It used to be very common for estate plans to include a two-part trust scheme, often called an AB trust, designed to avoid or minimize estate taxes. In 2012, Congress finally passed “permanent” estate tax legislation, with the estate tax exemption set at $5,000,000 per person adjusted for inflation. In other words, married couples who have less than $10,000,000 in assets no longer face serious estate taxation concerns. It might be tempting to think that the once-common trust is now a relic of the past. Although the use of trusts in estate planning has changed, they remain as important to a well-designed estate plan as ever.
(In some states, the old AB trust scheme remains important to avoid state estate taxes. Idaho has none, so that’s not an issue here.)
There are many non-tax reasons why a well-designed estate plan should include the use of a trust. Probably the most common one is to protect the inheritance from any number of possibilities, such as irresponsible money management by the beneficiaries and claims against the inheritance by a child’s creditors or ex-spouse. With a trust, the money will be protected from these factors, and will be put into the hands of a knowledgeable, experienced money manager, who can help the beneficiaries make sensible spending decisions. This use is especially important for parents whose children are too young to be entrusted with an inheritance (particularly an inheritance that comes right on the heels of the death of the children’s parents). For many families, that might include trust provisions keeping the money in trust until the children reach thirty or forty years of age.
Trusts can be used to avoid the probate process, saving time and money for beneficiaries, as well as rendering an otherwise public proceeding private. Although the probate process in Idaho is much simpler and less expensive than in some states, it is still often worth your while to do your best to avoid the process or to minimize those assets that need to pass through probate.
In a prior post, I explained that usually IRA benefits should not be left to trusts as beneficiaries, because of the tax consequences of doing so. However, if IRAs are left directly to beneficiaries, those assets will become “inherited IRAs,” which are not protected from creditors of the beneficiaries. Thus, for high-value IRAs, a specialty trust, known as a standalone retirement trust, can be used to protect those assets when appropriate.
Trusts can also be established to hold assets for a loved one who is receiving government benefits such as Medicaid. If the assets are left directly to the Medicaid recipient, Medicaid will often stop providing the benefits to that person until the inheritance money is spent. If the assets are put into a properly-designed trust, Medicaid will ignore the assets and continue providing benefits, while the trust money can be used to supplement the well-being and quality of life of the benefit recipient.
Another important use of trusts in estate planning is to cope with blended families. Any time one spouse has children who aren’t the children of the other spouse, there is a high risk of accidentally or even intentionally disinheriting those children. As an example imagine a husband and wife, each of whom have children from prior relationships. Say the husband dies, leaving his assets to his wife. Ten years later, the wife decides to remarry, and later dies, leaving all her assets to the new husband. The first husband’s children have been disinherited and likely the wife’s children have been, too. All of these scenarios can be avoided with trusts arrangements. In this example, the husband could leave his assets to a trust that could be managed to support the wife during her lifetime, but then would be distributed to the husband’s children. Problem solved.
You see, that’s the point of a good estate plan — to spot potential problems and to solve them. Trusts are often an important part of the solution.
If you have questions about whether your estate plan should include the use of a trust, you should contact a competent estate planning attorney for a review, such as the Learned Lawyer!