When you consider the subject of estate planning, if you haven’t looked into the it extensively, you are naturally going to think about wills and trusts. You could get the idea that it is an either/or proposition. A will is a will, and a trust is a trust; it’s as simple as that.
In fact, this is a misguided perception. There are numerous different types of trusts that are used in the field of estate planning, and there are actually multiple different types of wills.
A single type of trust cannot satisfy every possible estate planning objective.
You may have friends and family members who have established revocable living trusts. A living trust can be a great choice for a wide range of people. However, a living trust is not going to be the right tool when certain circumstances exist.
Let’s look at some of the reasons why you may want to use some other type of trust when you are planning your estate.
Living Trust Limitations
People who have enjoyed a significant amount of financial success can breathe a sigh of relief on one hand, but on the other hand, wealth preservation can be challenging. There are taxes on asset transfers, and this is a very important consideration.
On the federal level, there is an estate tax that can be applied on large transfers to anyone other than your spouse. Any amount of property can be transferred to your spouse tax-free, because there is an unlimited estate tax marital deduction.
The tax carries a 40 percent top rate, and it can be applied on the portion of an estate that exceeds $5.45 million in value. This $5.45 million figure is called the estate tax exclusion.
We practice law in the state of New York. There is a state-level estate tax in our state, and the top rate is 16 percent. At the beginning of 2019 the state-level estate tax exclusion will be raised to equal the amount of the federal exclusion. However, until then, it will be somewhat lower.
If you are exposed to estate taxes on either level, a revocable living trust would not provide you with estate tax efficiency. Assets in this type of trust would be part of your estate, because you have the power of revocation. You can take back direct personal possession of the assets any time you want to.
However, there are different types of trusts that do provide estate tax efficiency. These would be irrevocable trusts.
Special Needs Planning
People with disabilities often depend on Medicaid as a source of health insurance. You are probably aware of the fact that you cannot qualify for Medicaid if you have significant assets in your own name. The limit on assets that are considered to be countable is just $2000.
There is another government program that is important for a lot of people with special needs called Supplemental Security Income. It doesn’t take a government benefit expert to surmise that this program provides income for people with disabilities who are physically unable to work.
When eligibility for these programs is granted, the arrangement is flexible. If a person who was enrolled in these programs was to come into money, eligibility could be forfeited.
The type of trust that would be used to help out a loved one with a disability without causing a loss of benefits would be an irrevocable supplemental needs trust. The assets would not be in the direct personal possession of the beneficiary, so the trustee could use the resources to satisfy certain unmet needs. Benefit eligibility would not be negatively impacted.
Asset Protection
Some people want to protect assets from legal judgments while they are living, and you could also be concerned about asset protection for a loved one who is in line for an inheritance. There are irrevocable trusts that can be used for asset protection purposes.
However, if you have a revocable living trust, while you are living, the assets would not be protected from litigants seeking satisfaction from you.
Contact Us For a Consultation
In this blog post we have looked at some of the things that a living trust cannot accomplish, but in some cases, a living trust would in fact be the ideal choice.
Most people who are not estate planning professionals are simply not going to have a full understanding of all of their options. This is why you should discuss everything in detail with a licensed estate planning attorney.
Our firm can help if you are ready to take action. We offer no obligation consultations, and you can drop us a line through our contact page or call us at (631) 265-0599 to set up an appointment.
Mark S. Eghrari, Estate Planning Attorney
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