What is a trust? In its simplest form, a trust is a fiduciary arrangement that allows a third-party, the trustee, to hold legal title to certain assets on behalf of another, the beneficiary, who holds the beneficial interest to the assets. Trusts can be arranged in many ways; each being designed to help achieve a specific goal.
In estate planning, we encounter a myriad of trusts – there are charitable trusts, insurance trusts, Crummey trusts, supplemental needs trusts, spousal lifetime access trusts, grantor retained interest trusts, and the so-called intentionally defective grantor trusts, to name a few.
However, the most common (estate planning) trusts are testamentary trusts, which are created and funded under one’s Will, upon death, and inter vivos, or living trusts, which are established during one’s lifetime. But wait; given the current status of the estate, gift, and generation skipping transfer (“GST”) tax exemptions, you might ask, “are trusts still a relevant part of estate planning?” “Can a good estate planner continue to trust in trusts?”
The passage of the Tax Cut and Jobs Act of 2017 substantially increased an individual’s exemption for estate tax, gift tax, and GST tax, and in 2019, each citizen, as well as all resident non-citizen’s, has an $11,400,000 exemption for purposes of gift, estate, and GST tax, and married couples would have a total exemption of $22,800,000! The incredibly high exemption amount has caused a definite shift in the use of testamentary trusts; moving the primary focus of estate planning, for many clients, from estate tax planning, to income tax planning.
Now, often, the high exemption amount, coupled with the availability of portability for a deceased spouse’s unused exemption has led to a landscape where a traditional simple pecuniary QTIP/bypass trust is no longer the ideal plan for the average married couple of moderate wealth, but this does not mean that testamentary trust are out of the picture. Rather, flexibility is the key.
To achieve an optimum level of flexibility, while planning for the eventual sunset of the TCJA in 2025, many planners are recommending a “QTIP-able” Trust. The QTIP-able Trust is one that allows the executor to elect between treating all, or a portion of the trust property, as qualified terminable interest, or QTIP property, or even to forego the aforementioned election and treat the trust as a traditional bypass trust.
This plan optimizes flexibility, allowing for estate tax planning, as well as allowing for the minimization of capital gains tax, by way of the basis adjustment for assets that would fund the QTIP trust, and the trust can still protect the estate tax exemption if that is a required need at the time of the client’s death.
Further, downstream testamentary trusts are still a very valuable tool in protecting the beneficiary as it pertains to creditors, including judgment creditors, and this can be very important to a client, especially as it pertains to the possibility of divorce for a future beneficiary. Thus, as you can well see, there are still many reasons, even if a post-TCJA world, for the estate planning practitioner to trust in testamentary trusts.
So, what about living trusts? Given Texas’s relative ease of probate, do these trusts still have a place within the arsenal of the modern estate planner? The answer is, of course, yes. Many practitioners will encounter a prospective client who is convinced that he must have a living trust. This is typically the A-B trust structure, which creates a joint revocable trust, followed by a survivor’s trust, and distribution of the decedent’s estate (usually pursuant to a bypass/martial trust formula) upon the first spouse to die, and then a complete distribution, either in trust, or outright to descendants upon the death of the surviving spouse.
Typically, these clients come from California, Florida, or another state with rather onerous probate systems. Sometimes, they have just heard that probate is bad, and should be avoided at all costs. And then there are some who look to a living trust as a vehicle of privacy. However, the utilization of a living trust as a substitute to traditional estate planning is not typically a necessity in Texas.
First, the ability to provide for an independent administration allows for a smooth and relatively simple probate process. Second, the use of an affidavit in lieu of inventory can maintain the level of privacy that many clients only associate with the living trust.
Moreover, the living trust is a life-long endeavor, and must be adequately maintained if one is to avoid probate all together. The goal is to place all of the client’s assets within the trust, but unlike traditional estate planning, which looks to the decedent’s estate at the time of death, the living trust must be constantly funded with each new asset acquired during the client’s lifetime, and any titled assets must be titled in the name of the trust.
If this does not occur, and the decedent is left with assets in their estate at the time of death, the client’s estate must still be probated, and this has the distinct possibility of resulting in additional cost for the client or her family, and this is one of the reasons that I typically do not recommend the use of living trust as an alternate to traditional estate planning, but that does not mean that a living trust is no longer a useful tool.
I prefer the use of what I refer to as the inverted living trust plan. It is inverted because, instead of having pour-over Wills that fund the trust upon the decedent’s death, this setup causes the trust to terminate upon the decedent’s death and fund their estate. This is especially useful with elder clients, or clients that have the risk of future diminished capacity. In such a case, employing the use of a living trust allows the trustee to act as a barrier, preventing a third-party to take advantage of a person who might otherwise be considered a vulnerable target.
The types of trusts discussed, and the advantages listed above are not exhaustive. Trusts are flexible, varied, and complex. A good estate planning attorney should continue to trust in trusts as a vehicle to be tailored to the client’s specific circumstances and unique needs, such that the trust will compliment a client’s overall estate plan. Matthew Williamson