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Most people think trusts are a tool of the rich. That’s not the case. A trust is simply a smart way to safeguard what you value. So you can benefit from a trust at any income level. At its most basic level, an estate plan is simply a way to make sure whatever you accumulate in your life gets shared according to your wishes after you’re gone. A strong estate plan has a variety of elements—all designed to make sure you control what happens in the future. These can include:
By design, a living trust is a private arrangement. It allows you to maintain privacy regarding the affairs of the family estate both during life and after death. On the other hand, a probate estate is a different matter, a subject of public record. Probate records must usually disclose (a) the specific assets of the estate, (b) the names and ages of heirs, including the amounts and timing of asset dispositions made to them, (c) the outstanding debts of the estate, and (d) other sensitive info considered related to the decease of the asset owner.
A living trust allows you to exercise prudent control over your estate, even after death. A large sum of money suddenly acquired by a young or financially unsophisticated family member may cause more problems than it solves. An incremental, age-based allocation formula is one of many methods that can be incorporated into a trust to exercise asset control. In fact, to the extent a beneficiary’s inheritance is being held in a trust, it’s usually protected from any creditor claims against that beneficiary, including (in most states) divorce settlements.
A living trust is an ideal holder for life insurance proceeds. Insurance proceeds payable to a trust can be managed and administered just as the other assets of the trust estate. Plus, if a named beneficiary of a life insurance policy doesn’t survive the insured, the proceeds might be assigned to the deceased beneficiary’s probate estate—something best avoided. Also, if children under 18 (or grandchildren) become direct recipients of insurance proceeds without the benefit of a living trust, then a surrogate court will be required to create and supervise a statutory trust to get and manage the proceeds on behalf of the children.
Parents with an incapacitated child currently receiving Supplemental Security Income (SSI) benefits, have special planning conditions to consider. If a distribution from a parent’s will or trust is directly allocated to such a child, then a partial or even full disqualification of the child’s governmental entitlement may occur. But a properly drafted “special needs trust” can provide funds to benefit that child. It would comply with the statutory standard, so the child wouldn’t be disqualified from continuing to receive SSI benefits.
IRAs (and other qualified retirement plans) can be payable to living trusts under “stretch IRA” and “see-through” rules. These rules protect this type of asset from a financially unsophisticated IRA beneficiary. Without that control, an IRA beneficiary could demand and receive an immediate and full withdrawal of the IRA.
Transferring the management duties of a closely held family business should always be arranged in conjunction with a family trust. This lets the trustee be the effective manager of the family corporation where corporate interests have been allocated to children or grandchildren. When a trust controls a closely held business interest, the courts won’t have any need to meddle in the managerial operations since the business wasn’t subjected to probate in the first place.
A living trust seems much more unaffected by contests against an estate than a will, due to a disinherited or disgruntled child. Wills are more frequently targeted for contestations and may lead to undesirable judgement terms.
Today, the federal tax exemption is high: $11.4 million per person. In effect, most people (99.8%) won’t have to be concerned about federal estate taxes. But Congress can change things at any time, making the flexibility of an estate plan with a living trust even more important. When structured properly, a living trust can help maximize the full use and value of a married couple’s transfer tax credits (estate tax exemption equivalent amounts) to help avoid, or even eliminate, unnecessary taxation and reduce expenses.
A living trust, because of its probate avoidance capabilities, precludes the necessity to own property jointly with another to avoid probate. If a parent, for example, reassigns personal property ownership into a joint-tenancy-with-right-of-survivorship deed, or any asset or account with a child, then the control of that property is forfeited. Each respective tenant in that ownership arrangement may be deemed to own 100% of the property for purposes of satisfying a creditor claim against any tenant. In other words, if the child gets sued, the parent could end up losing the property to a legal judgment.