A lot of people have misconceptions about trusts, and the notion of finality is one of them. They do not consider the possibility of creating a trust because they don’t want to lose control of the assets that they would place into the trust.
In reality, there are different types of trusts. In a broad sense, there are two classifications: the revocable trust, and the irrevocable trust. Let’s look at the distinctions and the reasons why trusts are used.
Revocable Living Trust
The revocable living trust is the trust that is most widely used. It is the ideal alternative to a simple will for a number of reasons. Before we get into the details, let’s clear up the subject of revocability.
You can absolutely revoke this type of trust at any time, and you don’t need anyone’s permission. With this type of trust, you will be the trustee while you are alive, so you will have complete control of the assets on every level.
Along the way, you can change the terms if you choose to do so, and you can add additional property to the trust. When you draw up the trust, you name a successor trustee to manage the trust after your passing or in the event of your incapacity.
Living Trust Benefits
A revocable living trust provides some very useful benefits that you would not receive if you use a will as an asset transfer vehicle.
First, there is a succession process when a will is used, and the court provides supervision while the estate is being administered. This can be time-consuming and costly.
Secondly, the estate administration process is streamlined because the assets are consolidated in one place. Thirdly, you can include spendthrift protections when you have a living trust.
After your death, the trust will become irrevocable, so the beneficiaries will not have direct access to the principal. The trustee would control the trust, and they would be bound by the instructions that you recorded in the trust declaration.
The beneficiaries’ creditors would “step into their shoes” in a legal sense. This means that they would have the same access to the principal as the beneficiaries. As we have stated, the beneficiaries would not be able to reach the resources. This would apply to their creditors as well.
You can also dictate the terms of the distributions. Let’s say that you want the trust to remain intact for years, providing ongoing income. In the trust declaration, you can instruct the trustee to distribute the earnings from invested assets on a monthly basis.
Irrevocable Trusts
In addition to the revocable living trust, there are also irrevocable trusts. As the name would indicate, under most circumstances, this type of trust cannot be revoked once it has been created.
Though there are limited exceptions, the terms cannot be altered, and the grantor cannot act as the trustee. Here are some of the revocable trusts that are used to address specific circumstances.
Supplemental Needs Trust
Many people with disabilities rely on Medicaid for health insurance. Supplemental Security Income (SSI) is self-explanatory. It is an income source for people with limited resources.
Suppose you want to leave an inheritance to a person with a disability. These are need-based programs, so a significant windfall can cause a loss of eligibility. As a response, you could create an irrevocable supplemental needs trust.
The trustee that you name would be able to use the assets in the trust to satisfy the unmet needs of the beneficiary. As long as the rules are followed correctly, benefit eligibility will not be impacted.
Estate Tax Efficiency
High-net-worth individuals can be exposed to the federal estate tax. The dividing line that determines the liability is the estate tax credit or exclusion. This amount can be transferred tax-free, and the remainder would be subject to taxation upon transfer.
At the time of this writing, in 2024, the federal estate tax exclusion stands at $13.61 million. If you convey assets into an irrevocable trust, you will be removing them from your estate for tax purposes.
There are trusts that accomplish this goal and allow eventual transfers at a tax discount. One such trust is the qualified personal residence trust.
The way it works is you transfer your home to the trust. When you take this step, it is no longer part of your estate for tax purposes. While you are drawing up the trust agreement, you establish an interim during which you will remain in the home as usual.
When the term expires, a beneficiary that you name will inherit the home. That transfer would be a taxable gift, but the taxable value of the gift would be significantly less than the home’s actual value.
This is because the beneficiary could not take ownership of the home for several years.
Medicaid Planning
Most senior citizens will need long-term care eventually, and over 30 percent will require nursing home care. These facilities are extremely expensive, and Medicare does not cover the custodial care they provide.
Medicaid is another government health insurance program that does pay for long-term care. Of course, it is a need-based benefit, so you can’t qualify if you have significant assets in your name.
As a response, you could convey resources into an irrevocable Medicaid trust. You would no longer have access to the principal, but you could receive distributions of the trust’s earnings.
If and when you apply for Medicaid, the assets in the trust will not count, assuming you fund the trust at least five years before you apply.
Schedule a Consultation Today!
The post demonstrates that there are different ways to proceed when planning your estate. When you work with our Metairie estate planning law firm, we will provide personalized attention. Your plan will be carefully crafted to ideally suit your needs in light of your family dynamic and your objectives.
Going forward, we will be available to update the plan when things change. Our firm can also be engaged to provide guidance during the estate administration phase if it is needed.
To get started, call our Metairie, LA, estate planning office at 504-831-2348 or send us a message through our contact page.
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