If you are thinking about setting up a trust as an estate planning tool, you should act in a fully informed manner. There are a number of different things to take into consideration, and the typical layperson may not be aware of the intricacies.
Estate Tax Exposure
Your financial position is going to have a lot to do with the equation when you are setting up a trust. First of all, you would do well to put together a statement of net worth. This is essentially a balance sheet that includes your assets and your liabilities. You could use the bottom line to evaluate your position relative to the federal estate tax exclusion.
The federal estate tax carries a 40 percent maximum rate, so it can have a significant impact if it is applied to the legacy that you will be passing along to your loved ones. Fortunately, there is an exclusion that can be used to transfer a relatively large amount of property free of taxation. For the rest of 2016, the federal estate tax exclusion is $5.45 million.
It is possible to transfer an unlimited amount of property to your spouse free of the estate tax, because there is an unlimited marital deduction that is afforded to American citizens.
If your estate is going to be exposed to taxation, there are certain irrevocable trusts that can be used to facilitate tax efficient asset transfers to the beneficiaries. There is also a trust called a qualified domestic trust that can be utilized for tax efficiency if you are a high net worth individual who is married to a citizen of another country.
Nursing Home Asset Protection
Setting up a trust can be a good idea if you are concerned about future long-term care costs. The majority of senior citizens will need help with their activities of daily living eventually, and Medicare does not pay for nursing home or assisted living community care.
Medicaid will help with these expenses, but it is only available to people who have very limited resources. The limit on countable assets for an individual is just $2000. To remove assets from your own name with future Medicaid eligibility in mind, you could convey resources into an irrevocable Medicaid trust. The assets would not be counted while you are living, and the beneficiaries would inherit the resources after you are gone.
Though you would not be allowed to touch the principal, you could continue to receive income from the earnings of assets in the trust if they are income producing. This would be possible up until the time that you actually qualify for Medicaid, because you would be required to contribute the income toward the cost of the care that you are receiving.
Revocable Living Trusts
Another type of trust that is very popular is the revocable living trust. Since you can revoke this type of trust, it would not be useful as an estate tax efficiency tool, and assets in this type of trust would be counted by Medicaid.
Though the above objectives would not be satisfied, a living trust can provide a host of benefits. One of them is the ability to include a spendthrift provision so that the beneficiaries are protected after you pass away. You could instruct the trustee to distribute income to the beneficiaries over time so that they do not have the ability squander their inheritances all at once.
To account for possible incapacity late in life, you could empower a disability trustee to handle the assets in the trust if you ever become unable to make sound financial decisions on your own. This is another major benefit, because incapacity is common among elders. Alzheimer’s disease alone is enough to get your attention. This disease strikes around 45 percent of people who are 85 years of age and older.
A revocable living trust will also facilitate probate avoidance. If you maintain direct possession of your property until the time of your death, and you use a will to direct its distribution, the will would be admitted to probate. The court would supervise the estate administration process, and no inheritances would be distributed during the process. In most areas, a best case scenario would be nine months to a year, and complicated cases can take longer.
Assets in a revocable living trust can be distributed to the beneficiaries outside of probate.
Schedule a Consultation
Our firm can help if you are interested in setting up a trust. To schedule a consultation, send us a message through our contact page or give us a call at 239-225-7911.