A living trust is a powerful estate planning tool, it allows property owned by the trust to avoid probate, it keeps finances from becoming public and it can be an important aspect of incapacity planning. Advertisements touting the benefits of a living trust are everywhere, but despite their promises, there are five things a living trust CANNOT do for an estate.
1. Protect your assets from creditors: Since a Living Trust is revocable, meaning terms of the trust can be changed and the trust terms changed or revoked, and therefore within your control, it should not be used as a tool for asset protection, as creditors can ‘pierce’ the trust to access the grantor’s assets.
2. Completely replace a will: Since not every single piece of personal property is normally transferred to a living trust, a will is still needed to distribute property not owned by the trust. The will also still has the important tasks of naming a Guardian for any minor children as well as naming the Executor of the estate.
3. Prevent challenges from heirs: While a trust is generally more difficult to contest than a will, a Living Trust can still be challenged.
4. Shield assets from being counted in Medicaid: While some forms of trusts may be used in limited circumstances during Medicaid planning, such as a Special Needs Trust, assets held within a Living Trust are normally counted during the Medicaid qualification process.
5. Avoid income or estate taxes: While some trusts may reduce the tax burden of an estate, income generated from a trust is normally taxable and it does not avoid estate taxes.
A Living Trust can still benefit many estates, and an estate planning attorney can review your situation to help determine if it is the best choice for your family’s needs and goals.