Posts

Estate Planning: What About Trusts?

, ,
brown books on shelf

When you hear the word “trust” it’s usually in the context of a belief of reliability of someone, such as: “I trust her to read about the past legal word of the day, quid pro quo.” Trust in the world of estate planning is entirely different, although you can certainly put trust in a well-crafted trust to maximize the benefits of an estate plan!

What is a Trust?

In simplest terms, a trust is a legal agreement between three parties: grantor, trustee, and beneficiary. This allows a third party (the trustee) to hold assets for a beneficiary (or beneficiaries). Trusts can be set up in a variety of ways and specify the details of when and how the assets will pass to the beneficiary. Trusts are a part of a well-crafted estate plan and can be used to minimize fees, costs, and taxes.

Let’s break it down further by looking at each of the three parties to a trust.

Grantor

 

All trusts have a grantor, sometimes called the “settler” or “trustor.” The grantor creates the trust, and also has legal authority to transfer property to the trust.

Trustee

The trustee can be any person or entity that can take title to property on behalf of a beneficiary. The trustee is responsible for managing the property according to the rules outlined in the trust document, and must do so in the best interests of the beneficiary.

What Is a Trustee & What Do They Actually Do?

Beneficiary

The beneficiary is the person or entity benefiting from the trust. The beneficiary can be one person/entity or multiple parties (true also of grantor and trustee). Multiple trust beneficiaries do not have to have the same interests in the trust property. Also, trust beneficiaries do not have to even exist at the time the trust is created (such as a future grandchild, or charitable foundation that has been set up yet).

Trust Beneficiary: Break it Down

Trust Property

A trust can be either funded or unfunded. By funded, we mean that property has been placed “inside” the trust. This property is sometimes called the “principal” or the “corpus.”

Legal Words of the Day: Tangible Property & Intangible Property

Any Asset

Any asset can be held by a trust. Trust property can be real estate, intangible property, business interests, and personal property. Some common examples of trust property include farms, buildings, vacation homes, money, stocks, bonds, collections, personal possessions, vehicles, and so on.

101 Assets You Could Place in a Trust

“Imaginary Container”

We speak of putting assets “in” a trust, but assets don’t actually change location. Think of a trust as an “imaginary container.” It’s not a geographical place that protects your car, for example, but a form of ownership that holds it for your benefit. For instance, on your car title the owner blank would simply read “the Jane Smith Trust.” It’s common to put real estate (such as farms, homes, vacation homes) and entire accounts (like bank, credit union, and brokerage accounts) into a trust.

After the trust is funded, the trust property will still be in the same place before the trust was created—your land where it always was, your car in the garage, your money in the bank, your stamp collection in the study, and so on. The only difference is the property will have a different owner: “The Jane Smith Trust,” not Jane Smith.

Transfer of Ownership

 

 

Putting property in a trust transfers it from personal ownership to the trustee, who holds the property for the beneficiary. The trustee has legal title to the trust property. For most purposes, the law treats trust property as if it were now owned by the trustee. For example, trusts may have separate taxpayer identification numbers.

But trustees are not the full owners of trust property. Trustees have a legal duty to use trust property as provided in the trust agreement and permitted by law. The beneficiaries retain what is known as equitable title: the right to benefit from trust property as specified in the trust.

Assets to Beneficiary

The grantor provides terms in a trust agreement as to how the fund’s assets are to be distributed to a beneficiary. The grantor can provide for the distribution of funds in any way that is not against the law or against public policy.

game of chess

Types of Trusts

The types of trusts are almost limitless. Trusts may be classified by their purpose, duration, creation method, or by the nature of the trust property.

One common way to describe trusts is by their relationship to the life of their creator. Those created while the grantor is alive are referred to as inter vivos trusts or living trusts. Trusts created after the grantor has died are called testamentary trusts.

Another way you can describe trusts is by whether they are revocable or irrevocable. A revocable trust can be modified by the grantor; an irrevocable trust cannot be modified or terminated without the beneficiary’s permission.”

But again, there are so many types of trusts, and the aforementioned are just a few examples.

Calling all Word Nerds: 9 Terms to Know About Trusts

Do YOU need a trust?

If you have substantial or complicated assets (for example, you own more than one piece of real estate), own part or all of a robust business, or have any other special circumstances, a trust may be incredibly helpful.

Great Place to Start: Estate Planning Questionnaire

A great place to start is with the estate plan questionnaire, provided to you free, without any obligation. Also, feel free to reach out at any time by email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.

/by

Back to School: Political Science- How Changes to Legislation Impact Your Estate Plan

,
legislative building

On the GFLF blog this month, we’re going “back to school” with some fun legal lessons like last-minute gifts of personal property, nonprofit operation, and what planned giving actually means. Happy learning! 

If you have an estate plan already, give yourself a high-five! You’re well on your way to establishing a worthy legacy; effectively and efficiently transferring your hard-earned property; and saving your loved ones time, money, and emotional turmoil. Plus, you’re ahead of the more than half of Americans who haven’t done any estate planning!

Even though estate plans never expire there are many reasons you might need to revise or at least double-check your documents. Some common life events that could impact your documents and/or estate planning goals include: the birth of a child/grandchild; death of a beneficiary; marriage; divorce; moving across state lines; receipt of an inheritance; and other major financial status changes.

5 Scenarios for Estate Planning Revisions

I recommend my clients review their plans at least annually and if there’s any question if a life change would require an estate plan revision, it’s better to just ask! (Reminder, I offer a free one-hour consult! Even if I didn’t draft your current estate plan, I’m happy to discuss your situation to determine if an updated estate plan is in order.)

It can be easy to forget or overlook changes that occur outside the realm of your personal life that may impact your estate. For instance, changes in federal or state legislation could render your current estate plan provisions ineffective and irrelevant. A recent example that had a major impact was the Tax Cuts and Job Act of 2017.

Legislative Changes

The Tax Cuts and Job Act doubled the estate tax exemption, meaning the law massively increased the total amount of assets you can own before you are subject to estate taxes. For an individual to be subject to estate tax, your estate must exceed $11.2 million. For a married couple, the estate tax has no effect until total estate is worth more than $22.4 million. In short, the federal estate tax really only applies only to the richest of the rich.

What the New Tax Law Means for Your Estate Plan

Blast From the Past

But in 2017, before passage of the TCJA, the estate tax exemption was half of what it is now. Even more relevant, in 2001, the estate tax exemption was much, much smaller, just $675,000. From 2002-09, the estate tax ranged from $1 million to $3.5 million. Back in those days, even middle-class and certainly upper middle-class Iowans had to have some concern about the estate tax. After all, if you add up all your assets–real estate, vehicles, retirement benefit plans, insurance, etc.–you can reach that threshold surprisingly quickly.

Tax Talk: If You Die in Iowa is There a State Estate Tax?

Complex Trusts

It used to be that estate planners would establish complicated trusts to make certain clients avoided the estate tax. One example (of many) of such a complex trust is the A-B marital trust.

The A-B trust was almost entirely designed to minimize estate taxes. It was one trust, but with two parts. Under the A-B trust, the “A” trust holds the portion of the estate designed to qualify for the martial deduction, while the “B” trust was designed to maximize any unused estate tax exemption for the surviving spouse.

Now, an A-B trust isn’t as necessary unless a single person’s estate is greater than the federal estate tax threshold. (It might be necessary in a state that had a state estate tax, but Iowa does NOT have a state estate tax; we need only worry about the federal estate tax).

Estate planning for Married Couples: Avoid Conflicts of Interest

Cut the Complications

The upshot of the recent legislative tax change is that some folks could do with a much more simple trust than what they currently have. Considering the new estate tax regime, a simple revocable living trust will much more neatly fill their needs, and also be more easily interpreted, explained, and more easily defended in case of challenge. Also, with a simple revocable living trust, less can go wrong. There need not be any legale “Rube Goldberg” contraptions designed to avoid a federal estate tax that won’t apply anyway.

Funding and Administering Your Living Trust

We’re Not Just Talking Taxes

It’s important to know that estate planning is not just about protecting your estate from taxes. The benefits of estate planning are many when compared to dying intestate (without a will), including but definitely not limited to:

Plus, a good estate plan should be written to fit with your personal goals. It can be hard to think about a world where you won’t be alive, but it’s also a reality we must all face. How we prepare for our death (or incapacitation) can mean a world of difference for the loved ones and favored causes we leave to carry our torch on into the future.

Trusted Consultation

Was your trust drafted when the federal estate tax was lower? For the good of your loved ones, let’s optimize your planning strategy. If you’re not sure what kind of trust you have, or whether it really fits your situation, don’t stress one second. I offer a free one-hour consultation! Truly, I would love to hear from you; email me at gordon@gordonfischerlawfirm.com or call me at 515-371-6077.

/by

When is a Trust Not a Trust?

,
question mark cards

Similar to the bad joke, “When is a door not a door? When it’s a jar!” Ha! Similarly, but not as punny, we might well say, “When is a trust not a trust? When it’s a Totten trust!”

A Totten trust, also known as a savings account trust or a poor man’s will, is not a trust at all. Rather a Totten trust is simply a name given to a type of savings account. In this savings account, the depositor opens an account with her name designated “as trustee for” someone else. In a Totten trust, there is nothing stopping the depositor from withdrawing the funds for her own use, at any time during her life. Upon her death, any funds remaining are distributed to the so-called “beneficiary.”

Despite the confusing terms, no trust exists. The so-called “trustee” is not obligated to hold the property for the benefit of anyone, including the so-called beneficiary. Rather, the depositor can withdraw funds for her own use at any time during her life.

A Bit of History

The name—Totten trust—came from a New York case where their legality was tested, called In re Totten. The court ruled it was fine for one to open a banking account as a trustee for another person, who had not right to the funds until the account owner passed away. Previously courts had not allowed this under the objection that the situation could take the place of a will, which required more formality than this bank account scenario. To legally maneuver around this the Totten court called the account a “tentative trust” in which the account owner acts as trustee of the funds that will someday go to the trust’s beneficiary. After this decision other state legislatures authorized and regulated such accounts. Often they were referred to payable-on-death accounts in lieu of the term Totten trusts, but regardless of name, the result is the same.

Iowa & Totten Trusts

In states like Iowa, where Totten trusts are recognized, the proceeds for the account pass to the named beneficiary outside of the probate process. The treatment is just like a POD (“payable on death”) account or TOD (“transfer on death”) account.

Iowa recognizes Totten trusts generally, but specifically excludes them from the Iowa Trust Code. Iowa law describes legal trusts as follows:

‘Trust’ means an express trust, charitable or noncharitable, with additions thereto, wherever and however created, including a trust created or determined by a judgment or decree under which the trust is to be administered in the manner of an express trust. ‘Trust’ does not include [a] Totten trust account. Iowa Code 633A.1102(18)(a) (emphasis added).

When is a trust not a trust? Hopefully, thanks to this blog post, you now know that Totten trusts are not true trusts. I’ve written quite a bit on real trusts and would be happy to talk with you about what sort of trust may be right for you. Give me a call at or shoot me an email.

/by