be Accomplished Through Will

A guardianship for a minor child can best be established through a Will. For example, your Will could state something like this:

Nomination of Guardians. If I die leaving minor children, it is my wish that such minor children be cared for by my sister, AMY SMITH, and brother-in-law, GARY SMITH, as co-guardians, both of whom may also make a determination of appropriate custody, provided both are still living and are still married to each other. If AMY SMITH or GARY SMITH do not survive me, it is my wish that my brother-in-law, DARREN JONES, and his wife, LAUREN JONES, act as guardians, and both of whom may also make a determination of appropriate custody.

Be sure to discuss your guardianship choices with your family members to be sure they’re “in-the-know” and on board with the potential responsibility of caring for your young ones.

Without Nomination of Guardians, Iowa Court Must “Guess”

Unless guardianship has been established, as in the clause directly above, an Iowa Court must choose guardians. Unfortunately, with no clear choice as to what the former caregivers would have preferred, the Court must basically make its own and best determination as to who the parents would have preferred and what would be in the best interest of the children. The Court may or may not, choose who the former caregivers would have named.

child celebrating fourth of july

Spiraling into Conflict

In an extremely stressful situation such as in the case of major disability/death of a caregiver, there may be several family members all sincere in the same strongly held belief that the children would be best taken care of by them. From there, events can quickly spiral into conflict, even a full-blown Court battle. The people who suffer most during this conflict are, of course, the minor children themselves, as they are thrown into an even worse situation.

Oral “Promises” Not Sufficient

OK, you say. But, our neighbors and us, we have a special deal. We’ve talked and agreed, if something happens to us, they’ll be the guardians. If something happens to them, we’ll be the guardians. Isn’t that good enough?

In a word, no. No way. This sort of oral agreement is not enforceable in Probate Court (or any other Court). (Here’s an example of how such agreements fail to hold up using examples from the podcast, S-Town.) The Court might consider this as one piece of evidence among the many other pieces of evidence—assuming this oral agreement can even get admitted into evidence—including in-person testimony by would-be guardians, in order to reach a guardianship decision.

Not to Decide Is to Decide

I’ve known couples haven’t been able to agree who will take care of their children in the event of them both passing. Since they can’t reach an agreement, they bypass the conversation entirely, and leave their children without a legal guardian. Which is, of course, the worst possible decision of all!

A good estate planning attorney can help with this discussion. (Let’s set a time to have this discussion.) A compromise must be reached, to ensure a good plan for the kids.

Testamentary Trust for Children

girl blowing bubbles

Further, it’s not just guardians you can plan for in your will, you can also plan material support for your children. Through a will, you can set up what is known as a testamentary trust for your children. This trust will ensure your minor children will be provided and cared for in the event you are gone.

A trustee named by you to oversee the trust can distribute funds from the estate (with oversight by the estate attorney and the Court), for the following childcare categories:

  • Health
  • Education
  • Maintenance
  • Support

Lawyers often refer to this in shorthand as “HEMS.”

Show Your Kids You Love ‘Em with a Testamentary Trust

Who Wants to be an 18-Year-Old Millionaire?

When you pass, even at a young age, all your assets (house, vehicles, life insurance, retirement benefit plan) could add up to quite a tidy sum. Without a testamentary trust, a child would simply inherit everything at once, when he/she reaches the age of majority (i.e., on their 18th birthday). No matter how smart and responsible an 18-year-old is, they are still only 18. Most of my clients feel strongly that inheriting that much money, that quickly, would not be good for anyone. (Case in point, this guy learned his lesson from blowing through a trust fund in just a couple years.)

boy on roof

Instead, in a quality estate plan, a testamentary trust will provide assets to the child/children as they reach different age checkpoints as chosen by the caregivers. For example, the caregivers may decide the children should receive one-third of the estate at age 21, one-third of the estate at age 30, and one-third of the estate at age 40. Or, again, whatever ages and percentages the caregivers think best and most appropriate.

Contact Me for a (Genuine and) Free Consultation

I know this can be a lot to think about. So, don’t hesitate to reach out at any time with any questions, concerns, or considerations. You can also get started on the creation of an estate plan by filling out my Estate Plan Questionnaire.

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Four Major Ways to Classify Trusts

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number four on wood

We dove into the definition of the term “trust,” but that’s just the tip of the iceberg when it comes to learning about the important agreement that’s often used for purposes including estate tax liability reduction, estate property protection, and probate avoidance. There are four standard ways of classifying trusts.

Trust Classifications

handshake over table

Trusts may be classified by their purpose, duration, creation method, or by the nature of the trust property. One common way to describe trusts is by their relationship to the life of their creator. Those created while the grantor is alive are referred to as inter vivos trusts or living trusts. Trusts created after the grantor has died are called testamentary trusts. Another helpful classification of trusts is comparing those which are revocable to trusts which are irrevocable.

Inter Vivos Trust

An inter vivos trust, also known as a living trust, may be either revocable or irrevocable. In a revocable trust, the grantor can retain control of the property, if the grantor so wishes, and the terms of the trust may be changed or even canceled. An irrevocable living trust, on the other hand, may not be changed or terminated after it is executed.

What the Queen of England can Teach us about Trusts

Testamentary Trust

A testamentary trust is most often a component of a will. The testamentary trust is created when the trustor passes away. The designated trustee then steps in and distributes or manages the assets of the trust according to the deceased’s wishes.

Show Your Kids You Love ‘Em with a Testamentary Trust

Revocable Trust

A revocable trust allows assets to pass outside of probate, yet allows you to retain control of the assets during your (the grantor’s) lifetime. It is flexible in that it can be dissolved at any time, should your circumstances or intentions change.

A revocable trust typically becomes irrevocable upon the death of the grantor. You can name yourself trustee, or co-trustee, and retain ownership and control over the trust, its terms, and assets during your lifetime. You may also make provisions for a successor trustee to manage them in the event of your death or incapacity.

Although a revocable trust allows you to avoid probate, it’s subject to estate taxes. It also means that during your lifetime, it is treated like any other asset you own.

Irrevocable Trust

An irrevocable trust typically transfers your assets out of your (the grantor’s) estate and potentially out of the reach of estate taxes and probate, but cannot be altered by the grantor after it has been executed. Therefore, once you establish the trust, you will lose control over the assets and you cannot change any terms or decide to dissolve the trust. An irrevocable trust is preferred over a revocable trust if your primary goal is to reduce the amount subject to estate taxes by effectively removing the trust assets from your estate. Also, since the assets have been transferred to the trust, you are relieved of tax liability on the income generated by the trust assets (although distributions to others may have income tax consequences). Trust assets in an irrevocable trust may also be protected in the event of a legal judgment against you

Latest Iowa Lawyer Issue: Read GFLF’s Article on Irrevocable Life Insurance Trusts

Let’s Get Started

You probably still have some questions on trusts…which is why I’m here! Don’t hesitate to contact me. I offer a free one-hour consultation at which point we can discuss your personal situation, see if a trust is right for you, and set up the steps to take for success.

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