Do you need a Trust as part of your estate plan? Maybe, maybe not. Trusts are not one-size-fits-all. Some are established during a lifetime, others at death. Some Trusts can be amended, while others cannot. They serve a multitude of issues and are fundamental in an estate planner’s toolbox. The top Four Reasons You May Need a Trust as part of your estate plan are as follows:
1. Protect Assets for Adult Children and Keep Your Assets in Your Bloodlines
Often, clients say that they want to provide for their competent, trustworthy, and responsible adult children, outright, when they pass away. That same client may also say that, if their child(ren) predeceases them, they want the child’s share to pass to grandchildren. Unfortunately, if the adult child survives the parent/client, and assets pass to the adult child outright at death, those inherited assets could be at risk to the following: (1) the child’s creditors, (2) the child getting divorced, and/or (3) the child passing away and the assets passing to the child’s surviving spouse, rather than the child’s descendants (the client’s grandchildren). All of these ills can be avoided by leaving the assets to a Trust for the lifetime benefit of the adult child. Depending on the circumstances, the adult child can also be the Trustee of their Trusts. By leaving an adult child their inheritance into a lifetime Trust for the child’s benefit, the assets can be protected from the child’s creditors and in the event of the child’s divorce, and also remain in the client’s bloodlines at the child’s death.
2. Asset Protection from Long-Term Care Costs
Long-term care can come in many forms. Long-term care can be provided in-home, with assistance provided on an hourly basis or around the clock. It can also be provided in an institutional setting, such as in an assisted living or skilled nursing setting. In either case, care is expensive. There are two primary ways to pay for that care. First, you can privately pay for care. Unfortunately, that can be a very expensive undertaking and can significantly deplete your estate. In the alternative, you might want to qualify for Medicaid benefits. Medicaid is a federal program that helps persons who qualify (both medically and financially) pay for long-term care. Medicaid has a 5-year lookback period. Gifts made within 5 years of an application for Medicaid benefits will trigger a penalty period at the time of application. Accordingly, it is sometimes prudent to remove some portion of a person’s assets from their name in an effort to start the 5-year clock ticking for Medicaid and protect the assets from future long term care costs. In this case, the client/grantor cannot be either a trustee or a beneficiary of the trust, but the transferred assets will be protected from the client/grantor’s long-term care costs so long as the individual does not need to apply for Medicaid assistance within 5 years of the transfer.
3. Avoid Probate
Probate is the process by which an executor/administrator is appointed to manage an estate after someone’s death. Probate is a fairly simple process in New Jersey, and avoiding probate here—just for the sake of avoiding “probate”—is ill-advised. However, a New Jersey resident who owns real property in another state might wish to avoid probate in that other state after their death. Or, where privacy is of concern, a Trust is preferable to a Will because trusts are private, whereas a Will becomes a matter of public record once it is probated at the Surrogate’s Office. Also, where a tax return will be required after your death, by funding a Living Trust during your lifetime, your Trustee will have uninterrupted access to the Trust assets following your death. Without a Trust (and where a tax return is required), upon death, 50% of a decedent’s estate is to be frozen and is not released until the executor receives the Tax Waivers. Receipt of Tax Waivers could take more than a year from the date of death. That delay would not be desirable because no distributions could be made and no changes could be made to the account holdings. Establishing and funding a revocable trust during a lifetime can help avoid all of these ills associated with the probate process.
4. Death Tax Savings
Historically, this was the #1 reason clients incorporated trusts into their estate planning. Death tax-sheltered trusts could be used to remove assets from a surviving spouse’s estate for tax purposes. As New Jersey residents, we had three taxes to be mindful of: the New Jersey Inheritance Tax, the New Jersey Estate, and the Federal Estate Tax. The New Jersey estate tax applied to all estates valued in excess of $675,000, but it was repealed on January 1, 2018, and has not been reinstated. The New Jersey Inheritance Tax is imposed based upon the decedent’s relationship to the beneficiary. Assets passing to a spouse, parents, children, or further descendants are exempt from the Inheritance Tax. Accordingly, if your assets are to be distributed among these immediate family members, no New Jersey tax will be assessed at death. As for the federal estate tax, that tax has three primary components: (1) transfers between spouses are exempt (regardless of size); (2) so long as your estate does not exceed the exemption amount in effect for the year of death, no estate tax return is required and no tax is due—a tax is only due on the value of the estate that exceeds the federal estate tax exemption amount; and (3) if one spouse dies, the survivor can take advantage of any unused portion of the deceased spouse’s exemption amount by filing a timely federal estate tax return, and electing to add the deceased spouse’s unused exemption on top of the surviving spouse’s exemption. The current federal estate tax exemption amount is $11,580,000. Per person. It is the highest exemption amount in the history of the US Tax Code. Thus, there are fewer of us who are concerned about incurring a federal estate tax—at least in 2020. But, this historically high estate tax exemption amount is already scheduled to be reduced to $5,000,000 as of January 1, 2026. And, who knows what will happen to the estate tax laws between now and then. Thus, I think that death tax savings will continue to be a motivating factor for many high-net-worth individuals in years to come.
If any of these “Top 4 Reasons You May Need a Trust” sounds relevant to you, please call our office to schedule a consultation so that we can discuss it.
