For many Massachusetts residents, the value in creating a living trust (also called a revocable trust) can not be overstated. A living trust can provide many concrete, money saving and family protection benefits that go well beyond simply listing how you want assets distributed when you die. Sometimes clients ask me, “We have Wills, why do we need a living trust.” Well, in a nutshell, here is the answer:
1. Avoiding Probate: Whether you have a Will or not, when you pass away your estate must go through probate in order to be distributed to your heirs. This is a public process that involves filing an inventory of assets with a court and notifying creditors and potential beneficiaries through direct mail and newspaper publication. A typical probate in Massachusetts also requires that your estate remain open for at least one year so that creditors have an opportunity to make claims against the estate. All this leads to a time consuming burden on your loved ones and additional expenses to your estate (court and attorney fees) that can range from a couple thousand dollars to much more.
When you have a living trust, in combination with a pour-over Will, your estate can avoid probate completely, allowing your heirs immediate access to your assets in a privately administered process that costs you nothing.
2. Estate Taxes: Currently the Massachusetts estate tax exemption is $1 million while the federal exemption is $5 million. In 2013, as currently enacted, the federal estate tax exemption is set to be reduced to $1 million. This means that if your estate (including your home, accounts, investments, other real estate, insurance policies, etc.) is valued at $999,999 you will pay no estate taxes. However, if you are $1 over a million, you will pay Massachusetts estate taxes on the entire amount (not just the amount that is over). The Massachusetts estate tax rate is typically between 10% and 16% while the federal rate is 35%, rising to 55% in 2013.
The exemption limits mean that each person is allowed $1 million before they are taxed. However, all too often married couples who have done no trust planning end up in this devastating and preventable scenario: spouse A passes away leaving everything to spouse B. No estate taxes will be due on the death of spouse A, however their exemption is now lost. Spouse B now holds the couple’s total net worth in the surviving spouse’s estate but still has only their individual exemption of $1 million available. If the combined estate is more than $1 million the surviving spouse will get hit with an estate tax.
By utilizing a living trust with estate tax provisions, spouses are able to parcel out the estate, while not reducing a couple’s access to their assets, so that both $1 million dollar exemptions are maintained. Now, when spouse B passes away his or her estate tax exemption is effectively doubled to $2 million, allowing the surviving spouse to either significantly reduce his or her estate tax bill or avoid paying estate taxes entirely. The savings here can easily be in the tens of thousands of dollars.
3. Protection for Your Descendents: If you have young children or grandchildren, do you really want them to have access to their inheritance before they are mature enough to handle it? A living trust allows you to name a trusted person to act as trustee for their inheritance, allowing the funds to be used for their health, maintenance and education, until they reach a certain age of your choosing, at which point they will receive the inheritance you have left them. By deciding how the money can be spent and who will have control over their inheritance until your descendents are mature enough to make good decisions with their finances, you can help protect your loved ones well after you have passed.
A living trust can benefit adult descendents as well. Suppose one (or more) of your descendents is going through a divorce, bankruptcy or other creditor issue when you die. As soon as your Will distributes assets to them those assets are immediately available to their creditors. Instead of providing for your loved one’s well being, you may instead be financing their ex’s vacation plans or helping to repay a predatory lender.
When you leave your assets in a living trust, your descendents can elect to delay payment of their inheritance until after they have resolved their financial difficulties. The trustee can hold the funds for them, keeping them out of the reach of creditors, and then distribute them when the dark clouds have passed. Again, your descendents will be counting their blessing that you thought ahead for their well being when they receive what you intended them to have, especially after a trying life event.
A living trust offers many benefits to you and your family, but only if you have set it up and funded it correctly. Call the Heritage Law Center today for a free consultation on how we can get you on the right path with your own living trust.