Trusts: Alternatives or Additions to a Will

Presented by Bracha Y. Etengoff, Esq., as part of the “Plan Your Future Today” webinar with Orsolya Bartha, Esq., and Dalia Zaza, Esq.

A lot of people think, “A trust – why is that something that I would need? I am not an extremely wealthy person. There’s nothing fancy about me.”

But even if you have only $5,000, your five-year-old cannot manage $5,000 by herself. She can’t manage $5, or $5,000, or $500,000, or $5 million. It really doesn’t matter – she’s five.

So as soon as you have a minor child, for example, you do need a trust.

How we draft it, whether we put it in the will or you need a separate document – that’s something you can discuss with your attorney. But you shouldn’t leave anything outright to a child.

Instead, somebody needs to be in an arrangement where they’re managing the asset for that child – for that beneficiary. And that’s exactly what a trust is.

And in terms of life insurance, that’s a time where ordinary people find themselves in a situation where estate tax actually might apply to them.

I have found that when I ask clients about their assets, many times what gets forgotten is life insurance. And people will ask me, is that an asset? And I’ll say yes, indeed it is. And that may be the one that you’re not thinking of, but we have to especially plan for it.

So in one case, I had a lovely young couple. They owned an apartment. They had a second one in another country. They both had good jobs. The apartments were going to appreciate – this is New York, and the one in a foreign country was in a desirable location as well. They also had some bank accounts.

But it was still not enough money for me to say, “Right now, you need a complex estate plan, you need a trust.”

Then she got pregnant – mazel tov, really wonderful. Our whole planning changed, which is fine.

But then she bought four million dollars in life insurance. So once we have a number like that, then I’m looking at the value of the apartments, and I’m looking at their income and how I expected hers at least to increase over the years.

And then I said to myself, here’s the threshold at which an estate gets taxed in New York – at that point, close to six million.

Once you’ve got four million in life insurance, does it help you now in your life? No, but she and her husband had purchased that so if neither of them are there anymore, there would be money to raise the child. Of course, that is why everyone buys it.

And what I can do to help is put that life insurance in a special trust – in a way that takes it out of the value of the estate completely.

So now a trust owns that life insurance policy instead of my clients directly.

And the trustees – the people who are going to make decisions about those life insurance policies – those are people who are separate from my clients: a sister and a brother.

So this is actually another illustration of why working with an attorney closely is so important, and why choosing someone who’s going to follow up is very important.

Because I worked closely with the with the insurance agent to make sure that the policies were now retitled in the name of the trust – which they did not do right the first time.

I always say, you don’t want to be your doctor or your lawyer’s interesting case.

We don’t want to get to the other end of things and find that the life insurance policy wasn’t quite titled properly in the trust, and have the IRS say, “Well, we don’t really think you should get the tax benefits,” and have a little fight.

And that would be really interesting to me! But that is not what we’re here for. We are here to make things smooth for our clients. And I don’t want any of my “interesting cases” to be ones that I planned.

So that’s one example of a trust. It’s often this legal arrangement whereby the person who’s benefiting is not the same person as the person who’s managing the assets.

The life insurance trust here is an example of one of the purposes of a trust, and that’s tax savings. That saved the estate from being subject to estate tax.

There are other purposes, and different kinds of trusts offer different kinds of protection and benefits, but also different kinds of limitations.

A trust may offer asset protection – it may be able to shield your assets from creditors. But it may not.

Certainly a trust is the most complex document we’ve talked about here. Please don’t download and sign anything online.

The other most important value of a trust to many people is that it can streamline the distribution of assets.

In New York State, we have tremendous backlog downstate for probate.

So remember, that’s the process by which someone takes the will after someone passes and files it in court. You need to prepare a petition, and that comes along with waivers from different family members. And that does take some time for even the best lawyer to gather all the required documents, get you to sign and notarize, get it filed properly.

Unfortunately, now the situation in downstate New York is even once we do that, the court may not do anything for six months. In a case in the Bronx recently – for a year.

It just sat there. And during that time, nothing could be done about the house that needs to pass through the will. So the house can’t be sold. The property taxes need to be paid. If the market was good, we might be missing the market. New York real estate, we turn on a dime here – you want to be nimble, you want to be able to catch the market. So what’s the alternative?

The alternative is to put the house in a form of trust called a “revocable trust,” meaning it can be revoked, it can be changed.

But that trust is a separate entity. It is now holding the house in a way that lets it pass to the next generation, to whoever the beneficiaries are, totally separate from whatever process is going on in court.

So if you’ve appointed a trustee who will take care of that house after you pass, that trustee can step right into your shoes. That trustee can make nimble decisions about when is the right time to sell.

And that is just not something that we can offer clients through wills anymore. And there are so many attorneys like myself who don’t believe in overcomplicating things.

But I also don’t believe in not showing clients the full range of options. And I believe that plans do need to be as complex as is beneficial for the client.

So this is actually not a very complex estate plan or an expensive estate plan necessarily. It’s something that Dalia and Orsolya and myself would love to combine our expertise, to offer clients at a really affordable price point. It’s something that we’re all very passionate about.

Because of our joint expertise, how can we do this for you in a way that you’ll be able to access and your family will be able to benefit from for the next generation?

A couple other types of trusts here that we’ll just go over quickly:

This is unfortunately confusing because the alternative to a revocable living trust is an irrevocable trust, which means the opposite. It cannot be changed.

And this is the type of trust where you start seeing tax benefits. This is the type of trust that a life insurance trust that I talked about earlier fits into. And this is where you’re going to find your Medicaid trust.

People say, “I need a trust to qualify me for Medicaid.” That works because you’ve made an irrevocable transfer of your house into it. Usually you retain the right to live there during your lifetime, but that house has actually been transferred.

We consider all the different types of taxes, the implications that may have on the capital gains tax, the estate tax – these are very complex decisions. And when it’s irrevocable, as you might imagine, it’s even more important to make the right decision the first time, because you’ve now done something that cannot be changed.

You might have heard of a special needs trust, and that’s something that we have to do often for persons with disabilities so that they can continue to qualify for government benefits while we provide separate funds – private funds from the family for basically everything that the government benefits will not provide.

So we don’t interfere. We say, these funds can only be used for things that the government benefits won’t pay for. And then the government looks at it and says, okay, you’re not giving us any resources for what we would pay for. And therefore, we’ll keep paying. That’s the general idea.

I wish it didn’t have to be so complicated, honestly. I wish that the benefits could just be given to the people in need, and we did not have to play this game, but you do. So for persons with disabilities, it’s important that we have this mechanism.

I think I’ve covered the ones that apply to most people. Most people don’t really have the sorts of estates where they’re setting up their own charitable trust. There are pet trusts – as a proud pet parent of a cat, I could talk about that one forever. That is a separate webinar!

So we’ve reached the end here, and I do want to invite people to submit questions, comments – anything that we could use the remaining time for, in a way that would most benefit you.