People sometimes assume that a trust is a somewhat glorified legal device that accomplishes the same thing that a will would accomplish. In fact, there are different types of trusts. Trusts can satisfy objectives that a will would not satisfy.
Let’s look at some of these scenarios.
Estate Tax Exposure
The federal estate tax is a legacy threat to high net worth families. This tax carries a 40 percent top rate, so we are talking about a very significant level of taxation.
The good news is that there is a relatively high estate tax exemption or exclusion. During the current calendar year, the exclusion stands at $5.45 million in 2016. This represents a $20,000 increase over the 2015 exclusion. The exclusion is updated each year to account for inflation.
If you are married, you don’t have to worry about the estate tax on transfers to your spouse, because there is an unlimited marital deduction. Transfers to others are potentially taxable.
There are certain types of irrevocable trusts that can mitigate estate tax exposure. These would include generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, charitable lead trusts, and charitable remainder trusts.
You may have a loved one who is not very good at handling money. This person could burn through a direct inheritance far too quickly.
To protect the inheritance, you could make this person the beneficiary of an irrevocable spendthrift trust. Assets in the trust would be managed by a trustee rather than the beneficiary, so the spendthrift would not be able to directly access the funds or make investment decisions.
In the trust declaration, you include instructions for the trustee to follow, so you can allow for measured, long-term distributions. The assets in the trust could not be attached by the beneficiary’s creditors, so there would be asset protection built-in.
Special Needs Planning
A significant percentage of people with disabilities rely on government benefits like Medi-Cal and Supplemental Security Income. These programs are only available to financially needy individuals, so a significant direct inheritance could cause a loss of eligibility.
Special needs trusts are used to provide resources that can be used to satisfy the beneficiary’s unmet needs without jeopardizing ongoing eligibility for government benefits.
Many elders seek Medi-Cal eligibility toward the end of their lives, because Medicare does not cover living assistance. Once again, Medi-Cal is a need-based program, and you cannot qualify if you have more than $2000 in countable assets.
As part of a plan to qualify for Medi-Cal to pay for long-term care, you could convey assets into one or more irrevocable Medi-Cal trusts.
When a will is used as an asset transfer vehicle, the executor or personal representative must generally admit the will to probate. This is a lengthy legal process, and the heirs do not receive their inheritances until the court closes the estate.
Probate can also be expensive, and it is a public proceeding, so anyone can access the records to find out how the assets were distributed.
To avoid these drawbacks, you could use a revocable living trust as an asset transfer device. The trustee that you name in the trust agreement would be able to distribute assets to the beneficiaries outside of probate, so these pitfalls would be avoided.
Our Can Help
To learn more about trusts, contact us through this page to request a consultation: Sacramento, CA Estate Planning Attorneys.