Whether you are creating your first estate plan or updating an existing plan, deciding which estate planning tools and strategies to include will be among your most important decisions. One of the most common of those tools and strategies involves including a living trust in your estate plan. Although you will need to discuss your unique need and goals with your estate planning attorney before deciding if a living trust should be part of your comprehensive estate plan, the estate planning attorneys at Nash Bean Ford, & Brown LLP explain common reasons to include a living trust in your estate plan.
Living Trust Basics
A trust is a relationship whereby property is held by one party for the benefit of another. A Settlor (also referred to as a “Grantor” or “Trustor”) transfers assets into the trust that is then administered by a Trustee, appointed by the Settlor. Trusts can be divided into two broad categories – testamentary and living trusts. A testamentary trust is a trust that only activates after the death of the Settlor. As the name implies, a living trust activates while the Settlor is still alive. Living trusts can be revocable or irrevocable.
Reasons to Create a Living Trust
The reasons to include a living trust in your estate plan are numerous and varied; however, the following five are among the most common:
- As the parent of a minor child you wish to protect his/her inheritance. Legally, your minor child cannot inherit directly from your estate. Shielding your child’s inheritance in a living trust ensures that those assets are protected until your child reaches the age of majority or a much more mature age and can inherit directly. A living trust also allows you to stagger the distributions your child eventually receives so that he/she has time to learn how to handle the inheritance. No matter how mature your child is, handing an 18-year-old a large lump sum inheritance is rarely a good idea.
- You want your estate to avoid probate. Probate is the legal process that is typically required following death. Formal probate can take a very long time to complete and can be very costly. Consequently, the estate that is eventually distributed to loved ones may be significantly diminished and your loved ones may have to wait months – even years – before they receive their inheritance. It should come as no surprise, therefore, that probate avoidance is a popular estate planning goal. A living trust can help further that goal because assets held by a trust are non-probate assets, meaning they do not have to go through the probate process before being distributed.
- You want to plan for the possibility of incapacity. Planning for the possibility of your own incapacity should be as important as planning for your own death. A revocable living trust is a good way to do that. It works by allowing you to name yourself as the Trustee of the trust, allowing you to control trust assets as long as you are able to do so. You name the person you wish to take over control of those assets as the successor Trustee. If you become incapacitated, control shifts to the successor Trustee automatically.
- You want to make sure you are eligible for Medicaid if you need it. For many seniors faced with the high cost of long-term care, Medicaid is their only hope for help covering those costs. Qualifying for Medicaid, however, can put a retirement nest egg in jeopardy if you failed to plan ahead because of the Medicaid asset limits used to determine eligibility. Creating an irrevocable trust as part of a larger Medicaid planning component within your estate plan can protect those assets while ensuring your eligibility for Medicaid if you need it in the future.
- You want to protect your assets from a wide range of threats. Whether you are concerned about creditors, divorce, Medicaid eligibility, or other threats to your assets, an irrevocable living trust can help. Assets transferred into an irrevocable living trust become trust assets. As such, you no longer have an ownership interest in those assets, meaning they cannot be reached by creditors or other threats.
Contact an Estate Planning Attorney
For additional information, please download our FREE estate planning worksheet. If you have additional questions or concerns about including a living trust in your estate plan, contact an experienced estate planning attorney at Nash Bean Ford, & Brown LLP by calling 309-944-2188 to schedule your appointment today.