Maroney Law Blog

Tuesday, January 4, 2011

Protecting Your Estate: Testamentary and Living Trusts

In our last blog, we stated that:
“Through the use of trusts, both living and testamentary, an individual can plan to mitigate their estate tax liability.”
Today’s blog will address the differences between Testamentary and Living Trusts.
Testamentary Trusts
A testamentary trust is a trust that is established in a person’s last will and testament, hence the term “testamentary.”  The trust language is set forth in the last will and testament and the trust is not “funded” until the testator passes away.  At that time if the contingency set forth in the last will and testament, such as the minor child is still a minor at the time the testator passes away, then the trust will be funded accordingly.  Funding a trust means placing the asset, whether it is a hard asset or liquid asset, into the name or term of a trust.
Living Trusts
A living trust is a trust that is set up during a person’s lifetime, hence the term “living.”  Living trusts come in two forms, revocable and irrevocable.  Both forms enjoy the benefit of having the assets held in the trust pass outside of probate.  This is a very useful tool when the beneficiaries of the estate are likely to be in dispute as a trust is more difficult to challenge than a probate of a last will and testament.  Also, the fact that the assets will pass outside of probate is a benefit when some of the assets are located out of state.  For example, a New York resident who owns a condominium in Florida will allow his family a much easier transfer of that condominium if it is owned by a trust instead of by the individual.  If owned by the individual, the family would have to probate in Florida.
The difference between a revocable trust and an irrevocable trust is a matter of control.
  • A revocable trust will allow the person establishing the trust to control the assets until such time as he or she becomes incapacitated or passes away.  While this allows control, it does not protect the asset relative to estate taxes or the devastating cost of long-term care.  That is, if the person controls the asset until he or she takes his or her last breath or needs long-term care, then the asset is not out of his or her name.
  • An irrevocable trust is very useful for protecting assets against estate taxes and/or the cost of long-term care.  However, the challenge to an irrevocable trust, at least for some people, is that the person establishing the trust and funding the trust must give up control of the asset(s) placed in the trust.
There are other rules relative to irrevocable trusts and how they might best benefit the person establishing them.  For example, if the purpose of a trust is to protect an asset or assets from the cost of long-term care, which is also known as an asset protection trust or a Medicaid trust, the asset may not be touched by the person establishing the trust and any income generated by the asset must be paid to the person establishing the trust.
Likewise, another useful tool is an irrevocable life insurance trust, which will allow the beneficiary to avoid not only income tax, but also estate tax.  Certain rules must be followed, however.  For example, the person establishing the trust cannot directly pay the insurance premiums.  Instead she or he should make a donation to the trustee, who will offer that amount of money to the beneficiary of the trust.  The beneficiary will waive their right to the money, at which point, the trustee will pay the life insurance premium.
Which is the better choice?
The question arises as to which is the “better” type of trust.  The answer depends upon the wishes and needs of the person establishing the plan.
  • If estate taxes are not an issue, and the person establishing the trust wishes to retain control over the assets, and does not have an issue relative to the devastating cost of long-term care (likely due to the fact that she or he has a long-term care insurance policy), then a revocable trust will work just fine.
  • On the other hand, if a person has significant wealth such that there will likely be a substantial estate tax impact on death, and/or is unable or unwilling to secure long-term care insurance, then an irrevocable trust would be the way to go.  This would remove the assets from the estate for the purposes of being counted toward long-term care and/or estate taxes.
This explains some of the similarities and differences between testamentary trusts and living trusts, both irrevocable and revocable in nature.
If you have any questions about these types of trusts, or any other matter, please feel free to contact us for a consultation.
Matthew J. Maroney, Esq
Cristina Prieto-Maroney, Esq
Maroney Associates, PLLC
Phone: 631-881-0877
Fax: 631-881-0874

Based in Melville and Garden City, New York, the attorneys at the Law Offices of Maroney Associates, PLLC assist clients throughout Nassau County, Suffolk County, Queens, and the cities of Mineola, Hempstead, New Hyde Park, Franklin Square, Williston Park, Queens Village, Melville, Huntington, Farmingdale, Patchogue and Uniondale, NY.

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