Assuming All Trusts Are the Same
If you read through Mistake #10, you now understand how a mere “last will and testament” does not provide the vital mechanisms offered by a living trust. A will can be partly disregarded by a judge or indefinitely delayed by probate. A living trust offers you the chance to bypass many of the frustrations of the probate, conservatorship, and guardianship systems.
Do not, however, be tempted create a living trust by yourself, or on the cheap. I urge you to reread the Introduction before you run to the Internet and download a generic living trust template, or pay $59.99 for a “Guaranteed 100 Percent Legal Online Living Trust in One Hour or Less.” If my warnings about gathering a “mushroom stew for your children” still fail to convince you to hire a qualified estate attorney, I urge you to consider the message of this chapter: there is no such thing as a generic trust.
A single person needs one kind of trust and a married couple needs another. Depending on their circumstances, a married couple may want to create a joint trust or two single trusts.
Sometimes a married couple should opt for an “A-B trust.”
These trusts have become obsolete for most purposes (see Mistake #4), but may be highly relevant to blended families, as it preserves the estate tax exemption of the first spouse to die, but limits the surviving spouse’s control over the deceased spouse’s share of the estate. In this way, an A-B trust protects the deceased spouse’s beneficiaries from the whims of the surviving spouse. Upon the death of the first spouse, an A-B trust sub-divides into an “A
Trust” (also known as a “Survivor’s Trust”) and a “B Trust” (also known as an “Exemption Trust,” a “Bypass Trust,” or a “Family Trust” with separate control mechanisms).
Sometimes, it’s appropriate to create a “revocable” trust and sometimes an “irrevocable” trust. As the word implies, an irrevocable trust cannot be amended or revoked. Generally speaking, an irrevocable trust serves the purpose of preventing property from being included in your total assets—your estate—during life or after death, or both. Some clients who are helping elderly parents get financial help for healthcare will use an irrevocable trust as part of the overall estate plan. It often provides the best protection of assets from creditors and predators, as the assets have “irrevocably” changed ownership.
Many useful trusts are not “living trusts” at all. The term “living trust” is short for “inter-vivos trust” or “a trust between living people.” Importantly, a living trust does not require a separate taxpayer identification number, and you need not file a separate tax return for your living trust. But, as you will see in some of the upcoming chapters, it’s not the right vehicle for all situations. For example, living trusts are always “revocable.”
Many problems arise from what we attorneys call an “I Love You Trust,” in which somebody creates a document which says, in essence, “I love you. I’m going to give you everything I have,” without any consideration of the taxes or legal pitfalls the loved one will face. You should not assume, however, that a well-written trust will include all the tax-planning provisions within its own structure. In 2014, we saw a significant change in tax law, which made it foolish to include certain then-common tax planning provisions in living trusts.
IRAs pose a special problem; you may want to consider an IRA Stretch Trust. In fact, whatever else you skip in this book, don’t skip Mistake #5: Assuming Your Living Trust Covers Things Like IRAs, 401(k)s, 403(b)s, 457s, Annuities, and Insurance.
Bottom line: you have to know what you are doing.
Take a couple with a large estate, say $5 million, $10 million, or more. The trust and will can be structured so that all the property goes to the surviving spouse. That sounds great. But suppose the husband dies and now all the assets are in the wife’s estate. If the assets continue to grow, they can become larger than the inheritance tax exemption the wife has at her death. As of this writing, the individual federal, tax-free limit for estates lies between $5 million and $6 million. These numbers are indexed to inflation. If her assets grew beyond that point (quite possible), the estate could take a huge tax hit. A married couple doubles up on the exemption, but when one spouse dies, the survivor must file a Form 706 and elect “portability.” This process should be handled with qualified professionals.
A tax-savvy estate attorney will know the trust strategies that protect the estate from such dangers. For example, some of the deceased’s assets could be held in a separate irrevocable trust created at his death. If properly structured, such assets might not be counted in the wife’s estate, so the total could grow to an unlimited amount and still not trigger the inheritance tax.
Other “tax planning trusts” might include charitable trusts, which are creatures of specific tax statutes.
Here’s a further example of a non-generic trust. Suppose you are wealthy and you have a wealthy child. When you die, you may not want to give that child your property outright, because when he or she dies, the grandchildren will have to pay inheritance taxes. A good estate attorney can create a separate trust to be used for the benefit of your child when you die, but has been excluded from his or her estate. The wealthy child can enjoy full access to the money during his or her lifetime, but this “generation skipping” trust preserves the wealth for the grandkids— even though it does not actually skip any generations at all.
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