The process of estate planning should involve a significant amount of research. You don’t want to limit yourself and make less than ideal decisions based on a lack of information. There are misconceptions out there, and you can make mistakes if you buy into them. One of them is the notion that trusts are only for the rich.
Different Types of Trusts
There are certain types of trusts that are used exclusively by wealthy people. In many instances these trusts provide estate tax efficiency.
There is a federal estate tax in the United States, as well as a New York State estate tax. In 2014 the federal estate tax carries a $5.34 million credit or exclusion. In New York the estate tax exemption is $1 million. If you are arranging for the transfer of more than this amount to your heirs, you must take steps to mitigate your exposure.
Certain types of irrevocable trusts are used in the field of estate planning to provide estate tax efficiency. Trusts that are irrevocable can also be useful for asset protection purposes.
However, these are not the only types of trusts. Different types of trusts accomplish different objectives.
Revocable Living Trusts
In addition to irrevocable trusts there are also revocable trusts such as the revocable living trust. Revocable living trusts are quite useful for those who are not especially wealthy. In fact, these trusts would not be a good choice for people who are looking for estate tax efficiency and/or asset protection.
This is because you do not surrender incidents of ownership when you create a revocable trust. You maintain control of the resources that you convey into a revocable living trust.
You may act as both the trustee and the beneficiary while you are living. You can dissolve the trust entirely if this is your choice and do anything you want to do with the assets that have been conveyed into it.
Because you retain this level of control, assets in the trust would be looked upon as part of your taxable estate, and they would be fair game for individuals or entities seeking to attach your personal resources.
The reason why these trusts are popular is because they facilitate the transfer of assets outside of the process of probate. Probate avoidance is appealing to many people because the process can be costly and time-consuming.
When you maintain direct personal ownership of assets up until the time of your death and arrange for transfers through the terms of a last will, the heirs to the estate will not receive their inheritances until the estate has been probated.
If you create a revocable living trust, the trustee that you name to succeed you distributes assets to the beneficiaries according to your wishes outside of probate. As a result, the heirs receive their inheritances in a much more timely and efficient manner.