Before we get into the objectives that a living trust cannot accomplish, let’s look at a few of the things that a living trust can do for you.
If you were to create a revocable living trust, you would be called the grantor of the trust. You would not be surrendering control of the assets that you convey into the trust, because the trust is revocable.
At any time, you could choose to revoke or rescind the trust. It would no longer exist, and you could take back direct personal control of the assets that you conveyed into it.
The anatomy of a living trust involves a trustee and a beneficiary or beneficiaries. When you create the trust declaration as the grantor, you name a trustee, and you name beneficiaries.
One of the nice things about a revocable living trust is the fact that you as the grantor can act as the trustee and the beneficiary while you are alive and well. As the trustee you administer the trust, and you can receive monetary distributions as the beneficiary.
You are creating the revocable living trust as an estate planning tool, so you name a successor trustee to administer the trust after your passing. You also name successor beneficiaries.
When you create the trust declaration, you have the power to leave behind instructions that the successor trustee must follow after you pass away. This is one of the benefits that you gain when you create a revocable living trust.
You may not want the beneficiaries to receive lump sum inheritances all at once. If you feel this way, you can instruct the trustee to distribute assets in a measured fashion over an extended period of time.
To provide an example, you could allow the trustee to distribute earnings from assets that have been conveyed into the trust monthly while the principal remains intact. As the beneficiaries reach certain age thresholds, you could allow for larger distributions.
This is just one example, but the point is that you control the nature of the distributions, and the successor trustee would be legally compelled to follow your instructions. Plus, the trust would have a spendthrift provision, and it would become irrevocable at the time of your passing, so there would be a certain level of asset protection.
The distributions from the trust to the beneficiaries would take place outside of probate, and this is another advantage. If a will is used to direct asset transfers, it would be admitted to probate. This is a time-consuming and expensive legal process, and you avoid it if you use a living trust.
Now, let’s examine three estate planning objectives that a living trust will not satisfy.
1.) Estate Tax Efficiency
The federal estate tax is potentially applicable on large asset transfers. If you are transferring more than $5.45 million to anyone other than your spouse, the portion that exceeds this figure could be subject to the estate tax and its 40 percent maximum rate.
There are irrevocable trusts that can be used to remove assets from your estate for tax purposes. However, assets that are contained within a revocable living trust would be part of your taxable estate.
2.) Asset Protection
If you want to protect your own assets from legal judgments, there are legal structures that you can utilize, but a revocable living trust is not one of them. Since you retain incidents of ownership due to the right of revocation, assets in a living trust could be attached by litigants seeking redress.
3.) Medicaid Eligibility
Most senior citizens are going to need living assistance eventually, and about 25 percent of people who are 85 years of age and older are residing in nursing homes. Nursing home care is extremely expensive, and costs have been rising year-by-year.
The Medicare program does not pay for custodial care, which is the form of care that nursing homes provide. Medicaid does pay for long-term care, and it pays for just over half of the care that seniors are receiving.
You can’t qualify for Medicaid if you have significant assets in your own name. Assets that are in a revocable living trust would be counted, but an irrevocable Medicaid trust be used if you are aiming toward future Medicaid eligibility.
If any of the above are a goal or major concern for you, it is important to consult an estate planning attorney to discuss other tools outside of your revocable living trust that may be available to you. Reach out to us today to get started.