Utilizing a Lifetime Trust as Part of Your Estate Plan

In recent years, more of our clients have been asking us to incorporate lifetime trusts into their estate plan for their beneficiaries. The purpose of this article is to provide some of the benefits and downsides of lifetime trusts to enable you to make an informed and educated decision about utilizing a lifetime trust as part of your estate plan.

The most common reason that clients approach us about lifetime trusts is a concern that the spouse of their married child may influence that child to spend an inheritance in ways that are inconsistent with your goals. There is a desire to have those inherited funds primarily or exclusively for the benefit of your children and grandchildren. Your child can be their own Trustee and have broad latitude with respect to the use of the trust funds while keeping the assets protected from creditors (potential future ex-spouses are often top of mind). In addition, an attorney can design the trust not to be subject to federal estate tax in the beneficiary’s estate if that consideration is or becomes applicable after 2025 with the sunset of the TCJA federal estate tax exemption.

Having a responsible child be a trustee of their own trust is an effective way to protect their inheritance. What if your child is not responsible? Then, who should be the Trustee? Asking a sibling to be their Trustee can lead to family tension and awkward conversations. We have found that including an independent Trustee, such as a trust company, as at least a co-Trustee with the sibling can allow the sibling to advocate for the trust beneficiary while allowing the Independent Trustee to be the communicator with the beneficiary regarding distribution decisions and other trust investment considerations.

There are additional costs with a trust. A smaller cost is the filing of the annual tax return. In addition, there is the more significant cost of the Trustee fee.  It is often a small percentage of the assets but can add up to a meaningful sum depending on the size of the trust. Depending on the complexity of your trust situation, the value of a Trustee can be much more than the Trustee fee. For example, a Trustee who has expertise in distributing funds to disabled beneficiaries can be a huge benefit to keep those funds protected and the beneficiaries eligible for public benefits. In addition, a Trustee who has experience with difficult beneficiaries can make what would otherwise be a stressful situation go more smoothly. In these circumstances, the expertise of a Trustee is well worth the Trustee fee.

Making the decision to create a lifetime trust for a child does not mean that you are punishing the child. The terms of the trust provide flexibility for the child while protecting them against worse case scenarios and maintains the use of your assets for your children and grandchildren.

If you have questions regarding whether a lifetime trust can be appropriate or helpful for your planning situation and who should serve as Trustee, we encourage you to contact our office to set up a discussion with Matt or John.

Photo by Heidi Fin on Unsplash

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