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Legal Trusts and Estate Planning: It’s Not Just For the Rich

Should You Set Up a Trust?

We tend to think of trusts as vehicles for extreme wealth when, in fact, most families with any assets could benefit from a trust. 

Trusts are essentially a means of protecting property and assets. They allow you to avoid probate, transfer assets without incurring huge tax burdens, and they give you significant control over how your assets are used after you are gone. Trusts can even help create or preserve eligibility for public funds when your assets or income might otherwise render you ineligible.

In other words, trusts are for almost anyone with assets.

You might be surprised by some of the ways trusts can help everyday folks achieve their goals. Here are a few scenarios where a trust can save the day.

Top 10 Reasons For Middle-Class Families to Create a Trust

  1. You don’t want your family to have to deal with the time and expense of probate court after you pass away.
  2. You have kids from a previous marriage and you don’t want to accidentally disinherit them.
  3. You want to provide for your surviving spouse but you also want to make sure something is left for your kids when that spouse passes.
  4. You want to provide for your children after you’re gone but you don’t want them to have unrestricted access to their inheritance when they’re too young.
  5. You want to provide for a loved one who receives public benefits like Medicaid or SSI and you don’t want an inheritance to disqualify them from those benefits.
  6. You have a child who is still a minor.
  7. You want to leave an inheritance to kids or grandchildren, but you’re worried that it might disqualify them from needs-based scholarships and financial aid.
  8. You want to qualify for Medicaid but your assets or income are too high.
  9. You want to qualify for VA benefits but the value of your assets is too high.
  10. You don’t want your estate diminished by estate and gift taxes.

What is a Trust?

A trust is a legal entity that holds onto your property for the benefit of a named party. You (the trustor) give another party (the trustee) the right to hold title to property or assets for the benefit of a third party (the beneficiary). In many cases, you are both the trustor and trustee while you are alive. A trust can hold a variety of assets including money, stocks and bonds, real estate, or even a business.

Trusts are established to provide legal protection for the trustor’s assets, and to set terms for the way assets are to be held, gathered, and distributed in the future. The ability to set precise terms for how your assets will be used is what distinguishes a trust from other estate planning tools.

For example, say you own a small business and want to ensure not only that it continues to run well during your lifetime but after you pass away. If you transfer ownership of the business to your trust, then you can create instructions for how to manage the business if you are incapacitated, as well as who will take over if you pass away.

During your lifetime and while you are capable, you will serve as trustee and control the trust. If your circumstances change, the instructions in the trust can be acted upon right away—no delay waiting for a court to approve your will or resolve issues with who can make decisions for you if you are incapacitated.

A trust saves time, reduces stress and emotional toll on loved ones, protects assets from misallocation, taxation, or misuse, and allows you to direct how your assets are used after you are gone.

You may not rub elbows with the rich and famous, but if you have any assets at all (a house, retirement savings, stocks, etc.) those assets could be reduced or improperly distributed if you don’t take steps to protect them.

When Should You Include a Trust as Part of Your Estate Planning?

You worked hard for what you have; you deserve to be confident that you and your loved ones can make the most of it. Here are a few specific situations where trusts are really useful.

To Take Care of a Spouse or Children

It’s easy to take for granted that your family will inherit your property, but this is much less precise than you might imagine. Without a trust, your assets could become whittled down by court and legal expenses, ultimately go to someone you did not intend, or even leave out certain family members entirely.  

It’s not easy to think about, but it’s important to consider some uncomfortable scenarios if you want to be sure that a spouse or children are taken care of after you’re gone.

Let’s say that you want to leave an inheritance for your kids, but you’re concerned that they may mismanage the money if they get it too early in life. If you pass away while your children are still young, a Minor’s Trust will hold onto the assets until your children reach a predetermined age, at which point the children will receive their inheritance (often 25 or 30 years old, depending on the wishes of the parent). This enables you to determine precisely who will receive what, and when they will receive it. 

The Minor’s Trust enables you to provide for the child’s quality of life into adulthood. Because the inheritance is in a trust it is protected from the child’s creditors. That way financial mistakes made in youth won’t result in your children losing their inheritance. This trust allows minors and young adults the space to graduate from ‘the school of hard knocks’ without it having a severely detrimental impact on the rest of their lives. 

What if you want to leave an inheritance to your children but you also want to provide for your spouse?

In this scenario, you could set up a Marital Trust. After you pass away, your assets will go into this trust which will provide funds to your surviving spouse using only the income generated from the trust assets—typically the surviving spouse will not be able to access the principle except for health, education, maintenance and support needs. When your surviving spouse passes away the principle will be intact and your kids will receive their inheritance at that point. This strategy protects against the assets going to members of a subsequent marriage, including a new spouse or step-children.

Second Marriages

Second marriages can further complicate the equation. A common issue for second marriages or children of a prior marriage is how to preserve assets for specific beneficiaries without leaving others out. If you’re not careful you might wind up accidentally disinheriting kids from an earlier marriage or allowing a subsequent remarriage partner to take advantage of the money you left for your surviving spouse. 

The Marital Trust discussed above ensures that the surviving spouse’s quality of life needs are met, but that assets are not spent frivolously or subsequently left to other beneficiaries that you did not intend. This is especially useful if you’re concerned that any inheritance eventually due to children could be used by a subsequent spouse of a surviving parent, or if you’re concerned that your children from a previous marriage might get left out of their inheritance.

The Marital Trust and the Minor’s Trust are good examples of how trusts can help you plan for any eventuality to make sure that you are taking care of your spouse and children.

To Qualify for Public Benefits

Most people with assets are surprised to hear that a trust could help them become qualified or preserve eligibility for public benefits. 

Preserving Heirs’ Public Benefits Eligibility

If you have a loved one who is currently on a needs-based public benefit like Medicaid or SSI, you need to be careful about how you leave them an inheritance. If they receive an inheritance directly they may become ineligible for their benefits. However, you can pass on your assets to this person while preserving their public benefits eligibility. 

By setting up a third-party special needs trust you can preserve public benefits eligibility for your loved one. This trust is often created through a will (called a testamentary trust) and allows any inheritance due to a beneficiary who is currently on a needs-based public benefit to be transferred into a special needs trust. This special needs beneficiary will not lose the benefits of Medicaid or SSI and will still receive their inheritance.

Qualify for Medicaid Regardless of Income

If you’re making plans for long term care, a Qualified Income Trust (or QIT, also known as a Miller Trust) can help you qualify for Medicaid regardless of Income. A common challenge for Medicaid applicants in “income cap” states like Texas is that their income is too high but they don’t have enough assets to pay for nursing home care. A Miller Trust can resolve the income issue and qualify the applicant for Medicaid Eligibility. 

For more details on how a Miller Trust can help you qualify for Medicaid see our recent blog on this topic.

Qualify for Medicaid When the Value of Assets is Too High

Another issue that can prevent you from qualifying for Medicaid is if the value of your assets is too high. Here, a Medicaid Asset Protection Trust (or MAPT) can help. With some advance planning, assets that would normally be countable against Medicaid eligibility will not be counted so long as they are placed in a qualified irrevocable trust at least 5 years before the need for Medicaid arises.

Qualify for VA Benefits When the Value of Assets is Too High

Assets may also render you ineligible for VA pension benefits. However, a Veteran’s Asset Protection Trust (or VAPT) can help you here. The VAPT is similar to the MAPT. By placing assets in an irrevocable trust they will not be counted, so long as they are placed in the trust at least 3 years before the need for VA benefits arises.

 The VAPT is also a great way to hedge against long-term care that could last longer than three years to ensure at least some assets are protected and not spent down.

Ensure Your Inheritance Gets to the Right Loved Ones as Quickly as Possible

Whatever you leave to your loved ones, you want the process to be as uncomplicated for them as possible, without exacting further emotional toll or significantly reducing the amount they ultimately receive. Here are two significant ways that trusts can help. 

Avoid Probate

Bypassing probate is one of the most common goals of a revocable trust.

If you don’t have any estate plans in place when you die, or even if you have a will, your estate will go through probate court before anything is passed on to heirs. This is a specialized court that deals with the property and debts of a person who has died. In a probate hearing the court will assess whether there are creditors who need to be paid and ascertain the proper beneficiaries of any remaining assets.

Probate can be a lengthy and costly process. It can be confusing and emotionally draining and loved ones will need to deal with attorneys and court appearances. Fees will eat away at your estate and it can drag on for months, depending on the complexity of the estate and the clarity of any instructions you have left in place. This is probably the last thing you want your loved ones to have to deal with after a loss.

 On the other hand, assets held in trust do not require a probate proceeding

This allows heirs to access assets right away, as opposed to waiting for the court to approve a will and appoint an executor. A revocable trust can also hold real estate from other states, so you can avoid opening probate in other states where property may be located. Finally, assets in a trust can be managed privately as compared with a probate proceeding that is public record and requires the public reporting of all assets in the estate

Perhaps most importantly, this allows heirs and loved ones to avoid the uncertainty and emotional toll of months of court proceedings.

Avoid a 40% Estate and Gift Tax

Most people know about income tax, property tax, and sales tax, but there is another kind of tax that many folks don’t know about: estate and gift taxes. This is a hefty tax that impacts the transfer of inherited and gifted property. When you pass on your estate a significant portion of it may be lost to taxes without proper planning.

In Texas, the Estate and Gift Tax is only taxed at the federal level, although in some states there are additional state-level estate taxes. 

Currently, your estate would be exempted from this tax if the total, including all other gifts you’ve made during your lifetime, is below $11.8 million. In other words, you will be subject to this tax only if the total of the gifts you’ve made during your lifetime plus the total assets you’ve left at your death exceeds $11.8 million (or $23.6 million for a married couple).

But before you start thinking you’re in the clear, Congress has a history of changing the levels for the estate and gift tax exemption.  For example, in 2005 the exemption was only $1 million. That meant that even middle-class families had to plan to avoid this tax. Politics being what they are, it’s impossible to know when Congress might change the exemption levels again. 

If exemption rules change, or if your estate will be above the current exemption levels, you’ll want to be positioned to avoid getting hit with an estate and gift tax liability. Trusts offer several ways to sidestep this tax. 

For more specific details on trusts that help you avoid estate and gift taxes, check out our trusts page.

How Much Does it Cost to Set Up a Trust?

The costs of trust vary widely—usually based on the trust complexity and the significance of the assets being protected. 

A high-quality trust will preserve far more value than it costs to create.

Keep in mind that without a trust, the cost of probate can cost anywhere from $3,000 to $10,0000 or more. Or a family may have to spend down tens of thousands of dollars of assets to qualify for Medicaid or to avoid losing out on $2,500 a month in VA benefits. If your assets are more substantial, you may lose as much as 40% to estate taxes.

Although there is a modest upfront cost, trusts are solutions that add significant value to a family’s estate and legacy.

Can I Create a Trust Myself?

You may be able to set up a trust on your own, depending on your specific needs. Although there are still some fees involved, doing it yourself will cost you significantly less. If your estate and your goals are very straightforward you could potentially set up a suitable trust without help.

Start by identifying your goals. For more detail on this see How Do I Create a Trust? on our Trusts page. 

However, the more complicated your situation and goals, the more important it will be to consult a professional estate planner or elder law attorney. Trusts are not a one-size-fits-all solution. There are a variety of applications for trusts and an assortment of strategies to consider. For folks with more complex needs, it’s common to see elements of multiple types of trusts used in conjunction, alongside other estate planning tools.

A trust is designed to give you confidence and clarity about how your assets will be used after you’re gone. It’s crucial that your trust is dependable—mistakes here could end up defeating the purpose of a trust and jeopardizing assets that you earned over a lifetime.

That’s why it’s important to talk to a professional. Estate planning attorneys are experts at evaluating your complete situation and helping you come up with a trust strategy you can rely on, no matter how straightforward or complex your needs.

For more information about how trusts work check out our Trusts page, or get started now by scheduling a free consultation.

Steven C. Holman

Holman Law, Estate Planning Attorney

I love to spend time with my wife and four children and serving the Dallas Fort Worth community. I provide clients with a wealth of knowledge and experience navigating each individual’s Estate Planning needs including Trusts, Probate, Elder Care Law, and Long Term Care Planning. My law firm specializes in assisting clients with complicated legal forms and qualifying for the maximum Medicaid and Veteran (VA) benefits in Texas.

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