Most people are aware of the existence of trusts, but many assume that these legal devices are only useful for people who are wealthy. This is a misconception. Let’s look at some of the facts.
Estate Tax Efficiency & Asset Protection
People who have accumulated a significant store of wealth have estate tax concerns. We have a federal estate tax that carries a 40 percent maximum rate. Most people don’t have to pay the estate tax because there is a $5.34 million credit or exclusion. (This is the amount of the exclusion in 2014. It is subject to annual adjustments for inflation.)
If the value of your estate is less than $5.34 million you have no federal estate tax exposure. On the other hand, if your assets do exceed this amount you must take steps to gain estate tax efficiency.
There are certain types of trusts that can be used to mitigate estate tax exposure. These would be irrevocable trusts. With an irrevocable trust you are surrendering incidents of ownership. As a result, assets that you have conveyed into this type of trust are not considered to be part of your estate for tax purposes.
The same thing is true for asset protection. If you wanted to keep assets out of the reach of creditors and claimants you could place them into certain types of irrevocable trusts.
A very commonly utilized type of trust is the revocable living trust. If you are the grantor of a revocable living trust, you can revoke it at any time. You can change the terms, and you can act as the trustee and the beneficiary at first.
Because of this ongoing control, assets that have been conveyed into a revocable living trust would not be protected from litigants seeking redress. The assets would also be subject to the federal estate tax because you are retaining incidents of ownership.
Wealthy people who are concerned about asset protection and estate tax exposure would not benefit from this type of trust. Revocable living trusts are useful for people who are not necessarily wealthy who want to avoid probate.
Probate is the legal process of estate administration. If you use a will to express your final wishes regarding the transfer of your monetary resources, the will must be admitted to probate.
The heirs to the estate don’t receive their inheritances right away. The estate must be probated first. This can take anywhere from a number of months to a number of years.
There are also considerable expenses that can pile up during probate.
Trusts Are for Everyone
Trusts are not exclusively for the rich. There are trusts that are useful for those who are not extraordinarily wealthy. The revocable living trust is one of them, but there are others.
If you would like to learn more about trusts, contact our firm to schedule a free consultation.
Parman & Easterday