Why a Living Trust? (Part 2)

We’re back to discuss more about why a living trust might be right for you!

A Trust can provide creditor protection for the inheritance you leave to your spouse or beneficiaries, protecting those funds if that person is going through a divorce, bankruptcy, a business loss, or a lawsuit.

The reason for this is that the Trust maintains “ownership” of the asset, not the beneficiary (until it is transferred to his or her name).  Thus, during a hardship, assets can remain in the name of the Trust – and therefore a creditor of the beneficiary cannot compel the beneficiary to give something that is not hers.  In spite of this protection, the beneficiary will still have access to the assets in accordance with the directions you leave in your Trust, for things like education, health, maintenance and support, and, eventual distribution.

A Trust may also be used to ensure that a disabled beneficiary will still receive his governmental benefits.  Leaving your assets outright to a person who receives needs-based governmental benefits may result in their loss of governmental assistance, which is often vital over the lifetime of someone with special needs.  However, leaving assets to a person with disabilities via a Trust will ensure that those governmental benefits are preserved and that the inheritance you leave will be available to pay for expenses beyond that covered by these governmental benefits, resulting in a better quality of life for your loved one.

A Trust may also be set up to prevent premature inheritance of your assets by your children. Although minors cannot inherit anything before the age of 18, a Trust may be set up for their benefit to provide them with monetary support for health, education, maintenance and welfare when they are minors, thereby preventing them from being a burden to their guardians during this vulnerable time.  A Trust can also limit distributions for certain types of expenditures (e.g. to start a business, to pay for a wedding, etc.)

Using a Trust for your children also allows you to delay distribution until certain ages to ensure your child is mature enough to spend those funds wisely (think, a ROTH IRA or down payment on a house, versus taking all of their friends to Cabo for a month). Although we all like to think our children would judiciously spend their inheritance, the more likely scenario is that he would spend indiscriminately on things like cars, trips, and consumables, until the money was squandered.  A Trust can also be set up to hold the child’s money indefinitely, providing robust asset protection, while allowing more access as he ages into maturity.

Conversely, if you leave your assets to your children by Will (or without a Will at all – {please don’t do this!}), the Court will be involved from the outset and every year thereafter until the child turns 18, at which point your child would likely inherit their money. In addition to the fact that your assets are being aired in a public forum, your kids do not receive the benefit of your financial guidance vis a vis the language you could have left them in your Trust, nor the delay in distribution that a Trust provides.

Importantly, Trusts can often reduce or eliminate estate taxes. Although the federal estate tax is currently quite high, at $11.58 Million per person, that number is due to expire in 2025 and will decrease at that time to approximately $5 Million per person (adjusted for inflation).  However, the estate tax floor changes frequently, with the ever-changing whim of Congress. There is presently a bill to reduce it to $3.5 Million. It is not out of the question that it will be reduced dramatically at some point in the near future.  Any estates over the estate tax floor are taxed at a whopping 40%, so it’s important to be aware of this limit and use Trust planning to avoid paying taxes, arguably unnecessarily, to the government.

In Washington state, the current estate tax floor is presently at $2.193 Million, over which you will pay between 10-20% tax on a graduated scale.  Although Federal law allows you to earmark your spouse’s estate upon his death, so that the surviving spouse doesn’t pay taxes on the whole estate upon her death, Washington does not allow this “portability”.  Thus, Trust planning becomes absolutely vital for Washingtonians so that you can “split up” your estate between spouses. Interestingly, between retirement accounts, life insurance and a rapidly appreciating house, I find that many of my Washington clients meet the $2 Million threshold quite easily. (Please note – In California, where I also practice, there is no estate tax floor…surprisingly!)

Along the same vein as protecting against estate taxes, a Trust can prevent your spouse from a spend-down of her assets to qualify for state-provided long-term care coverage as she ages. Many of us are living much longer than we are able to adequately save for, particularly if assisted living or medical assistance is required.  In order to qualify for Medicaid as a single person, your estate must be virtually exhausted. Thus, many people are required to spend away from their money (including selling off their home, which would have otherwise provided inheritance to their heirs) in order to qualify for state assistance. However, if a Trust is set up properly, it may have the ability to set aside a portion of the family estate when the first spouse dies, forever protecting this amount from being counted in the surviving spouse’s estate for Medicaid/Medi-CAL purposes, maintaining an extra amount of money to live your life comfortably while still collecting state assistance and, ideally, maintaining your children’s inheritance.

Obviously, every situation is specific to the family and person.  Although I am a staunch proponent of DIY projects, your estate plan should not be one of them. Please, consult with an attorney for any estate planning needs, and certainly if you believe you need a Trust!

Kira M. Rubel

*Licensed in CA and WA

The Harbor Law Group (formerly, Law Office of Kira M. Rubel)