The legal device called a revocable living trust is one of the most widely utilized asset transfer vehicles in the field of estate planning. There are pitfalls and limitations that go along with the utilization of a last will, and these are avoided if you opt for a living trust as an alternative.
One major benefit is the consolidation of assets. When a will is used, the executor must spend a lot of time and effort identifying and inventorying assets that comprise the estate. On the other hand, with a living trust, everything that will be distributed by the trustee that you empower is accounted for from the outset.
Another positive is the ability to arrange for long-term, ongoing distributions. To provide an example, let’s say that you have income producing assets in the trust. You could instruct the trustee to distribute the earnings from the trust every month. If you choose to do so, you can allow for larger distributions when the beneficiary reaches a certain age.
Speaking of the trustee and the beneficiary, if you establish a revocable living trust, you can act as the trustee and the beneficiary while you are living. In this manner, you retain total control of the trust in every way. The ultimate level of control is the fact that you have the ability to revoke the trust at any time.
There is great deal of flexibility as well when you have a living trust. You can easily sign property over to the trust after it has been established. Plus, you can change the beneficiary designations, the successor trustee designation, and/or the terms of the trust.
Another benefit that you gain when you use a living trust is the ability to name a disability trustee. This individual or entity would administer the trust in the event of your incapacitation.
A significant percentage of elders become unable to handle their own affairs toward the end of their lives, so it is prudent to designate a disability trustee. It can be the successor that is already named in the document, but this is not a requirement.
If you use a last will to state your final wishes, inheritances would not be distributed immediately. The executor would be required to admit the will to probate, and here in New York, the Surrogate’s Court would supervise the estate administration process.
Most people would like their heirs to receive their inheritances in a timely manner, but this will not happen when probate is a factor. It will take eight or nine months to a year, even if there are no complications. Complex cases can take considerably longer.
In addition to the time consumption, there are a lot of expenses that accumulate during probate. When a revocable living trust is utilized, the executor has the ability to distribute assets to the beneficiaries directly, without supervision. The probate process is not a factor.
Living Trust Drawbacks
As you can see, there are a lot of positives that go along with the creation of a living trust, but a living trust is not a cure-all. The retention of control is comforting on the one hand, but in the eyes of the law, they are still in your possession. As a result, if you are the target of a lawsuit, assets in the revocable living trust would not be protected in any way.
We have a federal estate tax in the United States that carries a 40 percent maximum rate. At the time of this writing in 2019, the federal estate tax exclusion is $11.4 million. This is the amount that can be transferred before the estate tax would kick in.
Here in New York where we practice law, there is a state-level estate tax. The exclusion is $5.74 million, so you can potentially be exempt from the federal tax and exposed on the state level. Assets in a revocable living trust would be part of your estate for tax purposes.
There is also the matter of Medicaid eligibility. Many seniors rely on this program at some point, because it will pay for long-term care. Medicare does not pick up the tab for a stay in a nursing home or assisted living community. Since this is a need-based program, you cannot qualify if you have a reasonable store of assets in your own name. Resources that have been conveyed into a revocable living trust would be counted if you were to apply for Medicaid.
That’s the bad news, but the good news is that there is a type of trust that you can use to obtain Medicaid eligibility. The principal in an irrevocable income-only Medicaid trust would not be counted, but you could continue to receive earnings from the trust until and unless you apply for Medicaid. There are also irrevocable trusts that can be used to gain estate tax efficiency.
Attend a Free Seminar!
We are holding a series of free estate planning seminars over the coming weeks, and you are invited to attend the session that fits into your schedule. To see the dates and obtain registration information, click the following link: Smithtown, NY Estate Planning Seminars.