You have a number of different legal devices at your disposal when you are engaged in your estate planning efforts. Trusts can satisfy many different respective underlying objectives, and you should understand all of the facts so that you can protect your resources and provide for each person that you love in the ideal manner.
A major distinction between classes of trusts is the power of revocation. There are some trusts that you can revoke, and there are also irrevocable trusts. Let’s look at some of the reasons why trust attorneys would recommend a revocable living trust.
Control and Efficiency
If you were to create a revocable living trust, you would be referred to as the grantor of the trust. The trustee is the individual who administers the trust, and the beneficiaries receive monetary distributions from the trust.
When you establish a revocable living trust, you can act as the trustee throughout your life, and as the grantor you can also act as the initial beneficiary. This ensures ongoing control of the assets, and the power of revocation is there if you want to revoke the trust entirely and take back direct personal possession of the property that you conveyed into it.
In the long run, the objective is to get the assets into the hands of your loved ones after you pass away. To account for the future, you name a successor trustee to manage the trust after you are gone. You could use someone that you know personally, or you could alternately engage a professional fiduciary. Trust companies and banks provide trust administration services.
You instruct the successor trustee with regard to the way that you want the assets transferred to the beneficiaries after your passing when you create the trust declaration. These instructions would be followed after your death, and the probate process would not be a factor.
The avoidance of probate is a major benefit that you gain when you use a revocable living trust instead of a last will. Probate is an expensive and time-consuming legal process, and the heirs have to wait it out before they can receive their inheritances. Transfers that take place through the terms of a living trust are not subject to probate.
Incidents of Ownership
From a legal perspective, you retain incidents of ownership when you create a revocable living trust, because you still control the assets in the trust, and you have the power of revocation. This is positive on the one hand if you are concerned about a loss of control, but there is another side to this coin.
Many people seek Medicaid eligibility as senior citizens, because Medicare does not pay for long-term care. Medicaid will pay for living assistance, but it is only available to people who can demonstrate a significant level of financial need. Assets in a revocable living trust can prevent you from obtaining Medicaid eligibility.
There are irrevocable trusts that can be established to enable Medicaid eligibility. You surrender incidents of ownership when you create an irrevocable trust, so assets in this type of trust would not be counted if you were to apply for Medicaid to pay for long-term care.
This is one reason why you may want to use an irrevocable trust, but there is also the matter of estate tax efficiency. Some high net worth individuals are exposed to the federal estate tax. At the time of this writing in 2018, the amount of the federal estate tax exclusion is $11.2 million. This is the amount that can be transferred before the death tax would be applicable. It carries a 40 percent maximum rate, so people that are in this financial stratosphere are facing some considerable asset erosion.
Fortunately, there are estate tax efficiency strategies that can be implemented that involve the utilization of certain types of irrevocable trusts. These would include qualified personal residence trusts, generation-skipping trusts, grantor retained annuity trusts, and irrevocable life insurance trusts.
Another type of irrevocable trust that can be useful for some people is the qualified terminable interest property trust. This device can protect the interests of your children from previous marriages when you are getting remarried while you simultaneously protect your new spouse. These are a handful of the irrevocable trusts that are sometimes utilized, but there are others.
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