One of the most confusing questions involved in estate planning is whether you need a trust or will a simple will work just as well. The answer in an individual case depends on the facts of your case and also what you are trying to accomplish.
You might be told that you must have a living trust by your financial advisor or possibly a banker or friend. In Pennsylvania the issue can be further complicated by the fact that assets held in typical living trusts are still subject to Pennsylvania Inheritance Tax. I once received a phone call from a past non-lawyer colleague. Her question, briefly stated, was “If I take all my assets and put them in a living trust is there still Pennsylvania Inheritance Tax for the children?” I answered “yes” and she hung up. For further confirmation check Pennsylvania Form 1500, Inheritance Tax Return for Resident Decedent. Question No. 8 indicates an item to be checked (or not) “Decedent Maintained a Living Trust” followed by the statement “Attach copy of trust.”
So why would financial advisors or money managers recommend a living trust? I questioned that myself over the years and arrived at some possibilities.
• A Living Trust Might Lend Itself Better to Pulling All Assets Together in One Plan.
Note the statement includes the word “might.” This depends on the plan and the character of the assets. If a substantial portion of the estate is held in assets that are TOD or POD (transfer on death or payable on death) or are tax qualified funds such as IRA’s, 401(k)’s or 403(b)’s with individual beneficiaries, the living trust might not pull all of them together in a single plan. Also, married couples might continue to hold real estate assets including their residences as tenants by the entireties and, therefore, outside the living trust. A good financial advisor and/or elder law or estate planning attorney may be able to help sort this out.
For tax, debt protection and planning purposes you might want to keep certain assets held as tenants by the entireties. On the other hand, if this is not your first marriage and you have children by a prior marriage you might consider trusts. It depends.
• A specific type of trust, known as a supplemental needs (or special needs) trust can deal with the circumstance where one or more beneficiaries could be denied government benefits if he/she were to inherit directly.
One of the most common reasons to consider trust planning has been the concern that, without a trust, when assets are inherited directly by a special needs beneficiary that person might lose government benefits. While this can be handled in the will in what is known as a Testamentary Supplemental Needs Trust, some planners recommend establishing a trust that takes effect during your lifetime to benefit the special needs person.
In that situation, individuals (or organizations) other than yourself can also contribute before your passing to a fund for the special needs individual. Such trusts established with your own funds and possibly supplemented by others are referred to as Third Party Supplemental Needs Trusts.
Note, however, that not all benefits being received by special needs individuals are necessarily threatened by receipt of an inheritance. It depends on the type of benefits he/she is receiving. Social Security Disability (SSD) recipients, for instance, can typically inherit without concern regarding loss of SSD income. Supplemental Security Income (SSI) and Medicaid recipients often may not. The planning is complicated and requires advice from an elder law or estate planning attorney or other professional experienced in these fields.
• If your estate requires money management that goes beyond the abilities of anyone you might designate to serve as executor or agent under power of attorney you might consider a professional advisor who prefers a living trust.
This is an option for someone experienced in the field.
• Note: There are different types of trusts for different purposes.
Trusts may be irrevocable or revocable. They might be so-called grantor trusts or non-grantor trusts. They might be established only to provide more detailed instructions than might be contained in a typical will although wills can be tailored to the circumstances or considered possibly for federal tax purposes. Transfer of assets to an irrevocable trust, generally speaking, has much different results than transfer to a revocable living trust. You would need to know the difference.
Janet Colliton is a Certified Elder Law Attorney by the National Elder Law Foundation. Her office, Colliton Elder Law Associates PC practices elder law, life care, special needs, real estate and estate planning and administration, with offices at 790 East Market St., Suite 250, West Chester, 610-436-6674, [email protected]. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.
