By Lorne C. Book
Trusts used to be must-haves for avoiding estate taxes; in 2000 the federal estate tax exemption was only $675,000.00. The 2017 Tax Cuts and Jobs Act rendered trusts for tax planning purposes largely unnecessary, which begs the question: Are trusts still necessary? The answer depends on what you have and what your goals are. Here are some situations where a trust still might be considered a “must”.
Planning for Incapacity. Every 65 seconds, someone in the U.S. is diagnosed with Alzheimer’s, an alarmingly upward trend. While people of all ages can experience an accident or illness that leads to their incapacity, those who are older are especially at risk. Since a Will does nothing to manage your estate until you die, trust planning for incapacity helps create a seamless transition of decision making and money management if you lose the ability to manage your own affairs, without having to go through a time consuming and expensive guardianship proceeding.
Avoiding Probate. Probate is a clunky word that just refers to the legal process of transferring ownership of your property after your death. In states like California or Illinois, these proceedings are notoriously difficult (and expensive). Fully funding a trust is a strategic step toward avoiding the probate process, as well as protecting your privacy during life and at your death.
Keeping the Peace in Blended Families. Family is inherently messy, and blended families – where at least one spouse has kids from a prior relationship – are particularly complex, especially if a money fight is brewing on the horizon between the kids and the “new” spouse. A marital trust can provide for your surviving widow(er), while keeping control over where your estate goes once the surviving spouse dies. This can help maintain the family peace after you’re gone.
Protection from Creditors. Worded right, some trusts can keep creditors from reaching anything held in the trust and can prohibit the beneficiaries from giving their interest away to a creditor. This can make a lot of sense when a child or other beneficiary has had bankruptcy issues or for beneficiaries who may experience a sudden job loss, prolonged illness, or malpractice litigation (i.e. doctors and lawyers).
Divorce Protection. Even in community property states, like my home state of Texas, inheritance is theoretically protected from divorce. Theoretically. In reality, spouses often mix their inheritance up with each other’s funds, creating a problem identifying which is which during a divorce. Trust planning can “divorce-proof” an inheritance. Anything in the trust is separate from the couple’s community property and will be readily identifiable as the beneficiary-spouse’s separate property. Consider this type of trust planning if your adult kids are struggling through marriage or heading for divorce.
Grandbabies. They’re cute and cuddly and can do a lot of things. But they can’t usually inherit property, so trust planning is an excellent option for parents, grandparents, or any other individuals who plan to pass their estate down to the kids or grandkids. Creating a trust for minors allows you to set the terms of the trust (AND the rules for withdrawals) and put a responsible person in charge. Besides that, you can appoint a “batting order” of successive trustees to take care of the money if your first trustee dies or can no longer serve. These trusts can terminate whenever you feel the child beneficiary is old enough to handle money responsibly.
Special Needs. Individuals with special needs often must rely on government benefits like Medicaid and social security for their care throughout their life. These programs have strict income guidelines that can be upset by even a modest inheritance. Trust planning for special needs beneficiaries can preserve the beneficiary’s future eligibility and protect the assets from possible exposure to the mandatory Medicaid payback provisions.
Reckless Beneficiaries. Some people need to be protected from themselves. Putting assets in trust is often a good solution for beneficiaries who struggle managing money, have substance abuse or mental health issues, or have a criminal past. Properly worded, these trusts can distribute money directly to the beneficiary’s service providers, (i.e. a landlord, doctor, or educational institution).
Lorne C. Book is the Owner and Principal Shareholder of Book Law Firm in Dallas, Texas. His primary areas of practice include estate planning, probate, and small business succession. You can visit the firm at www.booklawfirm.com.
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