NJ Trust Q&A

Should I Have a Trust or a Will?

Understanding the Differences, and Does it Matter?

Get Answers Here to Your Most Frequently Asked Trust Questions

Find Out by Reading On

You should consider your estate plan as an investment in yours and your family’s future. As the years pass, your family will grow and/or change, your assets will change, and new laws will be passed.

I wrote this page to focus on the use of trusts as part of your estate plan.

Frequently Asked Questions (and Answers) About the Use of Trusts

Because a Trust can be a terrific tool for protecting assets and income for beneficiaries as well as the trust creator I prepared the following questions with answers based upon the most frequently asked questions of me during my many decades of practicing law.

I suspect some of these questions questions YOU may have if not, then you should ask yourself when reviewing your existing estate planning documents.

  • Q: What is a trust?
    A: A trust is a legal document and arrangement designating a trustee to receive and hold legal title to property and administer the assets in accordance with the instructions in the trust document. The person who creates the trust is known as the “settlor,” “grantor” or “trustor.” The persons who receive income or other distributions from the trust are called “beneficiaries.” In this Q&A when we refer to a “trust” we refer to a revocable living trust.
  • Q: How does a trust work?
    A: Most often the settlor is the trustee with full power over trust assets. The settlor transfers assets to the trust and the trust is considered the owner. The trust document is given to account holders to make the transfer. Upon incapacity or death the trust provides for a successor trustee. Upon death the trust contains instructions for the distribution of assets, just as a Will would. The primary difference between a trust and a Will is that assets held in trust do not have to go through probate. This is because the trust is considered the owner of the assets. The assets are then distributed according to the instructions in the trust. The Will may not address incapacity.
  • Q: If I create a trust, do I still need a Will, power of attorney and a “living will”?
    A: Yes. A will, called a “pour over” Will, is also drafted in conjunction with the trust. If all assets are not transferred into the trust, the Will picks up those assets at the time of death and transfers them into the trust for central distribution. A general durable power of attorney is needed for legal matters that cannot be handled by the trust such as assets not transferred to the trust or items that cannot be transferred such as pension benefits or rights under health insurance policies. A living will or more broadly and properly, a healthcare power of attorney is needed to handle substitute medical decision making during lifetime and death.
  • Q: Once a living trust is established can it be changed?
    A: Not only can it be changed, it often should be. In most cases the terms of the trust should be changed or at the very least reviewed on a regular basis to account for changes in your family situation (deaths, divorces, etc.). In light of the events of September 11 everyone should review all estate plans to make sure they cover situations they once never considered. Similar to a will the terms of a living trust may be amended as long as you have the capacity to do so.
  • Q:  Once I set up a trust, how do I actually transfer assets to the trust?
    A:  To transfer cash or securities, the trustee will open an account in the trust’s name, secure a trust ID tax number, and the grantor will instruct his bank or broker to move the funds from his account to the trustee of the trust. For real estate, a deed is used to transfer legal title of the property from the grantor to the trust. All future insurance and property tax statements should be sent to the trustee and paid with trust funds. Finally, to transfer an existing life insurance policy, the grantor simply needs to obtain and complete a change of ownership form and change of beneficiary form from his life insurance company.
  • Q:  What are the trustee’s duties?
    A:  The trustee has two primary duties: (1) to prudently invest and protect the assets of the trust for the benefit of the trust beneficiaries, and (2) to make distributions to the trust beneficiaries according to the terms of the trust document. The trustee is required to act at all times in the best interest of the trust beneficiaries. This duty of loyalty is known as a fiduciary duty.  A trustee is a fiduciary for the beneficiaries.
  • Q:  Who should I name as trustee?
    A:  An individual or corporate fiduciary, including the grantor can serve as trustee of a trust, including the grantor’s spouse, children, family members, or friends. Of course, given the fiduciary duties required of a trustee, you absolutely must select someone who is honest, diligent, and trustworthy.  Trustworthy and diligent are the most important traits.   If you would rather have an independent trustee who is not related to the grantor, there are a number of very well qualified professional trust companies in the community.
  • Q:  Who is eligible to be a beneficiary of a trust?
    A:  Simple answer.  Anyone!  Anyone other than the grantor may be named as a beneficiary of the Trust. Different family circumstances may dictate the need to structure the trust for different beneficiaries.

    Q:  Do Trusts Avoid Probate in NJ?
    A:  NJ Trusts are often used in place of wills partly as a way to avoid probate and to keep a person’s financial matters private. There are other reasons to set up a trust rather than a will.A NJ trust can establish strict guidelines for distributions to young beneficiaries and others you are concerned about.A will generally spells out a one-time distribution of assets, while a trust can establish conditions to the distribution of assets and family property over time.  For example, if you have young children or grandchildren, a trust can be written so that they get their inheritance in installments upon certain milestones, such as a birthday, graduating college or marriage.  This way their funds are not squandered like the “prodigal son or daughter” referred to in the Bible.

  • Q: What is a “living” trust?
    A: A living trust (also called an “inter vivos trust”) is created during your lifetime. A trust that is created after you die is a “testamentary” trust.
  • Q: What is a “revocable” trust?
    A: A revocable trust is one that is capable of being changed, amended, or terminated. This is almost the only trust that the average person will ever see. “Revocable” means the settlor retains control over the trust. A trust that may not be changed is called “irrevocable.” Such trust are frequently used in tax planning.
  • Q: Is a trust better than a Will or using joint property to avoid probate?
    A: Most people should review what they are really trying to accomplish with their assets and consider what is possible. The key is that by using the trust we can have our instructions followed. We cannot do this with joint property-the joint tenant is free to do as he/she wishes. If we put instructions or conditions on a gift in a Will, we have created a testamentary trust. With the trust we can give guidance even when we cannot speak because of incapacity or after death.

  • Q: When is a trust the better alternative to a will or other Estate Planning option(s)?
    A: There are a number of situations where a trust is the best alternative. Some of them are:

    • A person who wants to leave property with conditions or “strings attached.” For example a grandmother may want to leave $10,000 to a child for college education, but if the child does not go to college, then to the child at age 25. A parent may have a child with a drug or gambling problem. In that case the trustee will administer the money and keep it protected until hopefully the child recovers. A will may not place conditions on gifts and if it does then the probate court must create a testamentary trust.
    • Persons with real estate in more than one state who want to avoid multiple state probate
    • Persons who own a business or real estate (i.e. landlord) with many rental homes. The trust will allow for smooth transition of administration in case of disability or death.
    • Single persons who have no spouse or children to take care of them should they become incapacitated. The trust can help the person maintain independence and have their instructions followed while alive. The trust may help avoid guardianship. The trust will also direct their gifts after death otherwise the property would go to distant heirs.
    • A married person whose spouse has a degenerative disease such as Alzheimer’s who is concerned about who will take care of their sick spouse should they predecease. In this case there may be no children or the healthy spouse may judge that the children need guidance and assistance in the care of their parent.
    • A parent of an adult disabled child who wants to provide for the child after the parent dies. The trust may be written so that the child does not lose public benefits.
    • Persons who want to avoid probate but do not want to rely on joint ownership of property and beneficiary designations to do so.
    • Tax motivated persons whose tax avoidance plan requires the use of a trust. Examples of tax driven trusts include “A-B trusts,” Irrevocable Life Insurance Trusts, and QPRTs, to avoid paying estate taxes on the transfer of property at death of the settlor. Note that tax driven trusts must often be irrevocable to achieve tax saving.
    • Asset protection trusts are not revocable. They must be irrevocable to achieve the asset protection for the reason that if the settlor could simply revoke the trust then the settlor could be required by a court order to revoke the trust and take the assets back.
  • Q: How can a trust help in case of incapacity?
    A: One of the great advantages of a trust is that it provides for comprehensive disability planning. If the settlor becomes incapacitated, the trust provides for a successor trustee to take over administration of the trust. The successor follows the instructions in the trust. For example if a nursing home stay is a possibility, the settlor may instruct that all alternatives are considered first. The trust instructions may require the hiring of independent professionals to monitor the quality of case, to provide for regular visitation and for a patient advocate. The trust avoids the necessity of having the probate court name a guardian and conservator to manage the assets and make person decisions.
  • Q: Does my tax status change when I create a revocable living trust?
    A: No. As long as the settlor is the trustee any income generated by assets owned in the trust are taxes as if they were still held in the settlor’s name. Taxes are still reported on the IRS 1040 form. No special taxpayer treatment is needed.
  • Q: Does the living trust reduce income taxes or estate taxes?
    A: In a word, no. During the owner’s lifetime the revocable living trust has no effect on the owner’s income tax. The owner will continue to be taxed on the income from the assets held in the trust. Similarly property taxes will not increase for property placed into a trust of the Settler. After the owner’s death the assets in the trust may be subjected to the estate tax, if at all, in the same manner as a probate estate. However, a different kind of trust may be used as part of a tax avoidance plan and as such reduces taxes. That type of trust effects limitations on control of the trust assets in ways the typical trust does not. Often times, proper estate planning will involve the use of both types of trusts.
  • Q: Will a Trust protect my estate if I have to go to a nursing home?
    A: Yes and No. Many people think that putting their assets into a trust will help them qualify for Medicaid, because the assets are no longer titled in their name. But if the trust is revocable and under the settlor’s complete control nothing is “given away”. This type of trust will cause problems since Medicaid considers a home or other assets in the trust to be a “countable” asset that must be sold or transferred out of the trust to the applicant or spouse. It is no longer an “exempt asset.” That could require the trust to be “reformed” in court. See below.
  • Q: Should you have a separate personal property designation in your trust?
    A: What I mean by this is a separate writing where you indicate who should receive specific items of your personal property such as photographs, jewelry, art work, automobile, furniture, etc. If you have one, you should review it and make sure that it is still an expression of your wishes. If you don’t have a personal property designation, you may want to consider creating one so that specific items will go to specific people.
  • Q: What authority does the Trustee have to distribute the assets in the trust?
    A: The answer is it depends on the terms of the trust. Is the Trustee’s authority to make dis­tributions limited to health, mainte­nance, education and support, or are distributions within the Trustee’s total discretion? If the beneficiary is also serving as Trustee, then distributions to the beneficiary/Trustee should be limited to health, maintenance, educa­tion and support. If the beneficiary and the Trustee are separate people, you may want to give the Trustee more flexibility in deciding how to distribute assets. You should also let the Trustee know what your goals are in terms of the distribution of assets.
  • Q: If the trust is for the benefit of a spouse and children, who is the primary beneficiary… the spouse, the children, or both?
    A:  If the trust is for the benefit of minor children, is the goal of the Trustee to hold the assets until the child reaches a certain age, or to spend the trust corpus for them on certain things along the way such as education, marriage, etc? You should explore this topic closely with your attorney.
  • Q: What goes into setting up a trust or a will in New Jersey?  How much do they cost?
    A: A trust document is written and is legally enforceable.  Either a trust or will can be simple or be more complicated, and therefore more expensive.Costs vary depending on the size and complexity of the estate, but many attorneys will charge a flat fee for either document. Be sure to get a fee quote from your attorney before you proceed.Once the document you pick is written up, be sure to let family members or those named in the trust or will know where to find it. Anybody who has possession of your trust – often your attorney – is obliged to produce it upon your death, if requested by the trustee named in your trust.It’s common to leave copies of trusts with your attorney or designated trustees. Confiding with trusted family members about the location of your important family documents is absolutely essential in the event of unexpected death or incapacity.
  • Q: What role does a probate court play with a will vs. a trust?
    A: One common reason for setting up a trust, rather than a will, is to avoid court proceedings, known as probate.Wills must be filed in the probate part of the NJ Superior Court to be probated, meaning they become public documents. If your will is challenged, court proceedings can sometimes be costly and time-consuming, taking as long as a couple years, if there is a will contest or contentious family relatives.The use of a will is more common in New Jersey with simpler probate procedures.  Usually the presence of only one person close to the deceased, often the executor of the will or a family member is required to probate a will.With a trust, upon death your assets remain in your trust and only the designated trustee (or trustees) changes. A brief “pour-over will” usually declares that any remaining assets not legally titled within the trust at time of death be transferred into the trust upon your death.You can also set up a “trust within a trust” or a trust within a will (known as a testamentary trust), for a single beneficiary or multiple beneficiaries, like children or parents.
  • Q: Are there additional benefits to setting up a trust rather than a Last Will in New Jersey?
    A: Another reason some people prefer trusts is that it makes it easier to handle your health and medical care if you become medically incapacitated. You can stipulate in your trust that your assets be used to pay for your care, and the trustee will be able to disburse money from your estate without going to court.Without a trust, the person who becomes your guardian could run into complications getting the power to tap into your assets, especially if the trustee is different from your executor.
  • Q:  Can I sell assets to the Trust?
    A:  Yes. You may sell assets to your trust for fair market value.  There are a number of sales techniques that can be used to maximize the future value of property sold to a trust.
  • Q:  What is an irrevocable trust?
    A:  An irrevocable trust is simply a trust that once signed, its terms and provisions that cannot be changed by the grantor or the beneficiaries absent enabling language. This type of trust is distinguished from a “revocable trust”, which is commonly used in estate planning and allows the grantor to change the terms of the trust and/or reassert ownership, dominion and control over the property at any time he or she decides.
  • Q:  Why would I want to use an irrevocable trust?
    A:  Using an irrevocable trust allows you to achieve a number of significant economic benefits, including reducing estate taxes, protecting assets from creditors, and providing for family members who are minors, financially irresponsible, or who have special needs.Q:  How does someone create an irrevocable trust?A:  It’s not complicated to create provided the author knows what he or she is doing.  To create a trust that is irrevocable, the grantor must create a written trust agreement. He or she names a trustee to hold the property according to the terms of the trust. The trust agreement will identify the beneficiaries and instruct the trustee on how and when distributions of trust income and property can be made to the beneficiaries. A well written irrevocable trust agreement can and often will (and should) identify the event of possible contingencies, such as what to do if the initial beneficiaries are no longer living, fail to attend college, get divorced, etc.
  • Q:  Can I transfer life insurance to an irrevocable trust?
    A:  Yes, you can. A life insurance trust is often referred to as an ILIT.  An ILIT is an acronym for irrevocable life insurance trust. It’s really nothing more than an irrevocable trust that holds one or more life insurance policies on the life of the grantor. The trust and tax laws are the same for irrevocable trusts regardless of whether they hold life insurance or any other type of asset.Q:  Can I use a trust to purchase a new life insurance policy?A:  Absolutely. In fact, it is recommended that you establish the trust and then have the trustee apply for life insurance on your life. However, if you have begun the process and applied for the insurance under your own name, you can still proceed with the trust formation.
  • Q:  Are there any special responsibilities placed on an ILIT trustee?
    A:  Not really.  The trustee’s responsibilities are primarily to hold the policy, receive annual cash transfers to cover policy premiums, keep trust beneficiaries informed, and ultimately ensure that policy premiums are paid timely. After the insured dies, the policy proceeds are paid to the trustee, and the trustee pays the death benefits to the trust beneficiaries.
  • Q: Are your alternate beneficiary designations appropriate? In the event that your primary beneficiaries pass away, who will your assets go to?A: Many people take the approach that half of their assets will go to one spouse’s siblings and their children, and the other half of the assets will pass to the other spouse’s siblings and their children.  However, this approach may not work for you, in which case you should make sure that your assets are directed to one or more specific people or organizations. This objective should be stated in your trust.
  • Q: Are your Executors, Trustees, and Guardians still the appropriate people, and named in the appropriate order?
    A: Over time, people and relationships change, so it may be appropriate to rearrange your Executors, Trustees and/or Guardians. You have the ability to appoint one or more people to serve in these roles, as well as Successors for those people.
  • Q: If you have a taxable estate (not many people do right now), have you and your spouse reallocated ownership of and title to your assets to minimize estate taxes?
    A: Estate planning for a tax­able estate will normally include the for­mation of a trust upon the death of the first spouse. However, if all of your assets are in joint names, there will be no assets available to fund that trust because all of the assets will pass by operation of law to the surviving spouse. This means that the estate tax exemption of the first spouse will be wasted. Accordingly, if you have a tax­able estate it is critical that you re-title your assets pursuant to your attorney’s recommendations. By doing this, upon the death of one spouse, he or she will have sufficient assets in his or her indi­vidual name to fund the trust(s) that will create the estate tax savings in the future.
  • Q: Is your New Jersey General Durable Power of Attorney more than 10 years old?
    A: If so, banks in New Jersey are not required to accept it. We recommend that your General Durable Power of Attorney and Living Will be refreshed every 3 to 6 years.
  • Q: Does your General Durable Power of Attorney continue to name appropri­ate attorneys-in-fact? You are allowed to name one or more attorney(s)-in-­fact to act in your place with reference to your financial matters in the event that you are unable to do so.
    A: You should verify that your named attor­ney(s)-in-fact and any successors have current addresses. Does your General Durable Power of Attorney allow for Medicaid planning or gifting? Many persons want the ability to engage in asset protection planning to shelter assets from the cost of nursing home care. Your General Durable Power of Attorney should specifically grant your attorney(s)-in-fact the power to engage in this type of plan­ning. We are recommending to all or our clients that they update their General Durable Power of Attorney if it does not specifically authorize this type of planning in the future.
  • Q: Does your Health Care Power of Attorney reference the Health Insurance Portability and Accountability Act (“HIPAA”)?
    A: The HIPAA privacy rules have created a new category of private information called “Protected Health Information” (PHI) or “Protected Medical Information” (PMI). In order to avoid any issues about the persons to whom your health care provider may divulge your PHI, you should specifically state who has the right to receive your PHI. We are recommending to all of our clients that they update their Health Care Powers of Attorney to include a HIPAA provi­sion to avoid any inability of a Health Care Representative to receive information in the event of medical emergency.
  • Q: Does your Living Will clearly state your desire about what medical treatment you want to receive or refuse in a terminal situation?
    A: You have a right to direct your care if you are terminally ill. You should make sure your Living Will clearly states your desires.
  • Q: Does somebody know where all of your estate planning documents are?
    A: If you have the greatest estate plan in the world, but nobody knows how to access your documents in the event of an emergency, it is going to be useless to you. One or more trusted people should know where they can find originals and copies of your Last Will and Testament, General Durable Power of Attorney and Living Will/Health Care Power of Attorney. In addition, we recommend having copies of your Health Care Power of Attorney and Living Will placed into your medical record with your pri­mary care physician. Note that your original General Durable Power of Attorney is a very powerful document and could allow somebody to access your accounts while you are alive without your permission. As a result, it may be best not to have the original of the General Durable Power of Attorney easily accessible.

 

More Questions and Answers for You to Consider When Evaluating Your NJ

Estate Plan With a New Jersey Trust, Will,

Power of Attorney and Health Care Directive

 

Your New Jersey trust and estate plan is an investment. If your trust, Last Will and power of attorney do not address your current intention, or if it was not completed through appropriate re-titling of assets, then that investment may have little or no value.  The law in New Jersey gives you the right to direct what happens to your assets upon your death, and gives you the ability to minimize any tax consequences by using an effective NJ Living Trust. You should take advantage of the law to make sure that your estate plan meets your needs today and into the foreseeable future.

Caution!

 

Your Beneficiary Designations on Bank Accounts, Life Insurance and Other Assets…….

…May Defeat the Goals of Your New Jersey Trust and/or Last Will & Testament

 

  • Q: Do you own assets held in joint accounts, or where you have a named beneficiary?
    A: These assets will not be distributed in accordance with your NJ living trust or Will. Instead, all joint assets will pass to the surviving joint owner, and all assets with a beneficiary designation will pass to that beneficiary.Accordingly, if you have a convenience account with one of your children, the assets in that account will pass to that one child at your death, regardless of what your trust or Will might say. You should carefully review the ownership and beneficiary designation of all of your assets to be sure that the assets will be distributed to the right people at your death.
  • Q: Are your residuary beneficiaries correct?
    A: Residuary beneficiaries are the people who receive the balance of your estate after (i) all the debts, expenses and taxes have been paid, (ii) any specific bequests have been made, and (iii) joint accounts or any assets with beneficiary designations have been distributed to the appropriate people. You should review this section of your estate planning documents carefully. If one of the beneficiaries were to predecease you, will that beneficiary’s share pass to his or her children, your other children, or otherwise?The use of a properly written New Jersey trust is a very good estate planning tool, but the beneficiary designations you name on your assets must be comparable with your trust objectives.
  • Q:  Can I transfer life insurance to an irrevocable trust?
    A:  Yes, you can. A life insurance trust is often referred to as an ILIT.  An ILIT is an acronym for irrevocable life insurance trust. It’s really nothing more than an irrevocable trust that holds one or more life insurance policies on the life of the grantor. The trust and tax laws are the same for irrevocable trusts regardless of whether they hold life insurance or any other type of asset.
  • Q:  Can I use a trust to purchase a new life insurance policy?
    A:  Absolutely. In fact, it is recommended that you establish the trust and then have the trustee apply for life insurance on your life. However, if you have begun the process and applied for the insurance under your own name, you can still proceed with the trust formation.
  • Q:  Are there any special responsibilities placed on an ILIT trustee?
    A:  Not really.  The trustee’s responsibilities are primarily to hold the policy, receive annual cash transfers to cover policy premiums, keep trust beneficiaries informed, and ultimately ensure that policy premiums are paid timely. After the insured dies, the policy proceeds are paid to the trustee, and the trustee pays the death benefits to the trust beneficiaries.

Hopefully I addressed one or more of your questions concerning trusts. I know it was a lot to digest and you may still need more information and/or advice. If you have any questions about a trust or whether you should have a Trust or a Last Will & Testament I want you to call or email me today.

Fredrick P. Niemann, Esq., NJ Trust Attorney
Contact Fredrick P. Niemann, Esq. a NJ Trust Law Attorney at (855) 376-5291 or email him at fniemann@hnlawfirm.com.
He welcomes your call and looks forward to helping you.

 

 

Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Trust Attorney

New Jersey Trust attorney serving these New Jersey Counties:

Monmouth County, Ocean County, Essex County, Cape May County, Mercer County, Middlesex County, Bergen County, Morris County, Burlington County, Union County, Somerset County, Hudson County, Passaic County