WILLS & TRUSTS. A Primer

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1 WILLS & TRUSTS A Primer

2 This page: (labrlo / Getty Images) Cover image: (amenic181 / Getty Images) WHAT WILL YOUR LEGACY BE? Your will and/or revocable living trust is the foundation of your estate plan. These documents specify your wishes for managing your estate after your death. Primarily, this involves a plan for distributing your assets (money, real estate and other property). Your will also contains provisions for the care of your minor children. For most people, a will is the first choice for passing on an estate to heirs. But it s not the only choice. Among other estate planning tools, the revocable living trust is gaining in popularity. In addition to being one of several ways to avoid probate the legal process that determines whether a will is valid living trusts may offer other advantages.

3 WILL OR TRUST: WHICH IS RIGHT FOR YOU? Both a will and a living trust contain your inheritance instructions, meaning who gets what, when and how but revocable living trusts do have certain advantages: Maintaining privacy A will is a public document filed with the probate court, and anyone can go to the court and read it. A revocable living trust document, on the other hand, is not filed with the probate court, thus protecting the privacy of your family and other beneficiaries. Avoiding probate Placing all your assets in a revocable living trust eliminates the need for your estate to pass through probate court before it can be passed on to your heirs, significantly reducing court supervision and the time and costs for settling your estate. Providing for incapacity A living trust can provide you with the peace of mind that comes from knowing that your assets and heirs will be protected in the event that you unexpectedly become unable to handle your own financial affairs. Even if you have a revocable living trust, you still need a will, but the will is much simpler. This will is referred to as a pour-over will, because it states that any remaining assets not previously transferred to the living trust are transferred ( poured over ) into the existing trust. Although trusts have many advantages, the disadvantage of a trust is that it can be costly to establish and maintain. It must also be carefully drafted to avoid problems later on. (borchee / Getty Images)

4 MORE ABOUT TRUSTS (stevecoleimages / Getty Images) Many other kinds of trusts can be useful estate planning tools. Here is a brief description of some of the most common types of trusts: A testamentary trust is established by a provision in your will. It does not exist until you pass away. This type of trust is most often used to leave assets in trust for the benefit of a minor child (or other minor beneficiary) until he or she reaches a certain age, or to protect assets for a beneficiary who might not manage them effectively. In addition, testamentary trusts are used in certain estate plans to minimize or eliminate transfer taxes. Example: Mark and Sheila have one young child, Alice. In their wills, they ve left everything to each other and named Alice as an alternate, in case they die at the same time. However, because Alice is a minor, they need to choose someone to manage Alice s property until she is old enough to do it herself. After considering the options, they decide to include a testamentary trust in their will naming Mark s sister Jenny as trustee. If Mark and Sheila die, their property will pass into the trust for Alice and be managed for Alice by Jenny.

5 A special needs trust provides for a beneficiary with a disability and receives a government benefit, such as Supplemental Security Income (SSI). A special needs trust must be irrevocable and can be set up to provide income to the beneficiary without adversely affecting SSI benefits or Medicaid eligibility. Example: Donna and Edward have two adult sons. Charlie, born with Down syndrome, has lived with his parents all his life. His younger brother, Jeff, is married with two children. Donna and Edward are concerned about how to provide for Charlie after they are gone without jeopardizing the government benefits he is due. They create a special needs trust to benefit Charlie, with Jeff as the trustee. In this way, the assets of the trust are not held directly by Charlie and are not subject to the limitations imposed by government agencies when calculating benefits due a person with a disability. (srhtkn / Getty Images) A life insurance trust removes the value of a life insurance policy from your estate to reduce estate taxes. A life insurance trust must be irrevocable, and the trust must be named the owner and beneficiary of a life insurance policy during the policyholder s lifetime. That way, upon the policyholder s death, all death benefits from the policy are excluded from the policyholder s taxable estate for estate tax purposes. Example: Jane is the mother of three minor children. She has a $2 million life insurance policy and personal assets worth another $2 million. Her estate plan is structured so that when Jane passes away, her life insurance company pays the policy to her irrevocable life insurance trust, which is the owner and beneficiary of the policy. According to the terms of her trust, her husband will receive income from the trust for as long has he lives. If he requires additional funds, the trust provisions allow for payout of the principal. When her husband passes away, whatever remains in the trust is payable directly to the children, with no estate tax liability. A charitable remainder trust can provide a lifetime income for you, your spouse or partner, or someone else, with the remainder going to one or more charitable organizations like Earthjustice. A charitable remainder trust must be irrevocable,

6 though you may retain the right to change the charitable beneficiary. Earthjustice won t receive any benefits until after the death of the income beneficiaries or at the end of a specified term of years. A charitable remainder trust can help you carry out your personal and philanthropic objectives in a tax-efficient manner. Example: Susan and Tom have two children and four grandchildren. They are worried about the fate of our planet and want to ensure a healthy environment for generations to come. They d like to make a gift to Earthjustice, but also need income in the future. The couple creates a charitable remainder unitrust with annual lifetime payouts equal to 6 percent of the fair market value of the trust assets, as determined at the end of each year. They fund the trust with $250,000 in stock, which they originally bought for $85,000. There is no capital gains tax due on this transfer. The stock paid annual dividends of $5,000. The first year, the couple receives $15,000 from the trust, tripling the previous income. They are eligible for a federal income-tax charitable deduction in the year they create and funds the trust. At the end of the trust term (in this case, after their lifetimes), Earthjustice will receive the trust s remaining assets. HOW ARE TRUSTS USED? Trusts have many uses, including: As a vehicle for your estate assets, designed to hold and manage your property for the benefit of your heirs after your death As a receptacle for life insurance proceeds to be collected upon your death For the professional management of your investments, such as stocks and bonds, real estate, etc., during your lifetime As a means of providing for your child s education or for the care of a handicapped dependent For use in conjunction with your retirement planning As protection against the mismanagement or non-management of your assets if you become temporarily or permanently unable to manage them yourself (thus avoiding a court guardianship proceeding) As a tax-saving device As a way to support or provide financial assistance to a charity or cause like Earthjustice

7 USING THE RIGHT WORDS If you have decided to leave a gift in your will or trust for Earthjustice, we suggest the following language: I hereby give (percentage, residuary, share or specific amount or asset) to Earthjustice, 50 California Street, Suite 500, San Francisco, CA Earthjustice Tax ID: Leaving an unrestricted gift to Earthjustice enables us to address the biggest challenges and opportunities we ll face at the time we receive your gift; however, we also welcome gifts to support areas of our work, such as wildlife and wilderness protection, healthy communities, or clean energy and climate change. We would be delighted to discuss ways to provide for the work you care about most and to create a statement of intent that ensures your wishes are honored. If you have left a gift for Earthjustice, we hope you will let us know so that we can thank you and welcome you to the Evergreen Council, a group of exceptional individuals who have made Earthjustice and protecting our planet a part of their lasting legacy. (fotovoyager / Getty Images) For more information: Planned Giving Team 50 California Street, Suite 500, San Francisco, CA (800) or legacy@earthjustice.org