There are a lot of misconceptions that circulate about estate planning. One of them is the idea that trusts are only for high net worth individuals. In fact, this is simply not the case at all, and we will look at the details here.
Trusts for Estate Tax Efficiency
First, it is important to understand the fact that there are different types of trusts. It is true that very wealthy people do utilize trusts to mitigate estate tax exposure. However, this tax will impact a very small percentage of the population, because there is a $12.92 million estate tax exclusion. This is the amount that can be transferred tax-free before the estate tax would be applicable on the remainder.
Irrevocable trusts will be part of estate tax efficiency strategies. With this type of trust, you “surrender incidents of ownership” in a legal sense. In other words, you no longer have control of the assets, and you cannot be the trustee of the trust. Property that has been conveyed into this type of trust would not be part of your estate for tax purposes.
Revocable Living Trust
In addition to the complex irrevocable trusts that are used by multimillionaires, there is the revocable living trust. This is a very versatile estate planning device that is the right choice for a wide range of people. It is preferable to a will for a number of different reasons that are quite compelling when you understand the facts.
Most importantly, you do not lose control of assets that you signed over to the trust. You will be the trustee while you are alive and well, and you have total access to the assets at all times. You retain the right of revocation, so you can dissolve the trust entirely. Short of that, you can alter the terms at any point after the trust has been established.
When you are drawing up the trust, you name a successor trustee to administer the trust after your death. This can be someone you know, or it can be a professional fiduciary like a trust company or the trust department of a bank.
The trustee will distribute the assets in accordance with your stated instructions after your death. These distributions will not be subject to the legal process of probate. This is a time-consuming, public, and costly proceeding that would be necessary if you state your final wishes in a simple will.
Probate avoidance is one benefit, and you can include spendthrift protections when you have a living trust. For example, let’s say you are concerned about one of your children burning through their inheritance too quickly. You can make them the beneficiary of a living trust with a spendthrift clause.
The trust would become irrevocable after your passing, and the assets would be protected from the beneficiary’s creditors. In the trust declaration, you could leave instructions regarding the way you want the assets to be distributed. You could allow for limited distributions over an extended period of time to prevent bad financial decision-making.
Other Types of Trusts
There are other trusts that serve different purposes, and you don’t have to be wealthy to utilize them. One of them is the supplemental needs or special needs trust. This type of trust can be established to provide resources for a person with a disability without impacting government benefit eligibility.
An incentive trust can be established to guide a beneficiary toward fruitful behavior or away from self-destructive tendencies. Simply put, there are a number of different types of trusts in the estate planning toolkit that can be useful for people of relatively ordinary means.
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There is no one-size-fits-all estate plan that is right for everyone. As you can see, there are many possibilities, and the right approach will depend on the circumstances.
When you work with our firm, we will gain an understanding of your position your objectives and provide recommendations. At the end of the process, you will emerge with a custom crafted plan that ideally suits your needs.
If you are ready to get started, you can set up a consultation at our Oakdale, MN estate planning office if you call us at 651-478-8999. We also have a contact form on this site you can fill out to send us a message.