A living trust is a very versatile, useful estate planning document that is actually the right choice for most people. Contrary to popular belief, a last will is not necessarily the simplest, most effective device for people that are not extraordinarily wealthy. The primary reason for this is the fact that a will must be admitted to probate. This is a costly and time-consuming process, and it is an open proceeding that allows the general public to find out the terms of the will.
With a living trust, the assets can be distributed by the trustee outside of the process of probate, and this is a major advantage. Another one is the fact that you can consolidate all of your resources that will eventually be passed along to your heirs.
Thirdly, you can include spendthrift protections when you establish a revocable living trust. For example, if you want the trustee to keep the principal in place while distributing the earnings from the trust incrementally, you could leave these instructions in the trust declaration.
There is yet another advantage that can be gained through the utilization of a revocable living trust. If you establish such a trust, you can act as the trustee and beneficiary while you are still alive. A successor trustee would be named in the trust agreement to administer the trust after you are gone.
A significant percentage of senior citizens become unable to handle their own affairs at some point in time due to incapacity. To account for this, you could empower the successor trustee, or any other person or entity, to act as a disability trustee who would step in if you ever become unable to make sound decisions on your own.
Limitations of Living Trusts
Clearly, a living trust can accomplish a lot of objectives, but it would not be the right choice under some circumstances. The fact that a living trust is revocable is a positive for some people, because you have the ability to dissolve the trust at any time, and you have direct access to the resources in the trust while you are living. However, since you have these powers, you retain incidents of ownership.
As a result, if you are exposed to the federal estate tax, assets in a revocable living trust would potentially be taxable. At the time of this writing, the amount of the federal estate tax exclusion is $11.18 million. This is the amount that can be transferred before the estate tax would become applicable. There are other trusts that are irrevocable that could be utilized to reduce estate tax exposure. These would include generation-skipping trusts, qualified personal residence trusts, charitable remainder trusts, and grantor retained annuity trusts to name a few.
Many elders require long-term care at some point in time, and nursing homes are very expensive. Nationally, the median annual cost for a private room in a nursing home exceeds $97,000, and over the next five years, a four percent increase is anticipated. If you are thinking that you are not too concerned because you will qualify for Medicare as a senior citizen, we have some bad news to pass along.
The Medicare program will pay for convalescent care after an injury or illness, but it will not pay for the custodial care that you would receive in a nursing home. Medicaid is another government health insurance program, and it will pay for nursing home care. However, it is a need-based program, so there are income and asset limits. Resources that are held in a revocable living trust would be counted, because once again, you retain incidents of ownership.
It would be possible to convey assets into an irrevocable Medicaid trust to get them out of your name so that you can obtain eligibility for the program, as long as you take this action at least five years before you apply. You could potentially continue to receive income from the earnings of appreciating assets that are held by the trust.
Attend a Free Workshop!
If you would like to learn more about trusts and other estate planning tools, there are some great opportunities coming up in the near future. We are holding a series of workshops, and they are absolutely free to attend, but we do ask that you reserve your space in advance. You can visit our workshop page to check out the schedule and obtain registration information.