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Estate Planning: 4 Common Misconceptions About a Living Trust

Posted by Larry Jones on Feb 14, 2017 9:30:00 AM
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A Matter of Trust

In my previous blog I spoke about the importance of having a revocable living trust in your estate planning toolkit.  This type of trust can do several things for you, such as reducing the amount of taxes and fees your estate will pay, shortening the amount of time that beneficiaries will have to wait to take ownership of assets, and removing all of the transactions from the public eye.

Trusts can be an invaluable tool in your estate plan. Irrevocable trusts are usually used by higher net-worth folks to escape the absolute pillage of their estate by the government. There are also some significant tax advantages found in gifting to these trusts, as well as to charities.

The immediate tax advantages with a revocable living trust are less dramatic. However, for the person with an estate of less than $5 million the living trust is much more commonly utilized. Sometimes people confuse the two types- revocable vs. irrevocable - and the benefits that each kind provides.

What You Don't Know (but think you do) Can Hurt You

Once a living trust is in place and funded, there's very little that needs to be done with it. There are some administrative costs with setting one up, but after that it's painless The assets inside the trust are treated as if you own them, and you can spend, borrow from, and buy and sell from the trust. You manage the assets just as you have always done. You have complete control over your money.

There are, however, a few common misconceptions about the living trust that should be understood:

Misconception #1: You don't need a trust. If you have a will your assets will not go through probate.

This is simply not true. Even though it's foolish not to have a will, and even though a will may spell out very specifically who gets what, the entire process is through public probate. The settlement of a will typically takes 8-14 months. With a living trust, change of ownership of the assets take place immediately upon death, and outside the public eye.

Misconception #2: If your estate is less than the exemption amount ($5.45 million) then a living trust is not needed.

Large estates are usually more concerned with huge tax losses to the estate, and irrevocable trusts are more useful in that context. The living trust is designed more for the lessening of immediate fees associated with the death of the benefactor, which can be substantial depending on your situation and which state you live in.

Misconception #3: Your creditors cannot get to assets inside a living trust.

With a living trust you still have complete administrative control over your assets, which is not the case with an irrevocable trust. Since that's so, creditors can come after the assets inside the trust. Don't depend on any living trust for asset protection.

Misconception #4: You can shelter assets inside a living trust in case of a long-term care event.

This one is related to the last misconception. Medicaid considers the assets in a living trust to be available to you. These assets will not be sheltered in their calculations for your dependence on state long-term care funding.

The Living Trust Shines

 The revocable living trust can be a powerful vehicle in helping you accomplish your desires after you are gone. For example, suppose you had two children, one of them a hard working family man, the other addicted to heroin. With a living trust you can spell out, in advance, how you'd like your assets to go to the two of them. I knew of one fellow who had a large estate and one lazy son who put a provision in the trust that the son be given "an amount each year equal to the amount of his adjusted gross income." Pretty clever. Such is the power and usefulness of a well-designed trust.

In the next blog I'm going to present some case studies on the uses of a revocable living trust.

Until next time,


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Topics: Estate Planning

What you don't know can hurt you!

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