Estate Planning Services and Trusts

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Trusts

A trust by definition is a relationship whereby property is held by one party for the benefit of another.  The terms to be aware of are settlor/grantor (person or persons who create a trust) and trustees (person or persons who holds the property for the trust’s beneficiaries). 

A trust can be created while a person is living, and this is called an inter vivos or living trust, but a trust that is created upon death is a testamentary trust.  An irrevocable trust is a trust that cannot be changed by the grantor while a revocable trust can be modified by the grantor. 

There are a wide variety of Trusts that can be created, but I will herein below provide a description of a few types of Trusts that can be utilized in estate planning.

Examples of types of Trusts:

1.  Special Needs Trusts:  Trust designed to protect the assets of a loved one with a disability, while retaining eligibility for needed government benefits for health care and financial assistance.  The need for a Special Needs Trust becomes acute when a disabled person is an SSI (Supplemental Security Income) recipient.  SSI is a mean-tested programs which means that countable resources (i.e. cash and other assets that could be converted to cash) affect eligibility.  A person with a disability cannot own more than $2,000.00 in countable resources to be eligible for SSI.  A Special Needs Trust allows the beneficiary’s primary residence to not be counted up to a designated amount currently $500,000.00 or $750,000.00.  One car or van is also not counted.  Life insurance with a face value of up to $1,500.00 is also not counted.  If a beneficiary earns more than $65.00 a month then his or her SSI payments are reduced one dollar for every two dollars earned.  The trustee can purchase for the beneficiary non-countable assets.  The trustee needs to make sure that all bills are paid from the trust and not from the beneficiary.

2.  Spendthrift Trust.  A trust that is established for a beneficiary which does not allow the beneficiary to sell or pledge away interests in the Trust.  There are a few exceptions such a child support obligations. 

3.  Revocable Trust for Children.  A trust can be created for which a portion or all of proceeds from an estate can be placed.  A trustee or trustees are named to provide for the children.  This type of trust is normally created in case of the death of both parents.  A Guardian or Guardians of the children are normally named in the Will, and the Revocable Trust is used to guard the assets that are being used for the care and education of the children.  The Guardian or Guardians can also be the Trustee, but the Guardian can also be separate from the Trustee.

4.  Irrevocable Life Insurance Trust (ILIT).  An ILIT formation is a method used in estate planning to avoid life insurance funds being included in estate valuation for tax purposes.  An ILIT is a trust used to hold life insurance policies.  The ILIT is named the primary beneficiary of the policy.  The Grantor of the Trust cannot serve as the Trustee since this would give them a degree of control or ownership of the Trust that the IRS would deem part of the estate.  The ILIT and subsequent change in beneficiary needs to have been created more than three years prior to death to avoid the IRS including the life insurance proceeds in the estate.  The ILIT is irrevocable so the Grantor of the ILIT would lose the power to revoke the Trust after it is created, but an ILIT can be an effective aid in estate planning. 

Estate Planning

There are four main items that most estate planning clients need in Kentucky, and they are: will, healthcare directive, living will, and advance directive, and durable power of attorney. 

1.  Will.  A will is a document which addresses payment of debts of the estate along with disbursement of the remaining real and personal property of the estate.  A will should name an Executor (male) or an Executrix (female) to effectuate the will provisions.  Upon death, the original of the will along with a copy must be filed with the Probate Court to start the process.  A hearing will be set for the Executor/Executrix to be appointed by the Court.  The law in the Commonwealth of Kentucky requires six months to pass before the estate can be closed.  It is important to note that a Guardian or Guardians for minor children can be named in the Will.

2.  Durable Power of Attorney.  Unlike a will, the durable power of attorney is effective prior to death.  If a person becomes incapacitated or is simply unable to handle their business affairs then the durable power of attorney can act on behalf of the incapacitated individual.  The scope of the powers given is addressed in the durable power of attorney.  The durable power of attorney gives the named individual the power to sign or execute normal business documents including but not limited to signing checks and Social Security forms.

3.  Advance Directive/Living Will/Healthcare Proxy/Medical Power of Attorney/Healthcare Directive.  These terms are sometimes substituted for each other, but the basic difference is the living will addresses the pre-designated medical decisions of the individual who has become unable to make medical decisions while the healthcare proxy/medical power of attorney is a person you designate to make decisions regarding your medical care if you are permanently or temporarily unable to make medical decisions for yourself.  It does not matter whether the living will and healthcare proxy/medical power of attorney/heathcare directive are put together in one document or separated into two documents.  The advance directive is normally the title of the document which addresses both the living will and healthcare proxy/medical power of attorney.