Attorney Thomas B. Burton is joined by Attorney Matthew Underwood, of Underwood Legal, LLC, and together they discuss the various types of trusts used in estate planning including several popular trusts you may often hear referenced such as revocable trusts, special needs trusts and irrevocable trusts. Attorney Burton and Attorney Underwood discuss each type of trust and explain how each type of trust is used as part of a comprehensive estate plan. This video is designed to inform, educate, and empower you to take charge of your own estate planning by learning more about the variety of options available to you before you go to meet with your estate planning attorney.
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Thomas: Welcome back to 'Ask the Attorneys'.
Today's topic is the top three types of trusts used in estate planning! Once again, I'm joined by Attorney Matthew Underwood and Matt is going to start us off with his top choice of one of the most popular types of trusts we see in estate planning.
Matthew: Well thanks Tom, you know one of the most popular trusts that we see in our practice and a lot of you probably heard of them already, these are called revocable trusts or revocable living trusts and there's a couple of advantages to revocable trusts. You know number one, they're really great, general tools, where we can organize clients’ assets and basically, pull everything together from real estate, bank accounts, you know, life insurance and make sure that all of our clients’ assets are kind of moving in the same direction and have a plan for them. So that's one of the reasons why we use a revocable trust, gives us a lot of flexibility, in a way to get things organized but, the two other reasons why revocable trusts are really important and also really popular, is probate avoidance. So revocable trusts are one way that we can help our clients avoid probate and we can have a trustee step in and basically carry out the wishes and that trust and we don't have to go to probate court to do that as long as we set up that trust properly. So probate avoidance is a big one but the, you know, the third major reason why a lot of people like revocable trusts are the ability to do asset protection planning and a couple other ways to say it would be dynasty trust, sometimes called or creditor protection trust and really what we're doing is we're taking our clients wealth and their life savings and we're giving that to our clients beneficiaries and when we talk about beneficiaries, it could be children, could be nieces and nephews, grandkids, could be charities but what we can do is take our clients wealth and life savings and move it to the next generation but do it in a way that, that inheritance will be protected just for the benefit of our beneficiaries. So for example, if you know, if a beneficiary, if one of our clients’ children were to get married and divorced in the future, we can make sure that an ex-spouse wouldn't be able to touch that inheritance that was left to the children. Another example would be maybe our clients have children and maybe high-risk occupations like a doctor, a lawyer, an engineer but if you know, the kids are doing those high-risk occupations and get sued because of a professional liability, we can make sure that no one else is going to touch that inheritance. Again we're locking the inheritance away for your intended beneficiaries and then general creditor issues, if creditors are after our beneficiaries for money or asking for money, we can make sure that creditors wouldn't be allowed to touch the inheritance either.
So really by setting up a revocable trust, oftentimes we're setting up separate trusts, you know, one for each of those beneficiaries and then if the people setting up that trust pass away, now our beneficiaries receive their separate trust and then again anything that we leave in those trusts, to our beneficiaries, is protected. Again, protected from lawsuits, creditors, divorce. So for that, for those three reasons you know, probate avoidance, organization, asset protection for beneficiaries, that's why revocable living trusts are one of the most popular types of trusts out there.
Thomas: Those dynasty trusts, you're saying, you can set those up right inside the bigger structure of someone's, the smith family revocable trust, correct? And that would then cover that situation, if my daughter gets married, let's say?
Matthew: Yes, that's correct. So you know, really how it looks to the client is the client is really setting up one trust but within that one trust future trusts might be formed. So for example, all the language on how you know, the son's trust works, all that language is going to be in that client's revocable trust and if clients pass away, now that language goes into effect and actually operates on that trust that we set up for the son. So we're going to build in all the language and parameters of how we want those trusts to work for our beneficiaries and for our children and then when the time comes, if, you know, one spouse passed away or the trust maker passes away, we'll have the money split out, according to that creator's instructions and then the beneficiaries will receive that inheritance in a way that, that trust creator intends and if it includes protection, you know that's a really powerful thing that the trust makers can do to add some extra value to that inheritance.
Thomas: I think that divorce and creditor protection is huge because I hear that come up a lot. People, when they work hard to build a legacy, they generally want to leave it to their child, not to a future ex-spouse and as you were talking about that, this type of trust would work regardless of whatever state the child ends up living in, correct?
Matthew: That's a good point. You know that child could be living in Wisconsin or decide to move to another state but the fact is wherever, wherever that beneficiary moves to, that trust can stay intact and operate you know, wherever that beneficiary is situated. So that's one of the benefits and one of the, you know, more flexible aspects of trust planning that we can do.
Thomas: yeah I thought of that because I get a lot of questions about, people are sometimes aware of marital property law, in Wisconsin which is a form of community property and but often children move around and there are other community property states, California comes to mind, some out west but there's also the other states who don't follow community property law and I know with inherited property, parents will bring this up with me but your option with building in that dynasty trust into their overall trust then that would govern regardless of what state the child ends up living in. So I think that's a really big value-added bonus to that.
Matthew: yeah, absolutely. You know I think we don't know what the future is going to look like, we don't know you know how our children, our beneficiaries are going to turn out or where they're going to end up, so really, what we can do is, we can plan for today and really outline what's going to happen in the future. So that, you know, when the time comes as we move further down the road, we know what's going to happen already because we planned it out and we decided how it's going to work. We're not leaving it up to state laws to decide how things are going to work. We want to empower our clients to make those decisions and set up their own plan.
Thomas: okay, great, so that's a top. Definitely I see revocable trust top use in my practice as well.
So I'm going to move on to my choice for number two which we don't talk about as often but are very important and that's a special needs trust and some people out there, you may have heard that term someone with special needs, you may have not heard specifically of a special needs trust but in general, a special needs trust is set up just like I said, for someone who has special needs and is possibly going to need government assistance throughout their life and that's someone with a disability, many situations, are older in life but what the special needs trust does is it sets up that money in a separate pool that can be used for the health maintenance and welfare of the person with special needs but it won't disqualify them from government benefits to which they would otherwise be entitled. So most of my clients, if they're planning to leave a gift to a grandchild or a son or daughter, they want it to be a blessing to that person, to enhance their life but they don't necessarily mean if they were to die tomorrow, they don't want their child to lose their Medicaid, Medicare Medicaid or social security benefits just because they happen to pass away, let's say, the parent passed away relatively young, right but some of these government programs have asset limits and if the child were to receive that money into their own account, they would become ineligible for government benefits for a period of time after which they'd had to reapply for government assistance. So what we can do with a special needs trust is set up the special needs trust to receive that money for the person with special needs and then name a trustee to manage the money and it can be used again to enhance their life, you know, if they need special accommodative items like a wheelchair, other things like that, you can use the special needs trust to buy that and also their health education and welfare and with special needs trust, piggybacking on Matt's point, what I often do in my revocable trust plan for people is I include a provision that says to the trustee, "hey Mr./Miss trustee, if anyone ever has special needs down the road and they're a beneficiary under my trust, create a special needs trust for them and put that money in there before you distribute it directly to them which would disqualify them from government benefits. So it's similar to what Matt was talking about, one reason we like using revocable trust is they're so flexible, we can build in all these options because sometimes, it's not even someone, when we're meeting with you, the client, it might not even be someone currently has special needs but they might have special needs down the road. Either a child develops a serious illness and becomes disabled or a future grandchild or something like that. So if we build in that flexibility for the trustee, they will know if anyone later has special needs, I can set up the special needs trust for them and that money will still enhance their life and then the other thing we can do with a special needs test is we can set up a stand-alone special needs trust too. Specifically for someone, let's say they're already born and we know they have the special needs and they're going to continue to have it for life, we can set up a separate trust and put the money right in there from the get-go and then the third point, I wanted to mention on special needs trust is, we can also use what's called a 'Pooled Trust' and that's where a bunch of trusts are managed in a pooled fund, for the benefit of people and in Wisconsin, we have a great organization called WisPACT, which we often use for this, they're a non-profit and they will manage the special needs trust, serve as the custodian of the money and that's really helpful to individuals who don't have, maybe a large sum of money to put in the trust but they still need to put it somewhere and have it managed in a professional way.
So in my practice with Medicaid planning and people already receiving government assistance, often that's one option we look at is we can set up a WisPACT trust for that individual.
So special needs trust is again, I don't have as many clients bring it up to me, I know that if you are a parent of someone with special needs, you likely have heard the term and heard about it but today I wanted to kind of cover how they work in depth and a little more in depth and also bring up how we can plan for someone, who may have special needs, that we don't even know about currently.
Matthew: Yeah those are great points Tom, you know, the only other thing I would mention and maybe this would make a little bit more sense with an example here but you know, let's assume that you know, mom and dad have $50,000 and they have, you know, one child with special needs, so you know one option is you know mom and dad just leave that $50,000, drop directly to that beneficiary with special needs and what would happen is that beneficiary will receive the $50,000, that would put the beneficiary over that asset limit, beneficiary would be disqualified from government benefits and so, really that beneficiary would have to spend through that whole $50,000, spend through that inheritance and then they could re-qualify for benefits. The problem is, you know, at the end of that, that beneficiary is no better off than they were at the beginning. They're back on government benefits and they don't have, you know, a fund for those rainy days. So in a better example, if we do planning, we give you know mom and dad can still give that $50,000 to their child with special needs but that child gets to keep that $50,000, sitting over here on the side and still keep their government benefits. So if that child has some, some extra needs along the way, maybe some new furniture, maybe they need to do some traveling, they'll have that fund that they can pull from, for those extra needs, even while they're still having you know, government benefits for their main needs. So I would just reiterate what you said Tom, that the special needs trusts are extremely valuable for those families that have that and also, building in those provisions, if, you know, those issues come up in the future too.
Thomas: yeah, no thanks, that's a great example and that's, that's exactly how we see it play out sometimes and I've even had people say things like they don't want an inheritance because they're worried about it, what will happen to their, because it can be a lot of work to get on to, qualify for a government program and they don't want to like you said, have sometimes, it's even a small gift, disqualify them for a period of three months, let's say. It's a huge hassle factor and for someone dealing often with health issues or other things with special needs, it's not something they look forward to dealing with.
So that's a, your example is the way the parents can bless the child instead of leaving a burden.
Matthew: right yep!
Thomas: so let's turn, Matt, to the third type of trust that we see in estate planning and I'll let you name your choice.
Matthew: Sure, so for the third trust we'll talk about today, I chose Irrevocable Trust and specifically, these are Irrevocable Medicaid Trusts, sometimes called Medicaid asset protection trust. So you know, even though there's a bunch of different names for this type of trust, there is one primary goal of this trust and that's to protect assets in the event that our clients end up in a nursing home and sometimes this issue comes up because maybe our clients have had their own parents, they saw their own parents, you know, have an extended stay in the nursing home, maybe their own parents have lost everything by being in a nursing home and just having to spend through their life savings to pay for the cost of care. So a lot of our clients, that's a concern where our clients say you know what, we've worked really hard to save up all the money that we do have, we want to make sure that that goes to our children or our church or other beneficiaries and if possible we don't want to lose everything if we end up going into a nursing home and so, planning for that is, is possible as long as we're planning far enough in advance really. Far enough in advance means we're looking at setting this trust up five or more years before our clients need to go to a nursing home or need to apply for Medicaid. So this type of irrevocable trust isn't necessarily an option for people that need to go into a nursing home tomorrow or maybe clients are already in a nursing home, so in those cases, we have some emergency planning measures we can put in place but a better option is to look at this situation far enough in advance, where we can put some planning in place and not have to rely on some emergency measures in the future.
So I wanted to tie our irrevocable trust back to the revocable trust a little bit because you know, aside from being able to give yourself some asset protection, so I can protect my assets if I go to a nursing home, for example. The other protection, we can set up asset protection for our children as well. So through that irrevocable trust, we can leave trust to our beneficiaries, much like we could under a revocable trust. So we can create asset protection for ourselves as well as our beneficiaries but the other type of protection comes from the fact that when you set up an irrevocable trust, you're often naming a third party trustee, so someone other than yourself will actually serve as trustee on this trust and so, not only does that give you protection against the nursing home but if any other liabilities or events come up, by having that third party trustee involved, you can make sure that the assets in that irrevocable trust will be you know, stay set aside for you and you know those other third parties looking for money, won't be able to get those funds. So there's a little bit more protection that you can build in with an irrevocable trust versus a revocable trust but that being said, there are some things you have to give up through an irrevocable trust. So you give up some of your access to your funds, so to gain that asset protection, you have to give up some control to your assets. So this is where you know, I don't want to speak for you Tom but when you know, when we meet with our clients, that's one of the things that we're discussing with our clients, you know, how to, what are the pros and cons of irrevocable trust, revocable trust and so really, our job is to learn about our clients’ goals and then figure out the best planning tool for our clients and then allow our clients to make that decision.
So that's why I wanted to talk about irrevocable trust because it's an incredibly important event to plan for long-term care protection and since it is so expensive, it's something that you really want to take a look at it, ahead of time and get the best planning in place before you ever need to go into a nursing home.
Thomas: Great, thanks Matt.
Yes, that was a great summary of the irrevocable trust. I think we you know, we could do a whole video just on how they work alone but today, the goal was to give folks an overview of these different types of trusts because sometimes they hear us talking about trust but maybe don't fully understand what these different types do. So hopefully my goal is if folks are looking at doing some estate planning, if you watch this video, you have a high level overview, so if you go sit down with your attorney and they throw some of these terms at you, you can remember this video and maybe a little bit about what we use each type of trust for and like Matt said, with any attorney, in my opinion, the goal should be sit down with them and they should talk about what are your goals and then help you use the right tools to put that plan in place to meet your goals.
Matthew: absolutely Tom, yeah I think this is, this isn't intended to give everyone you know, an in-depth view of every trust. That's really for future videos or a one-on-one meeting but we just wanted to give folks a general idea and so you know, I would just you know, reiterate what you said about goals there Tom.
So that's all for today! Thanks for joining us for this episode of 'Ask the Attorneys' and we'll see you next time.
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