Should a Trust Be Part of My Estate Planning?
SHOULD A TRUST BE PART OF MY ESTATE PLANNING – EXAMPLE 1: HUSBAND AND WIFE WITH MINOR CHILD
Let’s say that there’s a young father with a wife and a young son, who owns a home and a Roth IRA account, with a few stock investments. On the stock investments, he’s filled out the beneficiary designation forms passing all his assets to his wife and son, should anything happen to him.
This father owns one-half of the home as community property between him and his wife. His wife owns the other one-half.
Does he need to set up a separate trust, if most of his assets pass through beneficiary designations?
Nj.com’s recent article entitled “Do I need a trust in case something happens to me?” says that leaving assets outright to a minor is typically a bad move. The son’s guardian and/or the court would take custody of the assets, both of which require significant court oversight and involvement.
However, in Louisiana, this would not be the rule. Under Louisiana law, community property is owned one-half by each spouse. If the father dies without a will or a trust, then his undivided one-half would be inherited by the son, subject to a “usufruct” in favor of the wife, the surviving spouse. In this case, a usufruct means that the wife would be able to use the husband’s one-half of the property until she dies or remarries. She would own her own one-half interest in the house.
SHOULD A TRUST BE PART OF MY ESTATE PLANNING – EXAMPLE 2: DIVORCED HUSBAND OR WIFE WITH MINOR CHILD
If however, the father (or mother) is single, then the minor child would inherit the house outright. In other words, there is no community property. This could be tragic, particularly since the ex-spouse would be the sole “tutor” (in other states, called a guardian) of the child. Under Louisiana law, THE EX-SPOUSE WOULD HAVE THE LEGAL POWER TO SELL THE HOUSE (on behalf of the child), AND USE THE PROCEEDS ostensibly for the benefit of the child.
How many single parents do you know of that would like their ex-spouse to inherit their property (through their minor children, of course)? I certainly don’t know of any.
This situation can be avoided with with either a “living trust” established and funded now, or through a “testamentary trust” established through the Last Will and Testament, and would be created at death.
The trust would give the power to a trusted family member to sell the house (or maintain it) for the minor child until the minor child reaches the age of majority (18 under Louisiana law).
But not even all children who reach the age of 18 can be trusted with assets. So consider Example 3.
SHOULD A TRUST BE PART OF MY ESTATE PLANNING – EXAMPLE 3: DIVORCED (OR MARRIED) HUSBAND/WIFE WITH MAJOR CHILD WHO IS IMMATURE OR IRRESPONSIBLE
Do you know if your minor child will be mature enough to handle assets at age 18? Do you know for sure if he or she will have a substance abuse problem? Even for a child without any problems, that corvette (and other luxuries) may be calling his name.
No one can tell what a young child will be like at the age of 18, especially after suffering the loss of their parents. Even if there are no significant issues, such as drug addiction or special needs, parents should think about what they’d have done with that much money at that age.
The best option is to leave assets in trust for the benefit of the minor son. And this may be preferable even if the child is a major.
The trustee can manage and use the assets for the benefit of the young boy with virtually no court involvement.
The terms of the trust can also delay the point at which the assets can be distributed and ultimately paid over to the child. The assets in the trust can be used for the care and education of the child, of whatever age.
For example, it’s not uncommon for a trust to stipulate that the beneficiary gets a third of the assets at 25, half of the remaining assets at 30 and the rest at age 35. This is called “ages and stages distributions.” However, other trusts don’t provide for such mandatory distributions and can hold the assets for the beneficiary’s lifetime, which has its advantages.
Talk to an experienced estate planning attorney, who can assess your specific situation and provide guidance in creating an estate plan. The attorney can also make certain that trust assets are correctly titled and that beneficiary designations of retirement accounts and life insurance are correctly prepared, so the trust under the will receives those assets and not the minor individually.
BOOK A CALL with me, Ted Vicknair, Board Certified Estate Planning and Administration Specialist, Board Certified Tax Law Specialist, and CPA to learn more about estate planning, incapacity planning, and asset protection.
If you liked this article, “Should a Trust Be Part of My Estate Planning?” read these additional articles: What Do I Need in My Estate Plan? and What is Louisiana Forced Heirship? and What Kind of Trust Is Right for You? and How Do I Sell a Home in an Irrevocable Trust?
Reference: nj.com (June 14, 2021) “Do I need a trust in case something happens to me?”
