Tuesday, October 16, 2018

Not All Accounts are Created Equal - Understanding what Different Trust Types Mean

Whether you are in the process of creating your estate plan or finding out you are the beneficiary of someone else’s planning, one thing is for sure – the variety of trusts can make things confusing.

For many clients, navigating different trust types can feel like making your way through a dark room. Trust Officers can light the way. Trust Officers are responsible for ensuring that day-to-day, and often generation-to-generation, trust terms are carried out as the person who formed the trust intended. Trust Officers are experts on each trust they manage, and are also knowledgeable about state law affecting trusts, fiduciary requirements, and tax implications. Hilliard Lyons Trust Company understands the level of sophistication trust administration entails. We have an, experienced staff of 15 Trust Officers, including six Certified Trust and Financial Advisors (CTFAs), representing 360 years of experience.

Not all trusts types are created equal, and it’s important to know what they can accomplish, what they cannot, and what to expect if you become connected to a trust as a trustee or beneficiary. Trust Officers are here to help.

Revocable Trusts

A revocable trust is a trust you establish during your lifetime. You retain the right to change or revoke the trust as long as you are alive. In a typical revocable trust, the grantor (person who created the trust), the beneficiary, and, often, the trustee are the same person. You pay taxes on the income your trust earns just like you would if it was in an investment management account. A well-drafted revocable trust will accomplish three things:

  • Tell the trustee who to support financially while you are alive;

  • detail what happens if you become incapacitated or if you plan on traveling for an extended period; and

  • set out what happens to the trust at your death (when it becomes irrevocable).

A revocable trust can also provide privacy and convenience by avoiding probate. Real estate not owned within a trust is always subject to probate in the state where it is located, and a will is always subject to probate in the individual’s state of residence. Both become a matter of public record – unlike trusts.

Irrevocable Trusts Under Agreement

An irrevocable trust is just what you would expect – a trust that cannot be modified or revoked. Most trusts handled by Hilliard Lyons Trust Company are irrevocable trusts, and they can come in many different types. A revocable trust becomes irrevocable when the grantor dies – or a grantor can also decide to create an irrevocable trust during their lifetime to “lock in” then-favorable estate tax exemptions.

Common to all is that both the trust document and state law determine what is and is not allowed. The trust document may contain provisions that prevent a creditor, an ex-spouse, or plaintiff from reaching the trust’s assets. The document may further prevent access to the trust assets by a child who has a substance abuse addiction (though the trust may permit funds to treat the addiction). Further, the document may guide distributions that were consistent with the grantor’s values, such as promoting higher education. A Trust Officer must be able to decipher a trust document that can exceed 100 pages and understand how state law applies.

A beneficiary of an irrevocable trust may have rights under the terms laid out in the document, subject to state laws and fiduciary standards. As many trust beneficiaries find out, grantors can exert quite a bit of control from beyond the grave through their trusts.

Irrevocable trusts commonly provide for a beneficiary’s support, maintenance, health, and education, but the specific terms of the trust can modify that standard quite a bit. Some trusts cover only health care, while some cover only education costs. A trust may require proof of employment or a completed college degree before a beneficiary can receive funds.

Alternatively, an irrevocable trust can provide for more than health, education, and support, such as funds to start a business or for a down payment on a home. The Trust Officer’s role is not to impose their own opinions and values, but to make sure that the grantor’s wishes are fulfilled in the manner that the grantor defined in the document.

A trustee of an irrevocable trust is responsible for attempting to ensure that there are funds available to support a beneficiary for that person’s entire life (or whenever the trust terminates) as well as providing for remainder beneficiaries as provided for by the trust document. Because of this duty, it is important for beneficiaries to know what the trust covers when it comes to their support, and to be aware that the trust can distribute only so much per year before depletion becomes an issue.

Irrevocable Trusts Under Will

An irrevocable trust under will is another type of irrevocable trust, and it is similar in many ways to an irrevocable trust under agreement. But a trust under will is created only at the grantor’s death, and all the terms governing it are contained within the will.

Charitable Trusts

Charitable trusts come in many forms, and can provide great tax advantages for those who are charitably inclined. Timed appropriately, charitable trusts can be great vehicles for clients who may be selling a business or who have other events that could cause a large one-time tax liability. A charitable trust can also be used to diversify a concentrated portfolio with little immediate tax effect. They also help guarantee that the donor’s wishes are followed and create an enduring legacy.

However, because charitable trusts must adhere to precise rules, Hilliard Lyons Trust Company can serve as trustee providing both independence and expertise to protect the donor, charity, and donor’s family. Without this guidance, a charitable trust may be subject to tax, penalties, or even lawsuits. A Trust Officer addresses these challenges and preserves the grantor’s legacy, even if an original charity dissolves, merges, or ceases to exist (for example, we all hope that one day there will be cures to diseases like diabetes and cancer).

Life Insurance Trusts

Life insurance trusts can be thought of as an envelope around life insurance that keeps the proceeds out of the insured’s estate. They may not be appropriate for every client, but can be helpful in some situations. A Trust Officer helps ensure that these advantages are not lost by sending and preserving required gift letters and making sure premium payments on the policy do not lapse.

Traditional & Roth IRAs

Hilliard Lyons Trust Company can serve as trustee for these tax-advantaged retirement accounts, even though they are not actually trusts. A Trust Officer manages the account through its life cycle, helping maneuver tax requirements such as contribution limits during the client’s career and required distribution amounts during retirement.

Estate Settlement

A service provided by Hilliard Lyons Trust Company that might involve one or more of the above account types is estate administration. Estate administration involves a common type of fiduciary known as the “Executor” or “Personal Representative.” Subject to geographic limitations, Hilliard Lyons Trust Company can often administer your estate.

Clients find this useful for many reasons, such as if no close relative lives nearby, if relatives serving would create undue stress, or if a person making estate plans wants to maintain privacy even after death. In these cases, our Estate Settlement Officers will represent the estate in probate court, distribute assets according to the will, coordinate sale of real or tangible other property, and oversee all tax filings.

As you can see, the variety of trust types, distribution requirements, legal documents, and state laws are a complex labyrinth. Professional Trust Officers guide those creating trusts and those benefiting from them so that laws and the wishes of the grantor are followed. If you have any questions about the services supporting your relationship with Hilliard Lyons Trust Company, please contact your Wealth Advisor or your Trust Officer.