Indeed, wills are a great way to designate assets for beneficiaries and appoint guardians for minor children. Estate planning experts remind us, however, that trusts can come in handy in the face of many of life’s twists and turns, including divorce and debt.
What If…
For many parents at mid-life or already in their older years, the disposition of assets seems fairly straightforward: equal division among adult children. This goal is relatively easy to accomplish via a properly written will. Though establishing a trust typically involves more time and resources, doing so can turn out to be very useful over the long run. For example, trusts can be set up to address specific intentions, including making arrangements for our own care as we age, as well as the education or special needs of others. Trusts can also safeguard family assets from the unpredictable twists and turns life may take for beneficiaries. Sean Weissbart, an attorney with Blank Rome LLP points out that although many parents start out thinking that using a will to make bequests is the best way to give adult children direct control of inheritances, they often shift strategies once they understand these three factors:
- Outright bequests will be subject to estate tax at the child’s subsequent death, while assets in a trust that is structured appropriately are not subject to estate tax;
- Outright bequests may be divided in divorce and can increase spousal and child support obligations, while assets in a trust fare far better in divorce; and
- Outright bequests are subject to claims of the beneficiary’s creditors, while assets in a trust that is structured appropriately can be protected from creditors.
Divorce and Inheritance?
On the occasion of a happy family wedding, no one wants to be thinking about a nasty divorce, but estate planners remind us that our children can in fact end up getting divorced–and this could have unintended consequences for inheritances. As Weissbart explains:
In certain states, all property owned by either spouse is subject to division in divorce without any carve outs to treat an inheritance as the separate property of the person who received it. Specifically, many New England states follow this “all property” approach to division of assets on divorce. Thus, an inheritance received outright in such a state would be subject to division. However, if that same inheritance is placed in a properly structured trust, those assets would not be subject to division and the non-beneficiary spouse should not be entitled to any interest in the trust.
Estate planning experts also point out that even in states like New York, which have a
“dual-classification equitable distribution regime…and treat inheritances as separate property not subject to division in a divorce,” a trust might still be wise: “Trusts provide a safeguard against a beneficiary commingling or transmuting their separate property inheritance into a marital asset by transferring it to an account jointly titled with a spouse.” In addition to the advantages a trust might have in the event of a contentious divorce, a trust can provide protection against creditors. Attorneys explain:
If a financial judgment is entered against an individual, assets inherited and titled in that individual’s own name are reachable by the creditor in the same manner as any other asset. However, if inheritance is instead bequeathed to a trust for the benefit of the individual, the assets should not be reachable, provided the trust is structured to be protected against creditors.
Appointing A Trustee
When families choose to establish a trust, they must also appoint the trustee who will administer it. It is important to understand that serving as a trustee is not a ceremonial duty: a trustee has many responsibilities. Most families opt to designate a relative or friend, but there is no rule mandating this: it is possible to arrange for a professional or institution to serve as trustee. A professional trustee can play a critical role in lifting some of the burdens and stress that tend to fall on loved ones, especially if they are juggling career and parenting duties. Grant Morris Dodds observes: “When an institution such as a bank or trust company acts in a fiduciary capacity, that institution is bound to act in the best interests of the beneficiary. Although such professional trustees charge fees, usually around 1% of the amount under management each year, the benefits of professional, independent, license, and bonded management are worth the costs.”
Ultimately, whether a friend, relative or professional is appointed, a trustee has a fiduciary obligation to the beneficiaries—and must always exercise reasonable care and skill in managing the assets of the trust. Accordingly, a trustee bond may be required. A trustee bond is a specific type of fiduciary bond that protects the interests of the trust and its beneficiaries in accordance with applicable state law. As a leading national provider of many types of fiduciary bonds, Colonial Surety makes it easy and efficient to obtain a trustee bond. Just get a quote online, fill out the information, and enter a payment method. Print or e-file the bond from anywhere.
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