A lot of people think trusts are only useful for multimillionaires who have multi-generational wealth and complicated portfolios. They assume a will is the document you use to direct inheritances if you are not rich.
In fact, there are trusts that can benefit everyday people. You should understand the facts so you can make informed decisions.
Wealth Protection Planning
Before we look at how the trust is useful for ordinary folks, we will look at where this misconception comes from. There is a federal estate tax that carries a 40 percent maximum rate. This tax can take a large chunk out of an estate.
That’s the bad news. The good news is that very few people have to pay this tax. There is a federal estate tax exclusion. This is a certain dollar amount that is exempt from taxation when it is being transferred.
When the Tax Cuts and Jobs Act of 2017 was passed, the exclusion was increased from $5.49 million to $11.18 million. This level has been in place since then, and there have been increases to account for the impact of inflation.
In 2022, the exclusion is $12.06 million, but this level is not permanent. The exclusion is scheduled to go back down to $5.49 million indexed for inflation in 2026.
There are irrevocable trusts that wealthy people use to reduce the estate tax liability. Assets that have been conveyed into the trust are no longer part of the estate. In the end, there are tax discounts when the assets are distributed to the beneficiaries.
Revocable Living Trust
A revocable living trust is in a different category. You can revoke or dissolve the trust if you change your mind. You can also be the trustee while you are living. This means that you have total control of the assets that you have signed over to the trust.
Because you still have access to the assets, resources in a revocable living trust would be part of your estate for tax purposes. A high net worth individual with estate tax concerns would not want to use this type of trust.
When you have a living trust, you name a successor to act as the administrator after you are gone, and your heirs are the beneficiaries. After your passing, the trustee would distribute inheritances to the beneficiaries, and probate would not be a factor.
Probate is a legal process, and there is court involvement. It would be necessary if you state your final wishes in a will. This process will take at least six or seven months to run its course. That is a long time to wait for an inheritance.
If you use a will as an asset transfer vehicle, your beneficiaries would receive their inheritances in lump sums. This may be a source of concern if you are leaving resources to beneficiaries that are not ready to handle a lot of money.
Things are different when you have a living trust. You can include a spendthrift clause that would protect the assets in the trust from the beneficiary’s creditors.
You can instruct your trustee to provide a certain amount each month for a number of years until the beneficiaries reach certain age levels. This is one example, but the distribution schedule is up to you.
We Are Here to Help!
A revocable living trust is one of the trusts you can utilize. There are also other trusts that can be used to satisfy specific objectives. Someone that is not in the field would not be aware of all the options that are available, and this is understandable.
When you choose our firm, we will gain an understanding of your situation and your intentions and help you develop a plan that is ideal for you and your family.
If you are ready to get started, call us at 408-843-6100 to schedule a consultation appointment at our Oklahoma City estate planning office. There is also a contact form on this site you can use if you would prefer to send us a message.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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