A trust is a legal arrangement that allows a third party (a trustee) to hold a person’s (the grantor’s) assets on behalf of their beneficiaries. Trusts are created to avoid certain tax consequences or legal liabilities. They also can preclude the trouble of going to court to probate a living will. Establishing a trust is a good idea for those with large estates who are likely to die within the next ten years. Tennessee does not currently have an estate tax and the current Federal Estate Tax exemption is $12.92 million for the value of the estate. Also, unless Congress decides to act, the Federal Estate Tax exemption will sunset to $5 million in 2026 per individual. Read on to learn the top things to consider under Tennessee trust law.
What Should Be Included in a Trust
For the most part, your real estate and business interests are what need to be protected with a trust. Other things like bank accounts, securities, and life insurance policies can also be included in your trust, though they might not need to be included in your trust if you’ve already designated beneficiaries on the account or in a will. Meanwhile, certain assets like 401(k) plans and IRAs should not be included in a trust because such a transfer could be considered a withdrawal and trigger tax consequences. That being said, a major key of a trust to ensure you place the assets you want in the trust into the trust.
Different Types of Trusts in Tennessee
- A Tennessee Investment Services Trust, or TIST, is an irrevocable trust, which means the terms cannot be changed, that allows for significant control over properties in the trust while also protecting the asset(s) from future creditors. A TIST enables more flexible estate planning and protects properties placed in the trust from creditors. TISTs can be perfect for those wanting to have flexibility for planning while creating protection from certain creditors.
- An Irrevocable Life Insurance Trust, or ILIT, allows a person to ensure the benefits from a life insurance policy are not included in your estate and to avoid federal estate taxes. Also, ILITs can protect one’s insurance benefits if legal action is ever taken against the person or their beneficiaries. The “irrevocable” part stems from the fact that the insured cannot change the trust once it’s been established.
- A Standalone Retirement Trust is a special type of trust that is itself the recognized beneficiary of your qualified retirement accounts, like an IRA or a 401(k) plan. You might recall that, by and large, 401(k)s and IRAs cannot be included in a trust. It falls on the trustee to manage the money in those accounts according to the terms of the trust document.
- A Charitable Remainder Trust is a gift of cash or other property to an irrevocable trust. The donor receives an income stream from the trust for the rest of their life (or a specified number of years), while the named charitable organization receives the remaining assets at the end of the term. When the CRT is funded, the donor immediately receives an income tax charitable deduction based on the value of the assets going to the charity.
- A Special Needs Trust is one where the assets are immediately placed under the trustee’s control. In this way, a Special Needs Trust protects a person’s assets without requiring them to be declared “incompetent” in a court of law. A key benefit of a Special Needs Trust is that it allows the trust to hold assets on behalf of the beneficiary while still allowing the beneficiary to qualify for various special needs benefits.
Who Your Trustee Should Be
Choosing who will manage your trust is a major decision. With revocable trusts, it can be you who manages it, but you will also need to name a successor trustee upon your death. In the case of a joint trust, it can be you and your spouse acting as co-trustees. Financial institutions can also be trustees; however, they will generally require a fee.
What Properties Should Go Into Your Trust
Under Tennessee state law, a trust is not effective until you transfer ownership of all deeds and titles into it. For those assets that can’t be titled, like art or jewelry, simply listing them in the trust agreement is enough.
Where To Keep Your Trust
Once your trust is created, you must sign the document in the presence of a licensed notary. Then you will want to keep your trust document in a safe place and let your successor trustee know where it is for when the time comes.
Why Hire a Trust Attorney in Tennessee?
As you can probably tell, there is a lot to consider when establishing a trust. While Tennessee’s trust law does not differ much from that in other states, you may want to hire a trust attorney to help you think through what type of trust is most appropriate for you and your beneficiaries. For more information, contact Hudson, Reed & Christiansen today.