Wills & Trusts
Documenting Your Decisions
Most People know what a Will is, but most are not familiar with a Trust.
A Will generally says who will inherit, and what, after the creator of the Will dies. Usually it also appoints someone to carry out those wishes (the Executor). The major downside is that a Will still requires a court procedure (call “probate”) in order carry out the wishes of the deceased. Probate can be a very costly and drawn out process, often times costing tens of thousands of dollars and taking at least 9 months to complete (it is not uncommon for it to take 2-3 years). Because of the costs and delays, most people would prefer it if their death did not require their family to go through the probate process.
A Trust can be administered without having to go to court (i.e., it “avoids probate”) and because of this, Trusts are frequently used as a substitute for a Will.
A Trust is usually created with a document that governs how the Trust will be administered (sometimes called a “trust agreement” or “declaration of trust”). In the context of estate planning, the governing document will say who is in charge of managing the trust property and who will get to use or have the trust property.
Trusts are extremely flexible and can be used to achieve a variety of different goals and outcomes, which is why they are so highly recommended by estate planning professionals. The main reasons people create trusts are to avoid probate, minimize estate taxes, provide a layer of asset protection, and/or placing restrictions on inheritance (usually to prevent an inheritance from being distributed to a young beneficiary).
Special Needs Trusts
A Special Needs Trust is a specific type of trust that helps avoid a situation where a beneficiary is forced to choose between receiving their inheritance and staying eligible for public benefits (usually SSI, housing assistance, Medicare, or Medi-Cal). They can also be used to help protect a beneficiary from themselves, usually when there are substance abuse concerns or other situations where a beneficiary might be harmed if they receive a large inheritance all at once.
Special Needs Trusts can also be used for people receiving a personal injury settlement if receiving a large sum of money would disqualify (or reduce) public benefits the injured person is receiving.
A Special Needs Trust preserves a beneficiary’s public benefits by allowing the trustee to make distributions from the trust in a way that doesn’t result in money going directly to the beneficiary. Usually this is done by buying things for the beneficiary that aren’t included in the eligibility calculations for the government benefits.
Since there are many different public benefits programs and multiple ways to qualify for each program, it is important for the trustee of a Special Needs Trust to understand what types of distributions are allowed and which can jeopardize the public benefits eligibility.
Asset Protection Planning
While everyone would like to protect all of their assets from future creditors or potential liability down the road, there are significant limitations and trade-offs that come from this type of planning.
In general, in California, the person that creates a trust cannot both be a beneficiary of that trust and protect the trust property from their creditors (though this may possible in some other states and countries).
The main trade-off ends up being receiving protection for some assets at the cost of giving up control over those assets. As an example, if someone creates an irrevocable trust for the benefit of their children and has someone else be the trustee, the assets transferred to that trust would not be reachable by the trust creator’s creditors.
The other obstacle is avoiding allegations of “fraudulent transfers” or transfers made with the intent to hinder, delay or defraud a creditor (which allows the creditor to undue the transfer). The main ways around this are to transfer property when there isn’t any pending liability, the transfers are made in exchange for equal fair market value, and retaining sufficient assets to support oneself.
For married couple, there is often more asset protection planning that can be done (when compared to non-married individuals). This usually involves transferring assets from a “high-risk spouse” to a “low-risk spouse” and allocating the assets based on their risks. The goal in this type of planning isn’t to be able to protect all assets from all creditors, but to create a safe-haven for some assets to serve as a “nest egg” that can’t be easily reached by creditors. The specific assets and potential risks are really the driving factors in determining how best to create an estate plan that incorporates asset protection planning elements into.