By Doug Fendrick, Esquire

There are many reasons to establish a Trust in your estate planning documents.  One reason is to avoid estate taxes.  However, with the increase of the federal estate tax exemption over the past several years, the all out repeal of the federal estate tax in 2010 and now a $5 Million federal estate tax exemption for years 2011 and beyond, fewer clients need complex trusts in order to avoid federal estate taxes. (Note, however, that the New Jersey exemption is $675,000 and, if your estate exceeds that amount, tax planning trusts may still be appropriate and recommended to minimize your New Jersey estate tax exposure.)  That said, there are still many important non-tax reasons to establish a Trust in your estate planning documents.

I.            Family Protection Trusts.  One of the most important reasons to incorporate a trust into your estate plan is to keep your assets in your bloodlines.  Most parents want to leave their assets to their children, and many parents trust their adult children to properly manage the funds for their benefit and the further benefit of grandchildren.  Often, a parent’s Will provides that if a child predeceases the parent, that child’s share to pass to the deceased child’s children (the parent’s grandchildren).  However, this distribution scheme in a Will may not achieve the parent’s desired outcome.

For example, if a child survives you and your Will left that child his or her share of your estate, outright, then your Will no longer controls the inherited assets.  Once the child receives his or her inheritance, then the child’s Will controls where the inherited assets will pass upon the child’s subsequent death.  The child’s Will is likely to leave his or her assets (including the inherited assets) to the child’s spouse if he/she is married.  This may be inconsistent with your estate planning objectives if you want the assets to pass to your grandchildren, rather than to a daughter-in-law or son-in-law.

Also, by leaving your assets to your children in trust, rather than outright, you help to ensure that your assets ultimately pass to your grandchildren, and stay in your bloodlines.  The trust can specify that, upon your child’s death, any assets that remain in trust will pass to such child’s children.  Such a trust can also be established irrespective of a child’s age.  Parents often think about trusts for minor children, and think that by leaving assets to an adult child in trust suggests that the parent thinks the child is irresponsible.  However, the parent can designate the child as Trustee of his or her trust.  That way, the child can make his or her own investment and distribution decisions (subject to certain limitations in the trust).

Also, by leaving assets to your children in trust, rather than outright, you protect their inheritance from any creditors they may have now or in the future (including in the event of a divorce).

Lastly, when your child passes away, any assets then remaining in the trust will generally not be included in the child’s estate for death tax purposes.  If the child inherited the assets, outright, then the inherited assets would increase the size of the child’s estate and could result in an increased estate tax bill for your grandchildren.

In summary, some of the benefits of leaving your assets in a Trust for your children are as follows: (1) creditor protection; (2) divorce protection; (3) control the ultimate beneficiary(ies); and (4) estate tax savings upon child’s death.

II.       ASSET PROTECTION DURING LIFETIME. A large portion of our practice is dedicated to protecting assets for future nursing home costs.  As many of you know, nursing home costs can cost well in excess of $100,000 per year.  That expense can either be privately paid or the individual can try to qualify for Medicaid.  Medicaid is available to cover nursing home or assisted living expenses if the individual’s assets are less than $2,000 (or, $4,000, depending on the individual’s fixed monthly income).  If there is a spouse, the spouse can keep the lesser of one-half of the couple’s assets or $109,560 (which figure is indexed annually for inflation).  In order to qualify for Medicaid, any gifts made within the preceding five years must be disclosed and a penalty period will be assessed based upon the amount of the gift.  Accordingly, more and more of our clients are gifting assets to trusts for children in order to start that five year clock ticking.  If the assets are gifted to children directly (rather than n trust), the parents risk: (1) the child spending the money; (2) the child dying and leaving the money to a son-in-law/daughter-in-law; or (3) having the assets diminished by the child’s creditors (including in the event or a divorce).  By gifting assets to a trust, you start the five year look back period and do not have to worry that your assets will be dissipated by your children during your lifetime.

III.      OUT OF STATE REAL ESTATE.  Many of our clients are snowbirds and have winter homes in southern states, such as Florida.  Likewise, many of our Pennsylvania clients own summer homes at the Jersey shore.  If you die owning real estate in a state other than the state in which you live, your Executor will need to raise an “ancillary estate” in that jurisdiction.  That can be both time consuming and costly for the estate.  Accordingly, we often recommend that such out of state property be transferred to a Living Trust.  Such a trust does not remove the real estate from your taxable estate, but will save your estate the expense of an ancillary estate administration and will save your executor the time and aggravation of needing to run multiple administrations in multiple states.

If you are interested in learning more about these non-tax reasons a trust might make sense as part of your estate plan, please contact Douglas A. Fendrick , Esquire, at 856-489-8388, or www.Fendricklaw.com,   to schedule an appointment at his office in Voorhees, New Jersey ..

Don’t forget to tell him, Marty sent you!

This month, Roy Rogers Jr. parted with Trigger, the horse made famous by his singing cowboy father.

Mr. Rogers and his siblings kept the palomino, mounted and preserved, in the family museum in Branson, Mo., before its doors closed last year. The horse sold for $266,500 at Christie’s in New York, one of 300-odd items, including cowboy boots, belt buckles and guitars, bequeathed to the Rogers family after their father’s death.

“I grew up with a lot of these things,” says Mr. Rogers, who goes by the nickname “Dusty.” “My dad told us years ago, when you get to the point where it costs a lot of money, when it becomes demanding to keep things, it’s OK to let them go. It’s been a very difficult decision.”

All told, some $41 trillion in wealth will transfer between generations over the next four decades, according to the Boston College Center on Wealth and Philanthropy. A significant portion will be in the form of art, jewelry and other heirlooms that have filled attics, safe-deposit boxes and hallways for decades—and for which economic values can be as difficult to ascertain as sentimental ones.

That can lead to major headaches when it comes to settling estates, especially this year. In most years, you simply need to determine the value of an heirloom on the owner’s date of death for tax purposes. But this year, with the estate tax temporarily suspended, things are far more complex. Very wealthy families will benefit as estates pass to the next generation tax-free. But those that are merely affluent may get hammered.

Ride ‘em, Christie’s: Roy Rogers’s stuffed horse, Trigger, sold for $266,500 at auction this month. Trigger and his taxidermied dog, Bullet. (Photo by Jemal Countess/Getty Images)