When it comes to estate planning, there are so many moving parts. What documents are needed to protect your family and your assets? Does the size of the estate matter? What about if you have children with disabilities? While you may think creating a will is the fix-all you need to your estate plans, there is quite a bit to consider. You may need a trust. The Scranton estate planning attorneys of Mazzoni Karam Petorak & Valvano explain.
Do I need a will, trust, or both?
Many families panic when they begin the estate planning process. Often, we believe that more is better–more documents, more coverage, more cost. But that actually may not be necessary.
In almost all cases, you need a will in place. In Pennsylvania, if you pass away without a will, it means you have died intestate. This means that all of your property will be distributed according to state intestacy laws, giving your assets to your closest relatives and children.
So while everyone needs a will, not everyone needs a trust. However, having a trust is a rather attractive estate planning measure, especially if you want to avoid taxes, have a loved one with special needs you’d like to care for after you pass, or have a charity or organization you are passionate about.
Types of Trusts
Trusts are not one-size-fits-all. That’s why you need an experienced estate planning attorney who can guide you through the process of creating a trust that is specific to you and your family’s needs.
Living trusts, also known as revocable trusts, are created during an individual’s life that can be changed or terminated at any time. The assets of such a trust are taxed as assets of the grantor for both income and estate tax purposes. These trusts are commonly used to avoid probate, protect privacy, and as a means of continued management in the event of a disability. These are very commonly used in conjunction with a pour-over will as a basic estate planning document.
Any trust can be revocable by the person who created it. However, when the only person who can revoke has died, the trust becomes irrevocable.
Testamentary trusts, also known as an irrevocable trust, is a trust that cannot be changed once it is created. The rules established at the time of creation will govern who can access the assets in the trust, when they can access them, and for what reasons. It will also set who is responsible for managing the trust and when the trust will terminate. This type of trust is often used for asset protection and tax avoidance.
Irrevocable trusts cannot be terminated by anyone. But, when assets of the trust are spent or no longer exist, the trust no longer exists.
Grantor trusts are somewhat broad as a trust either is or is not a grantor trust. But there are gray areas. A grantor trust is a trust where the person who created it is taxed by the IRS on any income earned by the trust. These trusts are used for three primary purposes: probate avoidance, asset protection, and income tax reduction.
More or less, a grantor trust is one in which the person who established the trust has retained one or more of the elements of control as listed in the federal income tax code.
Special Needs Trust
Special needs trusts are those created for individuals with physical and/or mental disabilities. These trusts are created when the donor is alive and is often created within a will.
The trust allows the donor to continue to provide care for the beneficiary while still allowing the beneficiary to qualify for federal programs such as Supplemental Security Income, Medicaid, and low-income housing.
Medicaid Trust (Income Only Trust)
A Medicaid trust is an irrevocable trust established for the purposes of having assets in place should the individual need skilled nursing care in the future. Restrictions built into a Medicaid trust work to prevent the assets from disqualifying the creator from medical assistance and protect them from estate recovery.
A charitable trust is created for the financial benefit of one or more nonprofit organizations. There are two types:
- Charitable Lead Trust: These trusts pay a set amount/percentage of the trust annually to one or more charities each year for a certain period. The remainder goes to another beneficiary.
- Charitable Remainder Trust: This type of charitable trust provides a set amount or percentage to one or more heirs for a certain period, with the remainder going to charity.
I think I would like to utilize a trust. Where do I start?
If you would like to create a trust for the benefit of your loved ones or another organization, you’ve come to the right place. Trusts can be complicated if you draft them alone, often leaving holes in the documents which may leave your family susceptible to unwanted taxes.
To start creating a trust, you first need to:
- Gather any information on your assets
- Determine who you want to be a beneficiary
- Decide who will manage your affairs if you have minor children
- Gather any paperwork you need
However, this may seem like a lot to do on your own. But the Scranton estate planning attorneys Mazzoni Karam Petorak & Valvano can guide you through the process.
Mazzoni Karam Petorak & Valvano: Trusts
If you are in need of a will or trust, the Scranton estate planning attorneys of Mazzoni Karam Petorak & Valvano are here for you. Contact the Scranton estate planning attorneys of Mazzoni Karam Petorak & Valvano today.