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July 14, 2022 General

When we meet with clients to address estate planning (wills, healthcare directives, powers of attorney, trusts and related documents) the question of including a trust is often raised.  Clients sometimes arrive with the expectation that they “need a trust”, which is understandable since the press, TV, talk shows, direct marketing and “helpful” family members often promote the idea that everyone should have a trust.  We subscribe to the view that only those with an identifiable reason or need should consider a trust.   

In every trust a person (or persons or bank) is named as “trustee” to manage, control and utilize the “assets” that are placed in the trust, in the way(s) instructed in the trust wording, for the benefit of the persons named as “beneficiaries”.  The trust should include provisions directing how trust assets may be used or distributed when the named beneficiaries die or are no longer in need.   A trust may have multiple trustees and multiple beneficiaries.

There are many and varied reasons to consider a trust as part of an estate plan.  Since every person’s or family’s needs are unique, there is no one answer to the question of including a trust in an estate plan.  Here are some common reasons a trust might be appropriate:

  • Avoiding Probate Court – Assets in a trust generally do not become part of a deceased person’s probate estate, which means that they are not listed in Probate Court filings. Trust assets are held or distributed after death pursuant to the instructions in the trust without court involvement.  The primary benefits of avoiding probate include:
    • More efficient and prompt distribution – availability of assets without delay
    • Privacy of family financials – what the person owned at death and who became the owner after death is not recorded in public court records
    • Reduced fees related to administration of probate estate – fiduciary and legal fees primarily. (Note however – the Probate Court fee and potential estate taxes are not reduced in most cases because the assets in a typical trust are considered in setting the probate fee in Connecticut and are included in the taxable estate, although few estates are currently subject to estate tax in Connecticut due to high exemptions.)
  • Management of assets during incapacity – a trust created and funded during the creator’s life can specify who will hold, invest, manage and distribute assets for the benefit of the creator when the creator is alive but no longer able to do so due to age, illness, injury or other cause. This may avoid the need for and expense of appointment of a conservator and supervision by the Probate Court.  Similar protection against decreased competence can be provided by a Durable Power of Attorney without a trust, but a trust can provide more detailed instructions and provisions for distributions during life and after death.
  • Minor children in the family – a trust will specify the trustee(s) who will manage, control and utilize family assets for the children’s benefit if the parents die early, and describe the goals and instructions of the parent(s) as to how family assets will be used. If life insurance is used to protect against early tragedy, as is often true for young families, the trust can be the holder of the insurance proceeds after the death of a parent/caregiver.  If a grandparent wants to leave assets to be used for the benefit of grandchildren, a trust can be a good option.
  • Children, or grandchildren, of any age with limitations – a trust will identify the trustee(s) and provide instructions as to how assets will be used. If the child is or may be qualified for governmental benefits that are asset limited (eligibility will be lost if the child owns more than minimal assets), the trust can be structured to avoid the loss of such benefits while making assets placed in trust available, through the trustee(s), to be used for the child’s benefit.  Limitations that can often be protected against by using a trust include:
    • Compromised mental capacity
    • Need to maintain eligibility for asset limited governmental benefits
    • Alcohol or substance abuse
    • Poor financial judgment or restraint
    • Creditor or liability risks of the beneficiaries
    • Poor social judgment – e.g., choice of spouse or other interpersonal relationships, vulnerability to being taken advantage of
    • Gambling or other risk-taking propensity
  • Adult children who are young – parents often prefer not to leave all their assets to young adult children immediately at death – preferring partial distributions at intervals as the children age and become more financially mature. A trust can hold assets and distribute them partially over time or at specific ages/milestones when the children will likely be better able to prudently manage the assets themselves.
  • Unstable marriage of intended beneficiary – concern over the possibility that the spouse of a beneficiary of a significant gift might take a large share of the gift in the event of a divorce is not uncommon. Placing the gift in a trust may avoid that danger and preserve the gift for the beneficiary’s benefit in the event of a divorce, or where the beneficiary’s spouse exercises control over the beneficiary’s finances during marriage.
  • Blended families – second marriages with children from prior marriage(s) – a trust can hold assets for the support of the surviving spouse at the first death while protecting assets for distribution to family members from a prior marriage after the death of the surviving spouse.
  • Preparing for possible governmental benefits – Medicaid/Title 19 – older clients are often concerned about the cost of long-term care as they age, and the risk to family assets. Eligibility for governmental coverage for long term care is generally means-tested, and all assets of both spouses are “counted” when one spouse needs assistance.  The factors are complicated, but a trust created well before the need for assistance arises can be used to shelter significant assets from having to be spent on long-term care to become eligible for governmental benefits.
  • To reduce estate and gift taxes for wealthy families – although few families are subject to estate taxes currently because the exemptions are high (12 million dollars federally and 9 million for CT residents for deaths in 2022), it is anticipated that these exemptions will be reduced in the next few years. Specialized trusts with careful financial planning and asset transfers can significantly reduce exposure to estate and gift taxes for families with estates above the exemptions that may exist in the year of death.
  • Charitable gifting – clients who want to provide significant charitable gifts can consider several options for specialized trusts that will benefit a charity while providing significant benefits to self and family before or after providing benefits to the charity. Charitable gifting trusts can provide significant income tax benefits through charitable deductions if properly constructed.

Trusts provide a great deal of flexibility and many options to tailor an estate plan that accomplishes the goals of the clients who come to our office.   They are not necessary for every client, but once goals and needs are fully identified they are sometimes the vehicle that best accomplishes the goals and satisfies the varied needs of our clients.  Call us today if you need an estate plan, need to update an existing plan or just want to explore the options best suited to accomplishing your goals.