It’s important to know that not all living trusts are the same. However, common reasons for using a living trust are for privacy and avoiding probate. Creating a trust doesn’t magically avoid probate, though. You’ll have to put your assets in the name of the trust for it to actually dictate how those assets pass to the next generation. Placing assets in a living trust can also provide protection to beneficiaries from divorce, nursing home costs, legal actions and creditors. So why wouldn’t a living trust be part of your estate plan?
The Green Bay Press-Gazette’s recent article, “Common questions about a living trust,” notes that trust planning is especially important for beneficiaries who may have special needs. A Special Needs Trust can be created so their government program benefits—like Medicaid—won’t be impacted by their inheritance. Let’s look at some specific situations:
Avoiding probate. A living trust can help avoid probate, but a trust only controls assets that are in the trust. You must put assets into the trust (commonly known as “funding” the trust). A person can have a well-drafted trust, but if it’s not properly funded, they will most likely lose out on the benefits of creating trust. In addition, our lives are always changing, from new jobs to new children or grandchildren, a move or the purchase of a vacation home or other property. From time to time, tax laws change, as well. To ensure your estate plan will work when it needs to—at the time of your death or incapacity—you’ll need to not just “fund” your trust once.
Proper alignment of assets with an estate plan is not a one-time transaction, but a process. As your assets change in type or value, different planning opportunities could appear and you’ll need to ensure new assets are placed into the trust as well. There’s another step most estate planners don’t address, either: verifying with your financial institutions that assets have been correctly aligned. If you don’t, there could be mix-ups and your assets may not be correctly placed in the trust.
You’ll want to work with your estate planning attorney to align your assets up-front, verify they’re correctly aligned with the financial institutions, and track any changes over time. Doing so will not only ensure you’re organized, but will make things easier for your heirs when you pass.
Tax savings. There may be some tax savings opportunities you should be thinking about, especially if you’re in a state that, like Massachusetts, has enacted a state estate tax. An individual can pass up to $5.49 million without any federal estate taxes in 2017. Anything above that is subject to a 40% estate tax. In Massachusetts, however, any estate over $1 million will incur a state estate tax.
A living trust can be structured so a married couple can pass double the federal exemption amount free of federal estate taxes between the two of them. There’s usually no estate tax due when the first spouse passes away. However, the surviving spouse, who may inherit from his or her spouse, would be potentially subject to estate tax at his or her death. A living trust can be used to potentially avoid that and pass the maximum assets to your loved ones without unnecessarily diverting assets to estate taxes.
Assets requirements for a living trust. There’s no dollar amount required for a trust! In discussing your goals with your estate planning attorney and how they can best be accomplished, trust planning will likely be your most efficient option. It allows you to protect your own assets from creditors and other lawsuits and gives you the opportunity to pass those protections on to your loved ones. There are also certainly significant benefits when you combine that with the ability to minimize federal and potentially state estate taxes, as well.
If you’re truly looking to take care of your family when you pass away by minimizing the costs and stress associated with the probate process, pass the majority of your assets to your heirs, not the state, and protect your heirs from bankruptcies, lawsuits and even divorce actions, trust planning is likely to be for you. An experienced estate planning attorney will be able to discuss your concerns and options about creating a living trust and help you create an estate plan that will truly care for your family.
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Reference: Green Bay Press-Gazette (June 29, 2017) “Common questions about a living trust”