Settling the Estate in Trust-Centered Planning

Settling the Estate in Trust-Centered Planning

By Alan G. Orlowsky

Today it is common practice to use a revocable living trust as the foundation of an estate plan. One of the reasons professionals recommend trusts is so that their clients can avoid the time delays, costs, and publicity of probate. Indeed, a trust that is fully funded (i.e. all assets are under trust control) does avoid probate. However, when some people hear that trusts avoid probate, they assume that means everything happens automatically, and that there is absolutely nothing to do after the death of a loved one.

 

Unfortunately, trusts are merely documents and cannot carry out the instructions found within their pages. That requires human intervention. There are actually many things to do after the death of a loved one – even if they died with a fully funded trust in place. The things that must be completed are often referred to as “trust settlement” or “estate settlement.”

Just like probate, the details of trust settlement may vary from state to state. However, most estate and trust settlements will include these elements:

• Even in a trust-centered plan, the decedent probably also has a will called a “pour over” will. It is used to transfer assets to the trust that may have been overlooked during the decedent’s lifetime. If that is the case, the pour over will must be found and filed with the probate court just like any other will.
• The Trustee who was named in the trust document to take charge after the decedent’s death is notified, and he or she immediately locates and takes control of the decedent’s assets and financial records. In some states, the Trustee will be required to file an inventory of the assets.
• The Trustee is responsible to protect those assets, ensuring that personal effects are not removed from the home, for example, and that the home is secure.
• The Trustee obtains several copies of the death certificate for use in carrying out administrative duties.
• The Trustee sends death notices and notices of administration to the Beneficiaries named in the trust, as well as to any known creditors.
• The Trustee obtains a taxpayer identification number from the IRS for the decedent’s trust, and opens a separate account in the name of the trust for administration of the estate.
• The Trustee notifies banks, brokerage firms, insurance companies, and other financial institutions that he or she is the successor trustee on all accounts and assets. The financial institutions will often require a copy of the trust (or certain articles of the trust) to prove the Trustee’s claim.
• The Trustee provides a change of address to the Post Office so that he or she can receive all of the decedent’s mail until the estate is settled.
• The Trustee locates any funds that are owed to the decedent such as a final paycheck or bonus, death benefits from Social Security or the Veterans Administration, or debts owed to the decedent by others.
• If the decedent was a business owner, the Trustee follows the trust instructions concerning temporary management of the business, the existence of any buy-sell agreements, and the final transfer of the business to the beneficiaries or to an outside buyer.
• The Trustee files any required tax returns such as a final form 1040 for the decedent’s income taxes, a form 706 for estate taxes, or trust returns, and pays any taxes that are due.
• The Trustee files a final accounting to be approved by the Beneficiaries, and in some states, a final Petition for Discharge.
• The Trustee distributes all remaining assets to the Beneficiaries in keeping with trust instructions.

 Although this process avoids making the family’s affairs public, it will still require time, and quite often the services of an attorney and/or accountant. So although probate avoidance is often a goal of trust planning, it doesn’t mean that there will be nothing to do. The biggest benefit of trust planning over will planning is not necessarily avoiding probate. Rather, it is the ability to provide detailed instructions during life, during disability, and after death, as well as possibly providing the beneficiaries with creditor protection.

If you have questions about settling Your Estate or Trust centered Planning or any of the topics discussed in this blog please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.

 

Special Needs Trusts for People Without Special Needs?

Special Needs Trusts for People Without Special Needs?

By Alan G. Orlowsky

Would it surprise you if your professional adviser recommended “special needs” planning when you don’t have any special needs children or grandchildren? It’s important to think about what might happen to your loved ones after you’re gone, that would impact your estate plan. We try to plan for unforeseen financial circumstances, and thus build into our plans some creditor protections for our beneficiaries whenever possible. The same type of preventive planning can be done to protect loved ones in a tragedy that leads to physical and/or mental disability. Consider what happened with the estate plan of John and Elizabeth.

John and Elizabeth had three children: John Jr., Michelle, and Jerry. Their estate planning attorney prepared a living trust that passed their estate in equal shares to the children in trust. At John and Elizabeth's death, the estate, which was estimated at $2,100,000 after taxes and expenses, would be divided among the children – $700,000 to each of their trusts, which they were free to spend as needed.

 The trusts for the children provide that if John Jr., Michelle, or Jerry passes away, anything that’s left in their trust will be distributed to their own children. All three of John and Elizabeth's children had children of their own, and everyone in the extended family was in good health.

One day John, Elizabeth, and Jerry were traveling together and were involved in a terrible automobile accident. John and Elizabeth were killed, and Jerry was injured so badly that he was no longer able to care for himself.

The person named as his guardian immediately sought help for Jerry's medical expenses from Medicaid or other means-based government programs. They were shocked to learn that Jerry’s entire inheritance of $700,000 would have to be spent on medical expenses before Medicaid would assist him. As an alternative, the guardian learned that the assets could be placed in a special kind of trust to be used for Jerry's benefit. But at Jerry's death, that trust must reimburse Medicaid for what was spent for care during his life. The result in either case is that little or nothing will be left for Jerry’s children.

This result could have been avoided by creating a special needs trust. A special needs trust is specially designed to hold the inheritance of a beneficiary, and to be used for needs above and beyond those covered by government programs. These trusts contain instructions that allow the Trustee to meet the needs of the beneficiary, but prohibit the Trustee from providing for those needs if already covered by Medicaid or other programs. It also prohibits the Trustee from using the assets to reimburse any government program after the beneficiary’s death.

John and Elizabeth could have included instructions in their living trust that if one of their children were disabled, their share of the inheritance would pass to a special needs trust which could be used at the discretion of the Trustee. The result in Jerry’s case would be that his needs would be met during his lifetime, and anything left over at the time of Jerry's death could be passed on to his children.

If you have questions about Special Need Trusts or any of the topics discussed in this blog please contact Alan Orlowsky by calling 847-325-5559 or visit our website www.orlowskywilson.com.