Many individuals are under the impression that trusts are inappropriate and unnecessary if you are not extremely wealthy. This is actually a misconception, but it is widely held.
Why would trusts be useful for wealthy people? Individuals who have been able to accumulate a great deal of wealth are exposed to the federal estate tax. This tax could be applied on transfers that exceed $5.45 million in value. It carries a 40 percent maximum rate, so it looms large for high net worth families.
There are irrevocable trusts that wealthy people can use to mitigate their estate tax exposure. Since you cannot revoke or dissolve this type of trust, you surrender incidents of ownership so assets in the trust would not be part of your estate for tax purposes.
However, there is another type of trust that would not be used by wealthy individuals who are looking for estate tax efficiency. This is the trust “for the rest of us.”
Revocable Living Trusts
A revocable living trust can be revoked or rescinded. Because of this, you retain incidents of ownership if you establish this type of trust. As a result, assets in a revocable living trust would be part of your estate.
If you are not concerned about estate taxes, a revocable living trust can be a very useful estate planning tool. First off, you do have the right to revoke so you can dissolve the trust and take back direct personal possession of the assets if you ever change your mind.
The person who establishes a living trust is called the grantor or the settlor. A trustee is named to act as the trust administrator, and beneficiaries that are named can receive monetary distributions from the trust. The grantor of a living trust will typically act as the trustee and the beneficiary at first and have complete control.
In the trust declaration, you name a trustee to succeed you after you pass away. Your first thought may be to ask someone that you know to act as the trustee, but you can also go in a different direction. Trust companies and banks offer trust administration services, and you can go forward with peace of mind if you know that a professional fiduciary will be managing the trust after your passing.
A great thing about a living trust is the ability to include spendthrift protections. You can add a spendthrift provision, and after you pass away, the trust would become irrevocable. Assets in the trust would be protected from the beneficiaries’ creditors.
If you were to maintain direct personal possession of your property and use a will to direct its distribution, the heirs would receive their inheritances all at once in a lump sum. This may be a source of concern for you. You may have someone in the family who is not good with money, and there can be those who are simply inexperienced.
To account for this, you could instruct the trustee to distribute assets to the beneficiaries on a limited basis or over time. For example, let’s say that you have income producing assets in the trust. You could allow the trustee to distribute the earnings from the trust while the principal remains intact.
You can also give the trustee the discretion to distribute portions of the principal under certain circumstances. Some people will start to allow for larger distributions when the beneficiaries reach certain age thresholds.
Another benefit that you gain if you use a living trust as the centerpiece of your estate plan is the ability to account for incapacity. Many elders become unable to handle their own finances late in their lives. There are other causes of incapacity, but Alzheimer’s disease strikes almost half of people who are 85 years of age and older.
If you have a revocable living trust, you can empower the successor trustee to handle the trust administration tasks if you ever become incapacitated.
All in all, when you compare a living trust to a last will, you will probably come away with the conclusion that a living trust is a better choice.
Learn More About Living Trusts
If you would like to speak with a licensed estate planning attorney about the possibility of creating a revocable living trust, our doors are open to you. We have created living trusts for countless people here the greater Ashland area over the years, and we can answer your questions and help you put a plan in place if you decide to go forward.
To schedule a consultation, send us a message through our contact page or call us at (606) 324-5516.
John’s practice focuses on the use of Wills and Living Trusts in Estate Planning to help individuals protect their families and preserve their legacies after their deaths, but his practice also focuses on the critical issues of protecting individuals with dementia or other diminished capacity, assisting individuals in qualifying for Medicaid and other government benefits to offset the costs of long-term care, and providing special needs planning.
John is admitted to practice law in North Carolina, South Carolina, Kentucky, and Ohio, and he is accredited by the Department of Veterans Affairs.
- What You Need to Know about the Medicaid Look-Back Rule - January 3, 2023
- How to Pass Down Your Legacy in Your Estate Plan - October 3, 2022
- Practical Steps to Take after Receiving a Terminal Diagnosis - September 30, 2022
