Raskin Planning Group

Estate Planning (Part 1): Does a Young Couple Need a Trust?

{6 minutes to read}

Estate Planning is the process that helps you determine how and when your estate is transferred during your lifetime or at your death. While your estate consists of property such as bank accounts, stocks, bonds, real estate, life insurance, businesses, etc., the goal of estate planning is to ensure the wellbeing of the people you love. This is accomplished by carefully considering your heir’s future needs and potential circumstances.

It can be a simple or complicated process depending upon your situation and objectives. However, the process can become even more complicated when local, state, and federal laws are introduced. Without a thoughtful and legally documented plan, your estate will be distributed to heirs according to the laws in the state in which you reside, which may not meet your family’s needs and your overall objectives.

What is a Trust?

A trust is a tool that is often used to help individuals and families meet their personal objectives. A trust is an entity created under state law that holds property and manages assets in accordance with the terms spelled out in the trust document. The entity can have a life beyond the person who created the trust (called the grantor). The trust can be established during the grantor’s lifetime or at his or her death. The beneficiary is the person (or sometimes, persons) who benefits from the income or assets distributed from the trust. A trustee is someone who administers the trust.

Does a Young Couple Need a Trust?

John and Sally are married, in their late-30s, and employed with two young children. Their assets include:

  • investment and retirement accounts valued at $250,000;
  • a $750,000 home; and
  • term life insurance policies for $1,000,000 each.

John and Sally are good savers who are focused on higher education for their children and their own retirements. They have simple “I love you” wills: all of their individual and jointly registered assets will pass to the surviving spouse and, if they are both deceased, the assets will transfer to the children at age 18.

Observations:

In the event of John’s death, Sally would have sufficient assets (totaling $2,000,000) to meet her future objectives. However, what would happen if Sally were to remarry and the second marriage ended in divorce? It’s possible the $2,000,000 could be considered marital property and subject to the claims of the second spouse. In the divorce settlement, it is possible some portion of Sally’s assets will need to be transferred to the new x-spouse. If Sally dies after remarrying, the new spouse might inherit all of Sally’s $2,000,000, plus her $1,000,000 of life insurance. In both instances, John and Sally’s children might be completely or partially disinherited from John and Sally’s $3,000,000 estate.

If both John and Sally died, the two children would inherit $3,000,000 of assets outright. Who would manage these assets while their children are minors? John and Sally might want someone independent of the children’s guardian to make financial decisions on their behalf. Moreover, when the children are at the age of majority (18 in most states), would John and Sally feel comfortable giving their children access to $1.5 million each? Will the children have enough maturity to handle that responsibility? This may be an unfair burden and many families will want to avoid this situation.

Is a Trust the Solution?

John and Sally can each establish a trust for the benefit of the surviving spouse and the children. In this case, if John were to die, his share of the estate would be transferred to a trust. Sally would be an income beneficiary of the trust and the trust principal can be distributed at the discretion of an independent trustee. Trust assets can be protected from creditors (like Sally’s second spouse in the example above). Upon Sally’s death, assets can be held in trust for the benefit of the children until they are more mature. The trustee could be someone independent of the children’s guardian, providing financial oversight.

In this situation, the trust may not be funded (it may not have any property) until the first death. While the grantor (John or Sally) is still alive, the trust is “revocable.” It can be changed or amended as circumstances and estate planning laws change. At the grantor’s death, the trust becomes irrevocable and cannot be changed. However, a thoughtfully drafted trust document can offer beneficiaries and trustees appropriate flexibility.

John and Sally’s estate isn’t large enough to incur any federal estate taxes (under current law), but the trust arrangement described above can help reduce state estate taxes.

Trusts can offer a young family significant protections and benefits from many unforeseen situations. It is best to have open and frank discussions with your family, your financial advisor and estate planning attorney.

Please contact us at the Raskin Planning Group and we can guide you through the process.

Peter Raskin is a registered representative of Lincoln Financial Advisors. Securities and advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer (Member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies. Raskin Planning Group is not an affiliate of Lincoln Financial Advisors. CRN-1442513-031416

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