Category: Trustee

Less Restrictive Alternatives to Guardianship

Less Restrictive Alternatives to Guardianship

The benefit of less restrictive alternatives to guardianships is that they don’t require court approval or judicial oversight. They are also much easier to set up and end.

The standard for establishing incapacity is also less rigorous than the standard required for a guardianship, says Kiplinger’s recent article entitled “Guardianships Should Be a Last Resort – Consider These Less Draconian Options First.”

Limited guardianships. A guardianship takes away an individual’s right to make decisions, just as full guardianships do, but they are specific to only some aspects of the person’s life. A limited guardianship can be established to manage an individual’s finances and estate or to control medical and health care decisions. These types of guardianships still require court approval and must be supported by a showing of incapacity.

Powers of attorney. Powers of attorney can be established for medical or for financial decisions. A second set of eyes ensures that financial decisions are well-considered and not harmful to the individual or his or her estate. A medical power of attorney can allow an agent to get an injunction to protect the health and well-being of the subject, including by seeking a determination of mental incapacity. A durable power of attorney for health care matters gives the agent the right to make medical decisions on behalf of the subject if or when they are unable to do so for themselves. Unlike a guardianship, powers of attorney can be canceled when they are no longer needed.

Assisted decision-making. This agreement establishes a surrogate decision-maker who has visibility to financial transactions. The bank is informed of the arrangement and alerts the surrogate when it identifies an unusual or suspicious transaction. While this arrangement doesn’t completely replace the primary account holder’s authority, it creates a safety mechanism to prevent exploitation or fraud. The bank is on notice that a second approval is required before an uncommon transaction can be completed.

Wills and trusts. These estate planning documents let people map out what will happen in the event they become incapacitated or otherwise incapable of managing their affairs. Trusts can avoid guardianship by appointing a friend or relative to manage money and other assets. A contingent trust will let the executor manage assets if necessary. For seniors, it may be wise to name a co-trustee who can oversee matters and step in should the trustor lose the capacity to make good decisions.

Speak with your estate planning attorney to explore if these less restrictive alternatives to guardianship work for your family’s situation. If you would like to learn more about guardianships, please visit our previous posts. 

Reference: Kiplinger (July 7, 2022) “Guardianships Should Be a Last Resort – Consider These Less Draconian Options First”

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There are Benefits to a QTIP Trust

There are Benefits to a QTIP Trust

There are some significant benefits to a QTIP trust. A Qualified Terminable Interest Property Trust, or QTIP, is a trust allowing the person who makes the trust (the grantor) to provide for a surviving spouse while maintaining control of how the trust’s assets are distributed once the surviving spouse passes, as explained in the article “QTIP Trusts” from Investopedia.

QTIPs are irrevocable trusts, commonly used by people who have children from prior marriages. The QTIP allows the grantor to take care of their spouse and ensure assets in the trust are eventually passed to beneficiaries of their own choosing. Beneficiaries could be the grantor’s offspring from a prior marriage, grandchildren, other family members or friends.

In addition to providing the surviving spouse with income, the QTIP also limits applicable estate and gift taxes. The property within the QTIP trust provides income to the surviving spouse and qualifies as a marital deduction, meaning the value of the trust is not taxable after the death of the first spouse. Rather, the property in the QTIP trust will be included in the estate of the surviving spouse and subject to estate taxes depending on the value of their own assets and the estate tax exemption in effect at the time of death.

The QTIP can also assert control over how assets are handled when the surviving spouse dies, as the spouse never assumes the power of appointment over the principal. This is especially important when there is more than one marriage and children from more than one family. This prevents those assets from being transferred to the living spouse’s new spouse if they should re-marry.

A minimum of one trustee must be appointed to manage the trust, although there may be multiple trustees named. The trustee is responsible for controlling the trust and has full authority over assets under management. The surviving spouse, a financial institution, an estate planning attorney or other family member or friend may serve as a trustee.

The surviving spouse named in a QTIP trust usually receives income from the trust based on the trust’s income, similar to stock dividends. Payments may only be made from the principal if the grantor allows it when the trust was created, so it must be created to suit the couple’s needs.

Payments are made to the spouse as long as they live. Upon their death, the payments end, and they are not transferable to another person. The assets in the trust then become the property of the listed beneficiaries.

The marital trust is similar to the QTIP, but the is a difference in how the assets are controlled. A QTIP allows the grantor to dictate how assets within the trust are distributed and requires at least annual distributions. A marital trust allows the surviving spouse to dictate how assets are distributed, regular distributions are not required, and new beneficiaries can be added. The marital trust is more flexible and, accordingly, more common in first marriages and not in blended families.

There are benefits to a QTIP trust and a marital trust. Your estate planning attorney will explain further how else these two trusts are different and which one is best for your situation. There are other ways to create trusts to control how assets are distributed, how taxes are minimized and to set conditions on benefits. Each person’s situation is different, and there are trusts and strategies to meet almost every need imaginable. If you would like to learn more about different types of trusts, please visit our previous posts.

Reference: Investopedia (Aug. 14, 2022) “QTIP Trusts”

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Options in Managing Unequal Inheritances

Options in Managing Unequal Inheritances

Estate planning attorneys aren’t often asked to create estate plans treating heirs unfairly. However, when they do it usually is because a parent is estranged from one child and wishes to leave him or her nothing. When it comes to estate planning, equal isn’t the same as fair, explains the article “Are Unequal Inheritances Fair?” from Advisor Perspectives. There are options in managing unequal inheritances in your estate planning.

An example of this can be seen in the case of a widow with four adult children who asked an estate planning attorney how to approach distributing her assets. Three of her children were high-income earners, already building substantial net worth. A fourth child had mental health issues, limited education, had been in and out of jail and was unable to hold a job.

She understood that her fourth child needed the financial stability the others did not. She wanted to provide some support for him, but knew any money left directly to him would be gone quickly. She was considering leaving money for him in a trust to provide a monthly income stream, but also wanted to be fair to the other three children.

The trust would be the best option. However, there were problems to consider. If the estate were to be divided in four equal parts, the fourth child’s share of the estate would be small, so trustee fees would take a significant amount of the trust. If she left her entire estate for him, it would be more likely he’d have funding for most, if not all, of his adult life.

The worst thing the mother could do was to leave all the funds for the fourth child in a trust without discussing it with the other three siblings. Unequal inheritances can lead to battles between siblings, sometimes bad enough to lead them into a court battle. This is often the case where one child is believed by others to have unduly influenced a parent, when they have inherited all or the lion’s share of the estate.

Sibling fights can occur even when the children know about and understand the need for the unequal distribution. The children may suppress their emotions while the parent is living. However, after the parent dies and the reality sets in, emotions may fire at full throttle. Logically, in this case the three successful siblings may well understand why their troubled sibling needs the funds. However, grief is a powerful emotion and can lead to illogical responses.

In this case, the woman made the decision to leave her estate in equal shares to each child and giving the three successful siblings the options to share part of their inheritance with their brother. She did this by having her estate planning attorney add language in the will stating if any child wanted to disclaim or refuse any of their inheritance, it would pass to a trust set up for the troubled sibling. This gave each child the opportunity to help or not.

Was it a perfect solution? Perhaps not, but it was the best possible solution given the specific circumstances for this family. Speak with your estate planning attorney about your options in managing unequal inheritances. If you would like to learn more about inheritances, please visit our previous posts. 

Reference: Advisor Perspectives (Aug. 22, 2022) “Are Unequal Inheritances Fair?”

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IRS Extending Time to File Portability Exemption

IRS Extending Time to File Portability Exemption

When a spouse dies, the surviving spouse has the option of taking the unused federal estate tax exclusion and applying it to their own estate. This is known as electing portability for the DSUE, Deceased Spousal Unused Exemption, according to a recent article “Estates can now request late portability election relief for 5 years” from the Journal of Accountancy. The IRS is extending the time it takes to file a portability exemption.

The portability exemption has grown in use, and the scheduled decrease in the estate tax exemption starting on January 1, 2026, will no doubt dramatically expand the number of people who will be even more eager to adopt this process.

The IRS has extended the amount of time a surviving spouse may elect to take the Deceased Spousal Unused Exclusion (DSUE) from two to five years. The expanded timeframe is a reflection of the number of requests for letter rulings from estates missing the deadline for what had been a two-year relief period. The overly burdened and underfunded agency needed to find a solution to an avalanche of estates seeking this relief. Most of the requests were from estates missing the deadline between two years and under five years from the decedent’s date of death.

To reduce the number of letter ruling requests, the IRS has updated the requirement by extending the period within which the estate of a decedent may make the portability election under the simplified method to on or before the fifth anniversary of the decedent’s death.

There are some requirements to use the simplified method. The decedent must have been a citizen or U.S. resident at the date of death and the executor must not have been otherwise required to file an estate tax return based on the value of the gross estate and any adjusted taxable gifts. The executor must also not have timely filed the estate’s tax return within nine months after the date of death or date of extended file deadline.

If it is determined later that the estate was in fact required to file an estate tax return, the grant of relief will be voided.

Note that this change doesn’t extend the period during which the surviving spouse can claim a credit or a refund of any overpaid gift or estate taxes on the surviving spouse’s own gift or estate return.

The decision by the IRS extending the time to file a portability exemption will become even more popular after December 31, 2025, when the federal exemption changes from $12.6 million per person to $5 million (adjusted for inflation). Given the rise in housing prices, even people with modest estates may find themselves coming close or exceeding the federal estate tax level. If you would like to learn more about the portability exemption, please visit our previous posts. 

Reference: Journal of Accountancy (July 11, 2022) “Estates can now request late portability election relief for 5 years”

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Spendthrift Trust has Restrictions to protect Heirs

Spendthrift Trust has Restrictions to protect Heirs

There are situations when you want to care for your children in your will. However, you know they’d just blow their inheritance in just a few years. That’s when a spendthrift trust is useful. A spendthrift trust is a type of trust that has restrictions to protect immature heirs from both themselves and potential creditors.

US News’ recent article entitled “What Is a Spendthrift Trust?” explains that a spendthrift trust lets you  leave funds to a beneficiary, without giving them full control over those funds. Instead, a trustee is given the authority to distribute funds for the benefit of a beneficiary.

This type of trust is created to protect a beneficiary from squandering the wealth bequeathed to them or was left to them

Speak with an estate attorney and talk in detail about your concerns. Ask the attorney to draft this document for you.

The attorney can write into the trust certain rules, such as that an heir may be required to reach a certain age before they start receiving payments, or that the heir receives installments at certain life stages.

If you have an heir or someone you want to leave an inheritance who is immature, irresponsible, or underage, a spendthrift trust can give you some control and power over how and when the money is spent.

A spendthrift trust can also try to limit access to the funds by creditors. The objective is to keep other people from accessing the funds set aside for the beneficiary.

It’s the goal of the original trust creator to protect their beneficiary’s assets from other people. This might be a creditor or even an ex-spouse.

Note that the laws regarding spendthrift trusts vary from state to state, so work with a local estate planning attorney.

The ability of a creditor to access assets in the trust will to depend on state law. Every state has different rules regarding their respect for the spendthrift trust.

A spendthrift trust that has restrictions to protect heirs can be a critical component in your heirs future success. One of the critical tasks in setting up a successful spendthrift trust is the person who is named as the trustee of the funds. That person can have some discretion when distributing the funds, so it needs to be an individual you can trust over the long term. That’s why partnering with an experienced estate planning attorney who’s truly an expert in that field is so important. If you would like to read more about these types of trusts, please visit our previous posts. 

Reference: US News (June 28, 2022) “What Is a Spendthrift Trust?”

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Funeral Trust is an Option for Final Expenses

Funeral Trust is an Option for Final Expenses

A funeral trust is an option for final expenses. A funeral trust is an inter vivos trust created by an individual, while alive, with the objective of covering final expenses associated with future funeral arrangements.

Anyone competent and of legal age can set up a funeral trust. Family members can open a trust for immediate family members, such as parents, siblings, spouses, children, or stepchildren.

Bank Rate’s recent article entitled “The pros and cons of funeral trusts” advises to first choose a reputable funeral home provider.

You can accomplish this by looking at online reviews or use local word of mouth recommendations to find the top funeral home provider with a good reputation.

Funeral trusts are also sold through insurance companies, in which case they’re typically funded with single-premium whole life insurance. Next, see how much your funeral will cost and check the funeral cost limitations set by your state.

You can then compare the various methods of funding a prepaid funeral trust. Cash, savings bond, CD’s, payment plans, or final expense insurance (burial life insurance) may be used to fund a prepaid trust.

Consider consulting an elder law attorney. He or she can help consumers understand the legalities and tax requirements involved in funeral trusts.

You then need to confirm that proceeds from the trust will be accepted as payment. If the funeral home you selected won’t accept the funds from the trust as payment for services, your family could be left confused and frustrated after your death.

Ask an elder law attorney about relocation regulations before opening your funeral trust. You should confirm that if you move across state lines, the trust can be changed to the new state. If you relocate, be certain that you change the trustee and beneficiary to the new funeral home you’ll use.

Make certain that family members are aware of your plans. You can provide your executor and all your heirs with a copy of the trust, as well as contact information for the funeral home and the beneficiary if different.

You then need appoint an independent trustee, who will audit the funeral bill for reasonableness and pay any excess to the family.

Finally, don’t forget to fund the trust. A funeral trust is an option for final expenses, but only if it is properly funded. If you would like to learn more about funeral planning, and additional issues related to probate, please visit our previous posts. 

Reference: Bank Rate (Feb. 8, 2021) “The pros and cons of funeral trusts”

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How to Manage Investments when Someone Dies

How to Manage Investments when Someone Dies

Taking responsibility for a decedent’s probate or trust estate often involves managing significant amounts of wealth, whether they are brokerage accounts or cash assets. They will need to know how to manage investments when someone dies. Today’s volatile markets add another level of complexity to this responsibility. The article “Estate Planning: Investments during administration of decedent’s estate” from Lake County News explains what estate administrators, executors and trustees need to know as they take on these tasks.

Investment account values are in a constant state of change and may include assets now considered too risky because they are owned by the estate and not the individual. The administrator will need to evaluate the accounts in light of debts owed by the decedent, the costs in administering the estate and any gifts to be made before the estate will be closed.

At the same time, too much cash on hand could mean unproductive assets earning less than they could, losing value to inflation. If there is a long time between the death of the owner and the date of distribution, depending on markets and interest rates, having too much cash could be detrimental to the beneficiaries.

The personal representative or trustee, as relevant, may determine that the cash should be invested, shift how existing investments are managed, or decide to sell investments to generate cash needed for debts, expenses and distributions to beneficiaries.

A personal representative is not expected or required to be a stock market expert. Their duties are to manage estate assets as a person making prudent decisions for the betterment of the estate and heirs. They must put the interest of the estate above their own and not make any speculative investments. With the exception of checking accounts, the expectation is for estate accounts to earn something, even if it is only interest.

If the personal representative has the authority to do so, they may invest in very low-risk debt assets. If the will includes investment powers and if certain conditions safeguarding payment of the decedent’s debts and expenses are satisfied, the personal representatives may invest using those powers. In some instances, a court order may be needed. An estate planning attorney will be able to advise based on the laws of the state in which the decedent resided.

Learning how to manage investments when someone dies is a critical role for a trustee or executor. For a trust, the trustee has a fiduciary duty to invest and manage trust assets for beneficiaries. Assets should be made productive, unless the trust includes specific directions for the use of assets prior to distribution. The longer the trust administration takes and the larger the value of the trust, the more important this becomes.

In all scenarios, investment decisions, including balancing risk and reward, must be made in the context of an overall investment strategy for the benefit of heirs. Investments may be delegated to a professional investment advisor, but the selection of the advisor must be made cautiously. The advisor must be selected prudently and the scope and terms of the selection of the advisor must be consistent with the purposes and terms of the trust. The trustee or executor must personally monitor the advisor’s performance and compliance with the overall strategy. If you would like to learn more about managing investment account in an estate, please visit our previous posts. 

Reference: Lake County News (June 11, 2022) “Estate Planning: Investments during administration of decedent’s estate”

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Special Needs Trusts can Protect disabled Child

Special Needs Trusts can Protect disabled Child

Parents with disabled children worry about how their offspring will manage when parents are no longer able to care for them. Leaving money directly to a child receiving means-tested government benefits, like Social Security Supplemental Income or Medicaid, could make them ineligible for these programs, explains an article from Kiplinger titled “Estate Planning: A Special Trust for a Special Need.” In most states, beneficiaries of either program are only allowed to have a few thousand dollars in assets, with the specific amount varying by state. However, the financial support from government programs only goes so far. Many families opt to have their own family member with special needs live at home, since the benefit amount is rarely enough. A Special Needs Trust can protect your disabled child.

The solution is a Special Needs Trust, which provides financial support for a disabled individual. The SNT owns the assets, not the individual. Therefore, the assets are excluded from asset limit tests. The funds in the trust can be used to enhance quality of life, such as a cell phone, a vacation or a private room in a group living facility. The SNT is a means of making sure that a vulnerable family member receives the money and other relatives, such as a sibling, don’t have a financial burden.

SNTs can only be created for those who are younger than age 65 and are meant for individuals with a mental or physical disability so severe they cannot work and require ongoing support from government agencies. A disabled person who can and does work isn’t eligible to receive government support and isn’t eligible for an SNT, although an estate planning attorney will be able to create a trust for this scenario also.

Each state has its own guidelines for SNTs, with some requiring a verification from a medical professional. There are challenges along the way. A child with autism may grow up to be an adult who can work and hold a job, for instance. However, estate planning attorneys recommend setting up the SNT just in case. If your family member qualifies, it will be there for their benefit. If they do not, it will operate as an ordinary trust and give the person the income according to your instructions.

SNTs require a trustee and successor trustee to be responsible for managing the trust and distributing assets. The beneficiary may not have the ability to direct distributions from the trust. The language of the trust must state explicitly the trustee has sole discretion in making distributions.

Because every state has its own system for administering disability benefits, the estate planning attorney will tailor the trust to meet the state’s requirements. The SNT also must be reported to the state. If the beneficiary moves to another state, the SNT may be subjected to two different sets of laws and the trustee will need to confirm the trust meets both state’s requirements.

SNTs operate as pass-through entities. Tax treatment favors ongoing distributions to beneficiaries. Any earned investment income goes to the beneficiary in the same year, with distributions taxed at the beneficiaries’ income tax rate. Trust assets may be used to pay for the tax bill.

As long as all annual income from the trust is distributed in a given year, the trust will not owe any tax. However, a return must be filed to report income. For any undistributed annual investment income, the trust is taxed at one of four levels of tax rates. These range from 10% and can go as high as 37%, depending on the trust income.

An SNT can be named as the beneficiary of a traditional IRA on the death of the parent. Investments grow tax deferred, as long as they remain in the retirement account and the SNT collects the required minimum distributions for the retirement account each year, with the money passing as income. However, any undistributed amount of the required distribution will be taxed at the trust’s highest tax rate. Using a Special Needs Trust can protect your disabled child and ensure they have a quality of life for years to come. If you would like to learn more about SNTs, please visit our previous posts. 

Reference: Kiplinger (June 8, 2022) “Estate Planning: A Special Trust for a Special Need”

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Firearms can be included in your Estate Plan

Firearms can be included in your Estate Plan

It’s common to focus on the big assets when creating an estate plan, like the family home, investment accounts and life insurance, but personal property also needs to be addressed, especially if the items are of great value or if ownership is complicated. This is especially the case regarding firearms, discussed in a recent article, “In the Crosshairs: Guns in Estate Planning” from The National Law Review. Firearms can be included in your estate plan.

Your executor, personal representative or successor trustee is the person who takes on the fiduciary role of administering your estate, according to the directions in your last will and testament. What seems like a relatively simple transfer of your favorite shotgun to a family member could lead to serious legal problems, if the family member is a “prohibited person.”

The Gun Control Act of 1968 made it unlawful for certain people to ship, transport, receive or possess firearms or ammunition. This group includes persons with mental illness, felons, dishonorable discharges or domestic violence convictions. Unless your executor knows the family member and can confirm they do not belong to any of these categories, the transfer and receipt of the firearm could constitute criminal behavior.

Geography could be an issue as well. A federal firearms license holder must be used to transfer the firearm, if the recipient lives in a different state. Since guns laws vary widely throughout the US, transfers are not straightforward. Something perfectly legal in one state may be a felony in another.

Laws about guns and related devices change also. After a mass shooting event in Las Vegas in 2017, the bump stock, a device used to allow more shots to be fired from an assault weapon was made illegal and owners were advised to surrender or destroy any bump stocks in their possession. If the fiduciary doesn’t know anything about firearms, they may unwittingly commit a felony.

The risks of transferring firearms can be addressed with informed planning. Gun trusts are used to protect and plan, especially for unique items like registered machine guns, suppressors, short barrel rifles and short barrel shotguns.

Firearms can be included in your estate plan. In recent years, the gun trust use has expanded to collectible firearms to preserve their use for future generations. Collectable firearms often are as expensive as collectible cars, so care must be taken to properly preserve and transfer them.

If firearms are in your home and you wish to pass them along to another family member, the best way to do this is with the help of an experienced estate planning attorney who can create a gun trust and help determine if the intended heir is permitted to inherit a gun. If you would like to learn more about addressing personal property in your planning, please visit our previous posts. 

Reference: The National Law Review (May 10, 2022) “In the Crosshairs: Guns in Estate Planning”

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What is the Best Way to Leave Money to Children?

What is the Best Way to Leave Money to Children?

Parents and grandparents want what’s best for children and grandchildren. We love generously sharing with them during our lifetimes—family vacations, values and history. If we can, we also want to pass on a financial legacy with little or no complications, explains a recent article titled “4 Tax-Smart Ways to Share the Wealth with Kids” from Kiplinger. What is the best way to leave money to children?

There are many ways to transfer wealth from one person to another. However, there are only a handful of tools to effectively transfer financial gifts for future generations during our lifetimes. UTMA/UGMA accounts, 529 accounts, IRAs, and Irrevocable Gift Trusts are the most widely used.

Which option will be best for you and your family? It depends on how much control you want to have, the goal of your gift and its size.

UTMA/UGMA Accounts, the short version for Uniform Transfers to Minor or Uniform Gift to Minor accounts, allows gifts to be set aside for minors who would otherwise not be allowed to own significant property. These custodial accounts let you designate someone—it could be you—to manage gifted funds, until the child becomes of legal age, depending on where you live, 18 or 21.

It takes very little to set up the account. You can do it with your local bank branch. However, the funds are taxable to the child and if an investment triggers a “kiddie tax,” putting the child into a high tax bracket and in line with income tax brackets for non-grantor trusts, it could become expensive. Your estate planning attorney will help you determine if this makes sense.

What may concern you more: when the minor turns 18 or 21, they own the account and can do whatever they want with the funds.

529 College Savings Accounts are increasingly popular for passing on wealth to the next generation. The main goal of a 529 is for educational purposes. However, there are many qualified expenses that it may be used for. Any income from transfers into the account is free of federal income tax, as long as distributions are used for qualified expenses. Any gains may be nontaxable under local and state laws, depending on which account you open and where you live. Contributions to 529 accounts qualify for the annual gift tax exclusion but can also be used for other gift and estate tax planning methods, including letting you make front-loaded gifts for up to five years without tapping your lifetime estate tax exemption.

You may also change the beneficiary of the account at any time, so if one child doesn’t use all their funds, they can be used by another child.

From the IRS’ perspective, a child’s IRA is the same as an adult IRA. The traditional IRA allows an immediate deduction for income taxes when contributions are made. Neither income nor principal are taxed until funds are withdrawn. By contrast, a Roth IRA has no up-front tax deduction. However, any earned income is tax free, as are withdrawals. There are other considerations and limits.  However, generally speaking the Roth IRA is the preferred approach for children and adults when the income earner expects to be in a higher tax bracket when they retire. It’s safe to say that most younger children with earned income will earn more income in their adult years.

The most versatile way to make gifts to minors is through a trust. This is perhaps the best way to leave money to children. There’s no one-size-fits-all trust, and tax rules can be complex. Therefore, trusts should only be created with the help of an experienced estate planning attorney. A trust is a private agreement naming a trustee who will manage the assets in the trust for a beneficiary. The terms can be whatever the grantor (the person creating the trust) wants. Trusts can be designed to be fully asset-protected for a beneficiary’s lifetime, as long as they align with state law. The trust should have a provision for what will occur if the beneficiary or the primary trustee dies before the end of the trust. If you would like to learn more about how to leave money, or an inheritance, to your children, please visit our previous posts.

Reference: Kiplinger (May 15, 2022) “4 Tax-Smart Ways to Share the Wealth with Kids”

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Information in our blogs is very general in nature and should not be acted upon without first consulting with an attorney. Please feel free to contact Texas Trust Law to schedule a complimentary consultation.
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