JANUARY 26, 2015 VOLUME 22 NUMBER 4
Do you need a living trust? Even with an estate tax threshold of over $5 million (and double that, for most married couples)? That is the primary question posed by most of our estate planning clients.
For years the answer depended mostly on the size of your estate. Not that there were (or are now) any inherent estate tax benefits to having created a living trust, but it was easier to take advantage of the easy ways of minimizing taxes using a trust than otherwise. So most Arizona couples worth more than about $1 million were urged to establish a trust. Couples who hoped to be worth more than $1 million often took the step, too — on the chance that their assets might grow enough to create a possible estate tax liability.
Then the federal government started raising the tax level, ending up at $5 million and indexed for inflation (so that the threshold for 2015 is $5.43 million). They ultimately changed the rules for married couples, too, making it easier for a surviving spouse to use his or her deceased spouse’s exemption, effectively doubling the level at which estate taxes were a driving factor. The State of Arizona jumped into the act, too, by repealing its state estate tax altogether. That all means that for more than 99% of Arizona individuals (and couples), estate taxes are no longer an important reason to consider creating a trust.
Does that mean that no one needs a living trust any more? Not exactly.
First, let’s think about people who established a trust back when it was an important step — do they need to consider revoking their trusts now? No. There are almost no downsides to creating a trust, other than the cost and trouble of setting them up in the first instance. Even though it might be hard to justify setting up a trust now, the individual (or couple) who has already gone through that process should probably not undo their earlier work.
Should a person worth well less than $5 million ever create a trust? Yes — at least in some situations.
Let’s get right to the point: what are the top reasons you might want to create a trust? With thanks and a nod to our associate attorney Elizabeth N. Rollings, who created the original list, here are our offerings:
- 10. You really, really hate the thought of probate. It’s not the monster you probably think it is, but that’s not to say it’s a lot of fun, or cost-free. We can try to persuade you that it’s not that important to avoid probate — or we can just help you avoid the process.
- 9. You favor privacy. There’s not all that much public disclosure involved in the probate process, and most of what does need to be disclosed can just be shared with your heirs. But there are some things that get into the public record, like the text of your will and the names and addresses of the people to whom you have left money or property. Do you have unusual family dynamics, or a publicly recognizable name, business or assets? You might prefer to create a trust.
- 8. You want to make it easier for your executor. We don’t actually use the term “executor” any more, but we know what you mean. It’s simply easier for a successor trustee to get control of your assets than it is for that same person when they are named as agent on a power of attorney. It’s also easier to arrange for an orderly transition as you are less able — from having your chosen administrator named as successor trustee to naming them as co-trustee, and dividing the job in a reasonable — and flexible — way.
- 7. You have complicated assets. Most people don’t think their assets are complicated. “I just have Certificates of Deposit in the four Tucson banks that pay the highest interest rates,” you say. Oh, and then there are the government bonds. Plus a brokerage account at a national low-cost broker, and a rollover IRA. Did you remember to mention those almost-worthless oil and gas rights you just learned about from your grandfather’s estate? Complicated, complicated. Having a trust makes it much easier for someone to handle your assets for you — both after your death and while you are still alive but not functioning at the top of your game. Oh, and there may be income tax benefits to having your assets in the trust (though you — or your spouse — may have to die in order to get the tax benefits. So maybe we’ll soft-pedal those).
- 6. You have complicated distribution plans. This one is related to the previous one, and — as with “complicated” assets — clients seldom think their plans are complicated. “I just want to leave everything equally to my three children,” you tell us. Oh, plus $10,000 to each grandchild, and a $100,000 gift to your church. Also, a list of personal property and who is to get it. And some thoughts about what should happen if, god forbid, one of your children should die before you. The more complicated your distribution scheme, the more you need to consider a trust. Why? Because your distribution will be more private, and it’s easier to adjust to changes in your future (should your church’s gift go up as your net worth expands, or down as you draw down your IRA?).
- 5. You have real estate in more than one state. Probate, as we have said before, is not as difficult as you probably think. But if you have real estate in more than one state, we have to go through the process in each state. Some states are much more complicated and expensive than Arizona. So if you have your home in Arizona, a condo in California, a summer place in Wisconsin, and a timeshare in Virginia, you might want to think about a living trust. Even if you only have two of those, you might be a better candidate for a trust.
- 4. You have professional children, or wealthy children. Your son is an architect, and your daughter is a physician. Why do they need their inheritances to be in trust? They don’t — but it’s an extra gift from you to put them in trust. You can help protect their inheritance from creditors, malpractice claims, even divorce proceedings. And you might be able to keep your assets out of their estates when they die, thereby reducing the amount of estate tax the grandchildren pay.
- 3. You have minor children, or children (or grandchildren) under about age 25. Why 25? Recent research suggests that that’s about the age at which a child’s brain really matures, even though the legal system considers them mature at 18. Of course you get to choose the cut-off age, but we are urging people to think about 25-or-so for their planning. Even if your children are older, a share of your estate might go to grandchildren — and they could be younger than the cut-off age you choose.
- 2. You have a family member who is just not good with money. Is your son (or, for that matter, his wife) a bit of a spendthrift? Is your youngest still trying “find” herself? You might want to provide some sort of management for that beneficiary’s share of your estate.
- 1. You have a child or grandchild with a disability. Are they receiving public benefits like Supplemental Security Income (SSI) or Medicaid (in Arizona, AHCCCS)? You need to create a special needs trust for any share they will receive. Are they not on public benefits right now? You probably still want to consider a special needs trust, because you don’t know how things will change over time. The same rules apply for any person you plan to leave money to, including your long-time housekeeper’s son or the young woman who grew up with your kids and was treated like a member of the family. We just use “child or grandchild” because they are the most common recipients.
Any of those sound like you? Let’s talk about whether a living trust is the right choice. Oh, and if you don’t live in Arizona — talk to your own lawyer, who might rearrange the order, drop some of these points altogether, and add others.