If you are a golfer, when you look into your golf bag, you see different types of clubs. The same club is not going to be appropriate for every type of shot they you are going to take. If you were to say to someone “hand me a club,” they’re going to ask you which club you want, because they’re not all the same.
You should apply the same type of logic when you are thinking about trusts. There are different types of trusts that are used in the field of estate planning, and they are not all intended for the same purposes.
The type of trust that is useful for the widest range of people is the revocable living trust. These trusts provide many different benefits, but there are some things that a living trust cannot accomplish.
Before we look at four things that a living trust cannot do for you, let’s look at the benefits that living trusts provide.
First off, if you use a living trust to facilitate asset transfers after you are gone, you are not required to allow for immediate, lump sum distributions of everything in the trust to the beneficiaries. You have the option of prolonging the viability of the trust so that the beneficiaries have incremental income to draw from over an extended period of time.
It would be possible to give the trustee the discretion to distribute larger amounts when certain circumstances exist, or when the beneficiaries reach certain ages.
If you were to use a last will to direct the distribution of your personally held property, lump sums would be distributed to the inheritors.
Another thing to understand about a will is the fact that it would be admitted to probate, which is a time-consuming and expensive legal process. On the other hand, if you convey property into a living trust, it could be distributed in a more timely and efficient manner outside of probate.
You can also account for incapacity if you use a living trust as your vehicle of asset transfer. A disability trustee that you name in the trust agreement could be empowered to handle the trust administration tasks in the event of your incapacitation.
Now that we have spelled out some of the benefits, here are the four things that a living trust cannot accomplish.
Estate Tax Efficiency
High net worth families could be exposed to estate taxes.There is a federal estate tax, and here in Vermont where we practice law, there is also a state-level estate tax that citizens of our state have to contend with.
Assets that have been conveyed into a revocable living trust would be part of your estate for estate tax purposes, so these trusts do not provide estate tax efficiency.
People who are in certain businesses are inherently vulnerable to legal actions. If you were to convey assets into a revocable living trust, they would not be protected from creditors or claimant seeking redress. The assets could be attached.
Special Needs Planning
A significant percentage of people with special needs rely on government benefit programs like Medicaid and Supplemental Security Income. These are programs that are only available to people who have virtually no financial resources.
If you were to make a person with a disability who is enrolled in these programs the beneficiary of a living trust, the improvement in financial status could cause a loss of benefits. A living trust would not be a special needs planning solution.
Many seniors endeavor to get assets out of their own names so that they can qualify for Medicaid. This program pays for living assistance, and Medicare does not pay for long-term care.
Assets that are contained in a revocable living trust would be countable for Medicaid eligibility purposes, so a living trust would not be a good Medicaid asset protection tool.
Since you can revoke a living trust, in legal terms, you are retaining incidents of ownership, and this is why living trusts do not satisfy the objectives that we looked at above. However, there are also irrevocable trusts. You surrender incidents of ownership when you establish and fund this type of trust.
Irrevocable trusts of various kinds are used for estate tax efficiency and asset protection purposes. Assets in an irrevocable Medicaid trust would not be counted by the program, and an irrevocable special needs trust could be created to provide for a loved one with special needs without impacting government benefit eligibility.
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If you would like to discuss your estate planning objectives with a licensed professional, give us a call at (802) 879-7133 to set up a free consultation.
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