Estate planning means making arrangements in the case anything bad happens to you. You get to say who will help you during your lifetime if needed, how the assets of your estate will be distributed after you are gone, and who will be in charge then.
The simple option is to prepare and use a Last Will and Testament. It only comes into effect when you die. However, upon your death (or upon the death of the second spouse to pass away), probate estate administration may be necessary, requiring otherwise avoidable court paperwork, reporting and filings.
An alternative to an estate plan based solely on a Last Will and Testament, is to use a Revocable Agreement of Trust (or so-called “Living Trust”) combined with a special kind of Will (called a “Pour-over Will”). A lifetime agreement of trust is intended to avoid probate costs and hassles. It offers peace of mind knowing that you have done as much as you can now to minimize the burden imposed on those who will wind up your affairs for you. No one has to go downtown or be officially appointed as an Executor, and certain filings are therefore not required.
A Revocable Agreement of Trust is created during your lifetime as the controlling instrument to provide for handling assets now – and for winding up your affairs and inheritance by your chosen beneficiaries when you are gone.
In fact, you play all three roles that are involved in the creation of the Trust: you are the Trust creator (also known as settlor or grantor); you are the Trustee(s) of the Trust in charge of your own money; and you are the beneficiaries of your Trust during your lifetime, entitled to use and enjoy your money. (You can name co-Trustees along with you, such as children or even make others Trustee in your place.)
During your lifetime, you have the same freedom and flexibility over the assets assigned to the trust that you have now. The income tax treatment of assets and income is also ordinarily unchanged. If you are unable to continue as Trustee, someone you choose can step in as successor Trustee(s) in your place. When you are gone, the trust acts like a Will, directing that the bills, debts, taxes and expenses be paid, and the remainder distributed to your beneficiaries e.g. your kids.
Under a Revocable Trust, you transfer the ownership of clearly identified assets into the Trust. In effect, you no longer own those assets as an individual or as husband and wife, but as Trustee(s) of your Trust. We always perform this final “funding” step to implement the Trust for or on behalf of our clients, to make sure that the process is completed properly.
Certain kinds of assets become actually owned by you as Trustee such as real estate, bank deposit accounts and non-qualified investments. Life insurance typically will still be owned by you individually but become payable to the Trust as a beneficiary. Qualified retirement plan assets can also be included in the Trust if necessary, but require special handling.
Setting up a lifetime agreement of trust costs more upfront. It is a more complex and substantial undertaking than just preparing a new Will in part because the process of funding the Trust can actually require a lot of time and office resources. The additional upfront cost now can lead to much greater efficiencies and savings later. Unfortunately, a revocable trust won’t reduce or avoid Pennsylvania inheritance tax.
Qualified retirement plan assets and accounts like IRA’s, 401K’s, etc., have lots of complicated tax rules. Putting such assets into a Trust creates a risk of unintended income tax costs for the beneficiaries. Special “Qualified Trust” provisions are required for these assets.
Tax code changes can have a significant impact on trusts and on qualified funds in or outside of a trust. For example, prior to the SECURE Act of 2019, a “stretch IRA” allowed beneficiaries to “stretch out” tax-deferred growth for decades. Now, inherited IRAs must be distributed within 10 years (with some exceptions). The difference to the beneficiary is dramatic.
At Marks Elder Law, we help people every day with issues like these. I invite your questions and feedback. Please let me know how I can help you and your family.