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10 Myths and Truths About Living Trusts - Part I
Many individuals and families choose to use Living Trusts in their estate plan, along with Wills. Before you decide whether to use a trust, you should understand what living trusts can and cannot accomplish. Here are the first five myths and truths about living trusts:
1. Only Wealthy Families Need a Trust. MYTH. I hear this myth regularly. It stems from a misunderstanding of what trusts accomplish. Although trusts can be used as part of a strategy to minimize estate taxes, (which is only necessary if your assets are worth close to $4 million,) trusts are MOST OFTEN used to: (a) avoid probate on assets after death; (b) set up a delayed distribution schedule for young or disabled beneficiaries; and (c) provide for someone to step in and manage your assets for your benefit if you become disabled, thereby avoiding the court process of guardianship.
These are goals that many families share, regardless of their level of wealth. Some families with currently small estates have large life insurance policies that they want to flow through a living trust so that the proceeds are spent on education rather than fast cars!
2. A Trust Protects Assets from the Claims of Creditors / Helps a Person Qualify for Medicaid. MYTH. Living trusts do not shield assets from creditors or help anyone qualify for Medicaid by removing assets from their personal accounts. Assets held in your revocable living trust are still accessible by you for any purpose - therefore they also are available to your creditors. Sometimes IRREVOCABLE trusts are used for asset protection purposes, but they are not used in a family's estate plan without serious discussion and consideration.
3. A Trust Requires a Lot of Paperwork. MYTH. During your life your trust does not file a separate tax return or any other government report. When it needs a tax i.d. number (to open a bank account, for example) it simply uses your social security number. Interest or other income earned on trust assets is recorded on your tax return.
Most life events do not create a need to amend your trust, such as having a baby or selling your home. Amendments are necessary to change a successor trustee or to add or remove a beneficiary, but amendments are usually not expensive for your attorney to draft. NEVER WRITE A CHANGE ON AN ORIGINAL TRUST OR WILL - IT WILL NOT BE VALID.
After your death your trust will need its own tax i.d. number and will file its own tax return if the trust will continue to hold assets. If all assets are fully distributed at your death, only one tax return (or, possibly, not even one) will need to be filed.
4. Trusts can be Creatively Drafted for My Personal Situation. TRUTH. Many of us have complicated, blended families and children who may not be mature enough to receive an inheritance at age 18. Some families have disabled adults or children. Some families are so devoted to their pets that they want to make sure these family members are well taken care of. Some parents are befuddled by having a valuable family business, but less than all of their children are involved in that business.
Almost any contingency can be successfully addressed by the careful wording of a trust - but remember - the more complicated the instructions, the more difficult the task you leave for your successor trustee. Also, make sure your instructions are funded - perhaps life insurance should be an asset of the trust if you want trust money to be available for an extended period after your death.
5. Trust Income Tax Rates are Higher. TRUTH. Only after your death will the trust be required to file its own tax return, but the higher trust income tax rates should be considered when you are setting up the trust. When you are planning whether to include provisions in your trust that delay distributions for some time after your death, discuss with your attorney and tax advisor how the higher trust income tax rates could affect your estate. Some families are very willing to pay the higher tax rate for the other benefits of a delayed distribution.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
10 Myths and Truths About Living Trusts - Part I
Many individuals and families choose to use Living Trusts in their estate plan, along with Wills. Before you decide whether to use a trust, you should understand what living trusts can and cannot accomplish. Here are the first five myths and truths about living trusts:
1. Only Wealthy Families Need a Trust. MYTH. I hear this myth regularly. It stems from a misunderstanding of what trusts accomplish. Although trusts can be used as part of a strategy to minimize estate taxes, (which is only necessary if your assets are worth close to $4 million,) trusts are MOST OFTEN used to: (a) avoid probate on assets after death; (b) set up a delayed distribution schedule for young or disabled beneficiaries; and (c) provide for someone to step in and manage your assets for your benefit if you become disabled, thereby avoiding the court process of guardianship.
These are goals that many families share, regardless of their level of wealth. Some families with currently small estates have large life insurance policies that they want to flow through a living trust so that the proceeds are spent on education rather than fast cars!
2. A Trust Protects Assets from the Claims of Creditors / Helps a Person Qualify for Medicaid. MYTH. Living trusts do not shield assets from creditors or help anyone qualify for Medicaid by removing assets from their personal accounts. Assets held in your revocable living trust are still accessible by you for any purpose - therefore they also are available to your creditors. Sometimes IRREVOCABLE trusts are used for asset protection purposes, but they are not used in a family's estate plan without serious discussion and consideration.
3. A Trust Requires a Lot of Paperwork. MYTH. During your life your trust does not file a separate tax return or any other government report. When it needs a tax i.d. number (to open a bank account, for example) it simply uses your social security number. Interest or other income earned on trust assets is recorded on your tax return.
Most life events do not create a need to amend your trust, such as having a baby or selling your home. Amendments are necessary to change a successor trustee or to add or remove a beneficiary, but amendments are usually not expensive for your attorney to draft. NEVER WRITE A CHANGE ON AN ORIGINAL TRUST OR WILL - IT WILL NOT BE VALID.
After your death your trust will need its own tax i.d. number and will file its own tax return if the trust will continue to hold assets. If all assets are fully distributed at your death, only one tax return (or, possibly, not even one) will need to be filed.
4. Trusts can be Creatively Drafted for My Personal Situation. TRUTH. Many of us have complicated, blended families and children who may not be mature enough to receive an inheritance at age 18. Some families have disabled adults or children. Some families are so devoted to their pets that they want to make sure these family members are well taken care of. Some parents are befuddled by having a valuable family business, but less than all of their children are involved in that business.
Almost any contingency can be successfully addressed by the careful wording of a trust - but remember - the more complicated the instructions, the more difficult the task you leave for your successor trustee. Also, make sure your instructions are funded - perhaps life insurance should be an asset of the trust if you want trust money to be available for an extended period after your death.
5. Trust Income Tax Rates are Higher. TRUTH. Only after your death will the trust be required to file its own tax return, but the higher trust income tax rates should be considered when you are setting up the trust. When you are planning whether to include provisions in your trust that delay distributions for some time after your death, discuss with your attorney and tax advisor how the higher trust income tax rates could affect your estate. Some families are very willing to pay the higher tax rate for the other benefits of a delayed distribution.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
