Like many estate planning attorneys, we are seeing an increase in the number of current and new clients asking us if they need a Trust as part of their estate plan. The conversation usually goes like this:
Client: “I think I need a Trust.”
Me: “Why do you believe you need a Trust?”
Client: Shrugs shoulders or says, “Because my friend has one.”
I follow this up with, “Does your friend live in New Jersey/Pennsylvania?”
The client says, “No.”
What Is a Trust, Anyway?
Generally speaking, a Trust is a relationship where certain property is transferred from the settlor or grantor, to the trustee to hold and manage for the benefit of another. There are many kinds of Trusts. The main differences are between Irrevocable Trusts and Revocable Trusts. Irrevocable Trusts, once set up and funded, may not be changed by the settlor. The settlor does not maintain control over assets in an Irrevocable Trust. They are not considered his assets, even though they may be used for his benefit. Revocable Trusts allow the settlor to retain control over the Trust during his lifetime, and include the ability to revoke or change the Trust while still alive.
Estate Laws Vary by State
Estate laws vary by state. In states where probate is more costly and takes more time, we see Trusts used more frequently. A Trust does not go through the probate process, so if you have moved all your assets to a Trust, there is no need for probate.
New Jersey and Pennsylvania are both considered “probate friendly” states. Here, probate is relatively inexpensive and quick, therefore, we don’t have the need to avoid probate.
What is an Estate Plan?
A comprehensive estate plan commonly consists of three documents, a Will, Power of Attorney and Advance Directive for Health Care (also called a Living Will, a Medical Power of Attorney and a Medical Directive). Whether the estate plan also needs to include a Trust depends on the client’s unique situation.
Some of Your Assets will Not go Through ProbateNot all of your assets have to be probated when you die. For example, an Individual Retirement Account (IRA) or a life insurance policy are assets which name a beneficiary who inherits when you die. Upon death, these assets pass automatically to the designated beneficiary – they do not have to be probated. Another example is an investment account which has a Transfer on Death (TOD) account. The TOD account will pass by law to the beneficiary. Only those assets that do not pass by law are controlled by your Will, and therefore get probated.
Issues to Consider
• Do you own property in a state other than where you reside? If so, I am going to recommend a Trust.
• Do any of your beneficiaries have special needs and receive government assistance? If so, I am going to recommend a Special Needs Trust.
• Do you want your Will kept private? It’s true that once probated, a Will can be viewed by anyone who requests to do so from the NJ Surrogate or the PA Register of Wills. If this is a major concern for you, then I will suggest a Trust. However, I will tell you that this rarely comes up. Wills do not list usually specific assets; they list beneficiaries.
• Will a Trust save on taxes? No. Federal and State inheritance taxes are paid on Trust assets as well as on probate assets.
• Will a Trust protect my assets in case I have to go into a nursing home? A Revocable Living Trust affords no asset protection in this regard, neither does it protect assets from creditors or in a divorce. The way to protect assets with a Trust is to draft an Irrevocable Trust, and to transfer assets into it five years before applying for Medicaid. There are other implications associated with Irrevocable Trusts that we should discuss.
• I’m concerned about my children receiving a large inheritance and squandering it. While this is a valid concern, it is not necessary to create a Revocable Living Trust for this purpose. We can create Trusts in your Will so that your children’s inheritance is doled out in certain percentages when they reach certain ages.
Most of the interest about Trusts is generated by internet ads and books attempting to frighten you into thinking that you must avoid probate. In NJ and PA, that does not apply, and a Revocable Living Trust offers little advantage over a properly drawn Will by an experienced estate attorney. Schedule an appointment with Barbara Boyd, Esquire. For more information. 609-452-8411.