Understanding Trusts in Estate Planning

September 15, 2022 by Erin Dunigan

Editor’s note: Information provided here is not legal advice. If you have a legal matter, please consult your own attorney.

Though discussing one’s eventual demise is not the most pleasant of topics, securing what happens upon passing is important. On August 11, nearly 260 people attended an “Understanding Trusts in Estate Planning” webinar hosted by the Board of Pensions. The webinar was in response to numerous requests received by the Board of Pensions to cover the topic of trusts in a more in-depth way.

Hosted by Jacqueline Boersema, Director of Financial Education for the Board of Pensions, the webinar was presented by Ashley Smalley-Ray, Assistant Vice President and Trust Officer with New Covenant Trust Company at the Presbyterian Foundation.

Smalley-Ray began the webinar asking participants if they currently had estate planning documents in place. About one-third of participants admitted to having no plan in place.

The basics 

Smalley-Ray started with a short list of plans everyone needs to have, no matter their circumstances.

“At the very minimum there are three documents that everyone should have,” Smalley-Ray said. Those are a will, a living will and healthcare surrogate, and a power of attorney.

“A lot of people think that estate planning is just having a will,” Smalley-Ray said. But these days, people live longer, and the need to plan for potential incapacity is much greater than it has been in the past, thus the need for the additional two documents to deal with long term incapacity.

“If you do not have a will when you pass away you are at the mercy of your state statutes,” she said. The requirements for wills vary from state to state, as do the specifics of the probate process.

Though a will is the cornerstone of an estate plan, there are often additional considerations in legacy planning, such as reducing estate and inheritance probate taxes, as well as charitable giving. These additional considerations are what make trusts an important estate planning component.

Benefits of trusts

Setting up a trust can provide various advantages. A trust allows the details of the estate to stay private. With a trust the only ones who become aware of the details of the estate are the trustee, the executor, and particular beneficiaries. A trust can also provide a method of avoiding probate, though not in all situations Smalley-Ray cautioned.

Additionally, a trust gives more control over where your assets go after your death, and what the beneficiaries can do with those assets when you pass. For instance, with a trust you can establish provisions that control the amount a beneficiary receives over time, with distribution provisions as to when the money is available as well as for what reasons. You might allow distributions for healthcare, education, job training, and other similar circumstances. 

Types of Trusts

There are two main categories of trusts: revocable and irrevocable. A revocable trust is used to manage trust assets during life as well as upon the upon the death of the person who created the trust. A revocable trust becomes irrevocable at the person’s death.

An irrevocable trust cannot be modified, terminated or amended, so it is important to be confident in your decision when setting up an irrevocable trust. Four categories of irrevocable trusts were highlighted during the webinar: Medicaid asset protection trusts, irrevocable life insurance trusts, special needs trusts and charitable trusts.

A Medicaid asset protection trust is a tool that protects certain assets from being required to be sold to cover long term nursing care. An irrevocable life insurance trust is created to minimize estate taxes, avoid gift taxes, protect government benefits and to protect assets.

A special needs trust is used to provide funds to recipients of Supplemental Security Income or Medicare without counting towards the income caps for either government program. The funds can be used for a variety of expenses such as medicine, transportation or other needs as long as they do not go toward housing or food.

A charitable remainder trust is an irrevocable trust that generates an income stream for individuals for a period of time. When that time is complete, the remaining trust assets are gifted to a charity or charities. (An example of a time period would be the life of the beneficiary.) A charitable remainder trust can be beneficial for assets that have gained a lot of value that could be subject to capital gains taxes. The beneficiaries of such a trust are often the donor themselves or their spouse. The payments can range between 5 to 50% of the assets but must provide the charity at least 10%. Distributions to a beneficiary are taxable.

Practical Advice

Talking about death can be a difficult subject, even with those to whom we are closest. “Instead of focusing on death the question you can ask is, “What legacy do you want to leave?” Smalley-Ray said. Thinking about what legacy you want to leave and who you would like to benefit from your estate can help guide the direction of the conversation.

Having your documents in order is also essential. “It is important to review all your accounts, how they are titled, beneficiary designations and create a list of your assets,” she said.

“You also want to understand how your estate will work at your death,” she said. “Read your trust and if you don’t understand it, ask for help.” If you do have questions and seek legal help, remember that even the nicest and best attorneys still charge by the hour. Have your questions written down and stay on topic.

Finally, unless there is a very good reason, make sure to share your estate plans with your family members so there are no surprises to be dealt with upon your passing.

Erin Dunigan is an ordained evangelist and teaching elder in the PC(USA). She is a graduate of Princeton Theological Seminary. She serves as a photographer, writer and communications consultant and lives near the border in Baja California, Mexico. In her free time, she is an avid gardener and leads horseback riding tours along one of the most pristine stretches of beach in Northern Baja.