If you are thinking about creating a trust, you may not fully understand the fact that there are many different options. The right trust for you will depend upon your objectives, your financial situation, and your family dynamic.
In this blog post, we will look at a number of different types of trusts that serve varying different purposes.
Wealth Preservation Trusts
If you have been able to accumulate a significant amount of wealth, you are fortunate on the one hand. On the other hand, there is a challenge that goes along with prosperity when you are planning your estate.
There are death taxes that can gobble up a huge portion of the legacy that you would like to pass along to the people that you love. The federal estate tax can enter the picture, and it carries an imposing 40 percent maximum rate.
We have an unlimited marital deduction that can be used to facilitate tax-free asset transfers between spouses who are American citizens, but that is the only exempt relationship.
There is however a $5.45 million exclusion. The first $5.45 million that you pass along to anyone other than your spouse can be transferred free of taxation. Only the remainder would be subject to the estate tax.
People in New Jersey are very used to the fact that we pay some of the highest taxes in the country. As a result, you will probably not be surprised to hear that there is also a state-level estate tax in our state, even though there are only 14 states that impose such a tax.
If you have been breathing a sigh of relief because the value of your estate is well under the $5.45 million federal exclusion, we have some bad news to pass along with regard to the New Jersey state estate tax. The exclusion on the state level is the lowest exclusion in the country among states with their own estate taxes. It stands at just $675,000.
Creating a trust that reduces estate tax liability can go a long way toward preserving your legacy for the benefit of your family. The trusts that provide estate tax efficiency are irrevocable trusts like generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable lead trusts.
Spendthrift Protections
You may not want to leave a direct, lump sum inheritance to someone who is on your inheritance list, because you have concerns about the way this loved one will handle his or her money. To account for this, you could make the person in question the beneficiary of a revocable living trust.
If you establish this type of trust, you can act as the trustee throughout your life, and you could also serve as the beneficiary. The right of revocation would exist, so you could dissolve the trust and take back personal possession of the assets if you ever wanted to do so.
In the trust agreement, you would name a trustee to manage the trust after you are gone. To make sure that the trust is administered effectively, you could engage a professional fiduciary to act as the successor trustee.
The assets would be professionally managed, so you would not have to worry about the poor decision-making of the beneficiary. Plus, you could instruct the trustee with regard to the nature of the distributions.
For example, you could instruct the trustee to distribute the earnings of the trust while the principal remains intact. It would also be possible to give the trustee the discretion to provide additional distributions.
These spendthrift protections are self-evident, but if you include a spendthrift provision, there would also be a certain level of protection from the beneficiary’s creditors.
Nursing Home Asset Protection
There is also the matter of nursing home asset protection. In many areas of New Jersey, nursing home costs are among the highest in the country, eclipsing $100,000 per year. It is not uncommon for seniors to require multiple years of care at the end of their lives, and Medicare does not pay for living assistance.
Medicaid does pay for long-term care, in the right situation, and creating a trust can facilitate eligibility for this need-based government health insurance program. Assets in an irrevocable Medicaid trust would not count as part of your personal portfolio, so you could potentially qualify for Medicaid if you need long-term care.
Attend a Free Seminar
If you would like to obtain a broad base of information about the estate planning options that are available to you, we invite you to attend one of our upcoming seminars. There will be a number of sessions held over the coming months, and they are absolutely free to attend.
To see the schedule, click this link: Warren NJ Estate Planning.
Alan Augulis, Estate Planning Attorney
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