Trusts and Estates

What are trusts and estates? Trusts and estates are legal mechanisms of passing or distributing property and wealth without consideration (i.e., without anything in return). Just like wills, these mechanisms can precisely direct who gets what property and when, and even for how long. You can appoint a trustee who will hold and manage property in trust for your beneficiaries. Unlike wills, trusts are not public documents. Trusts and estates are also frequently used to minimize the tax impact of passing property and wealth to heirs. This is done by taking advantage of unified credit, marital exemption (or deduction), and bypass trusts for example. Without trusts, some parts of your estate may be heavily taxed before your beneficiaries are allowed to take their shares.

Trusts and estates can also sometimes be used to minimize the tax impact on you during your lifetime: for example, by making a gift of property to your beneficiary during your lifetime, while reserving a "life estate" for yourself, or the right to use the property until your death. The beneficiary can take physical possession of the property after your death.

Why do I need trusts and estates? You need trusts and estates for the same reason you need a will- to distribute your property and your wealth the way you want. Using trusts and estates in addition to a will allows you to better accomplish what you want to do with your property and wealth. Although a will is a set of instructions to be carried out after your death, trusts can be set up and take effect during your life, so you can actually begin to see the distribution of your property and wealth. This also allows you to see how the people to whom you want to leave your property and wealth begin to enjoy these gifts from you.

Without some kind of estate planning, state law governs the distribution of your property. In other words, property either passes by operation of law because of the way title is held in the property, or it is passed by intestacy rules. People who do not have any estate plan to govern the disposition of their property risk leaving their property to individuals they did not intend to benefit in the first place.

Also, a court will appoint an administrator to oversee the distribution of your property if you do not leave a valid will or trust naming an executor or trustee to do that. The court will also appoint a guardian for your minor children, to manage their share of your property. Although typically the surviving spouse is appointed, this is not guaranteed, and your children's money may come under the management of someone you don't even know. This guardian may not make the best money management or investment decisions.

Other reasons to have a trust include (1) lack of faith in your child's money managing abilities; (2) to avoid will probate; (3) to vary benefits and beneficiaries; or (4) to protect beneficiaries from creditors. To protect the property and wealth from the child's poor money management abilities, a trustee other than the beneficiary (child) is appointed to hold and manage property in trust for the beneficiary. To protect the property and wealth from creditors, a trust called a "support trust" (for support, education and maintenance of the beneficiary) will not allow the garnishment of the trust fund by the creditors. Another way to protect assets from beneficiaries' creditors includes spendthrift trusts. With some exceptions, creditors usually cannot touch the assets in such trusts. In New York, all income interests in trusts automatically get spendthrift protection unless the settlor expressly specifies to the contrary in the trust instrument.

I don't have that much property or wealth, why do I need a trust? You need it to ensure that your wishes regarding your property are carried out and to minimize the tax impact of passing your property and wealth. You don't need to have a lot of property or wealth to take advantage of a trust: some types of trusts are funded with the proceeds of a person's life insurance policy.

Why doesn't everyone have a trust? Everyone does not have a trust for the same two primary reasons why everyone doesn't have a will. First, you have to come to terms with your own mortality. People are uneasy to engage in planning events to take place after their death because for that they must say to themselves "one day I will die." Once they treat death as the natural conclusion of life, and understand the tremendous advantages estate planning gives them in distributing their wealth and property, they usually come around and take great pleasure at deciding how to distribute their wealth. This gives them a peace of mind in knowing that their wishes regarding their property will be respected and carried out. Second, people usually assume that they still have a long life ahead of them and can still plan the distribution of their wealth and property later without losing anything. This is a mistake because death can be sudden and unexpected. Those who have planned for the distribution of their wealth and property can rest easy knowing that their loved ones will be taken care of and the tax impact on them will be as minimal as allowed by the law. It doesn't matter if you live five months, five years or fifty years - you should put in place some kind of estate planning to distribute your wealth and property should something happen to you.

Why should I use your services to settle a trust? Trusts are complicated mechanisms because they rely on many federal and state-specific laws and always involve federal and state taxation issues. There is an astounding amount of information a person needs to know to successfully use trusts. Strict formalities must be followed for drafting and executing a trust or the trust will be invalid or unenforceable, will fail, or will allow creditors to reach the trust principal or income. Therefore, you should always speak to a knowledgeable attorney about settling a trust that will allow you to achieve the maximum financial benefit.

How frequently should I update my trusts? Irrevocable trusts generally cannot be changed, although sometimes there is room to make some updates. Revocable trusts can be changed or updated as frequently as the settlor wants. A good rule is to update your trusts (1) at least every five years; (2) when federal or your state's tax laws change; (3) when events occur that affect the distribution of your wealth and property; (4) or when your wishes regarding your property distribution change. Common examples of these events are marriages, divorces, births or adoptions, or deaths of persons to whom you wanted to leave a part of your wealth or property. A well-drafted trust may account for some of these contingencies. However, there is no reason not to refresh your disposition instructions if possible.

One of the more famous examples of why a trust or a will should be updated is the Anna Nicole Smith case. After 15 years of litigation, her estate (she passed away before the dispute was resolved) was denied millions of dollars because her husband, millionaire J. Howard Marshall, did not change his will to leave a disposition to Ms. Smith. There was no disposition for Ms. Smith in Marshall's trusts. They were married for 14 months before he died, so there was ample opportunity to make changes. It is not always possible to change everything if you employ certain kinds of trusts, but between wills, trusts and estates there is usually enough of a leeway to modify the distribution instructions.

If you are looking for an attorney to help you draft trusts and estates, please contact attorney Leonid Mikityanskiy at our Brooklyn office at 718-256-3210