A lot of people are under the impression that a last will is the preferred estate planning document. They shy away from trusts for a couple of different unfounded reasons. One of them is the idea that a will is the right choice if you are not extremely wealthy. The second one is a fear of permanently losing control of assets that are conveyed into a trust.
Let’s clear up these misconceptions.
Essentially, there are two different classes of trusts: revocable trusts and irrevocable trusts. At the core, the differences are self-explanatory. You can revoke or change one type of trust, and you cannot revoke the other.
Why would you want to create a trust that you cannot walk away from when a safer opportunity exists? The answer lies in the understanding of a concept called “incidents of ownership.”
Under some circumstances, it is beneficial to surrender control and get assets out of your own name for one reason or another. If you are very wealthy, estate tax savings would be one of them.
There is a federal estate tax, and it carries a 40% top rate along with an $11.4 million exclusion. The exclusion is the amount that can be transferred before the estate tax would kick in.
Certain types of irrevocable trusts are used to divest yourself of direct personal possession of property to mitigate your estate tax exposure. We should point out the fact that there is a gift tax in place so you cannot simply give gifts to avoid the estate tax.
This is one reason why you may want to use an irrevocable trust, but there are others. One example would be a situation where you are trying to obtain Medicaid eligibility to pay for nursing home care. Medicare will not pay for this type of care. It is expensive, and many seniors will need it at some point in time.
Medicaid will pay for long-term care, but you are probably aware of the fact that there are low income and asset limits because it is intended for people with sparse resources. You could convey assets into an irrevocable Medicaid trust to separate yourself from direct personal possession from a legal perspective.
You could continue to receive income from the trust while you are alive and well, but you would not be allowed to touch the principal. After five years, the assets that remain in the trust would not be counted when Medicaid was determining your eligibility status.
These are a couple of reasons why you may want to use a trust that cannot be revoked, but there are others.
Revocable Living Trusts
You can indeed revoke a revocable living trust so you have total control while you are still alive. As the grantor of the trust, you can act as the trustee and the beneficiary, and you can change the terms and add or subtract property at any time.
The ultimate point of the revocable living trust is to act as an estate planning tool so you name a successor beneficiary or beneficiaries and a successor trustee. It becomes irrevocable after you die, and that is actually an added measure of control because you establish how the trust will be handled after your death, and no one can change the terms without your permission.
As you can see, there is absolutely no loss of control when you establish a revocable living trust.
There are a number of benefits that living trusts provide that are not available when you use a simple last will. One of them is the ability to include a spendthrift provision that would protect an inheritance that you are leaving to a person that is not good with money.
The estate administration process is streamlined when all or most of the assets that comprise the estate are in the trust, and this is another benefit. Plus, a joint living trust can be the ideal solution for some married couples, and these are just a handful of the advantages.
Attend a Free Seminar!
If you would like to learn more about trusts and other estate planning tools, attend one of our upcoming seminars. There is no admission charge so you have everything to gain and nothing to lose. Visit our seminar schedule page to see the dates, and click on the one that works for you to obtain registration information.