It’s time to learn the nuts and bolts of revocable living trusts

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When determining the best estate plan option, it is vital to analyze variables unique to you: age, health (physical ailments, disease, family history, terminal illness, disability), spending habits, retirement goals and, of course, all of the assets you own, including life insurance and potential inheritance.

Generally, an irrevocable Medicaid trust can be most beneficial if the goal is to protect and insulate your assets, including your home, against future nursing home costs. A revocable living trust, however, can provide flexibility for a more active, pre-retirement lifestyle as well as avoiding probate after your death.

Flexibility and Control.  While an irrevocable Medicaid trust generally prohibits principal assets from being taken back directly to the trust creator, a revocable living trust allows assets to be transferred in and out of the trust and can be amended at any time. The trustees (which can be the trust creator and, if married, their spouse) retain control and manage any assets inside the trust.

The trustee(s) then authorize the trust to take title to many of the trust creator’s assets including bank and brokerage accounts, life insurance, CD’s, and real estate.

The trust can also be the beneficiary of life insurance, IRAs or other qualified assets.

As one example, the revocable living trust may be useful for people who buy and sell properties and want to freely expend profits from those sales without restriction. The trade-off for such flexibility is that a revocable living trust generally will not have protections against creditors, nor will it insulate assets from Nursing Home costs.  

Avoiding Probate and Out of State Property issues. In short, probate is the legal process whereby a person (usually the named Executor in a Will) obtains legal authority from State Surrogate’s Court after notice and an opportunity to be heard is given to family members, to take charge of an estate.

Once court approval is obtained, among other powers, an Executor may pay outstanding claims, debts and sell and distribute assets to individuals or others in accordance with the Will’s terms. If there is no Will, an individual must seek court approval to administer the estate, which is subject to similar notice requirements to family members.  

The probate process generally requires the payment of filing and attorneys’ fees and can easily take over a year to resolve even with no issues or disputes over the estate. If disputes or litigation arises, it can take years to resolve, combined with ever escalating attorneys’ fees.

Avoiding probate by putting assets into a trust means that no such court approval, filing costs or waiting periods are needed. Assets like real property are titled in the name of the newly formed trust and any such property passes upon death to the named trust beneficiaries.  

If you own real property in multiple states, transferring property into your trust prevents your Executor from the expense and time of having to do a separate probate proceeding in those states. For many, the ease and substantial cost/time
savings of probate avoidance by itself justifies any expense in creating a revocable living trust.

Avoiding Capital Gains Tax consequences. While a tax professional should be consulted for any large transfer of assets, generally, a transfer of property to your children during your lifetime can have the unintended consequence of imposing a hefty capital gains tax on them when they sell the property.

With either a revocable or irrevocable trust, the capital gains tax can be avoided in most circumstances if real property is inherited (transferred to children post-death) resulting in beneficiaries obtaining the real property at a stepped up, or date of death, value. This can result in significant tax savings to your children or other named beneficiaries.

Disability and Terminal Illness. Another advantage of having a revocable living trust is that it can be set up to address the circumstance if you or your beneficiaries become disabled. Generally, in such an instance a special or supplemental needs trust would be set up as a vehicle to keep intact any governmental disability benefits while allowing your trust assets to cover other specified expenses.

Further, should a trustee be diagnosed with a terminal illness, assets may be moved into the trust to avoid probate and/or tax consequences to significantly save your beneficiaries time, expense and maximize their inheritance in the face of a tragic turn of events.

Avoiding Estate Tax. Fortunately for many people, in recent years the federal government and New York State have both raised the limits where an estate tax would apply. While subject to adjustments, for 2018, the federal estate limit before estate taxes are imposed increased dramatically to $11.18 million per person or $22.36 million per couple.

In New York, for a death occurring on or after April 1, 2017, through December 31, 2018, the limit is $5.25 million per person or $10.5 million per couple. For individuals with these type of assets, the tax consequences can be severe and can easily range in the hundreds of thousands of dollars against your estate. Properly placing assets in a revocable living trust, which may include setting up a separate trust for a spouse, can avoid estate taxes entirely. 

As with all aspects of estate planning, you should engage a legal professional who will do a thorough job of reviewing your assets and personal situation to devise the best option to meet your goals.

A revocable living trust may be ideally suited for some people, while others may be better served with an irrevocable trust plan or even a simple Will. The overriding goal should be the peace of mind that completing an estate plan will provide, knowing it will protect your assets and ultimately benefit those you care about most.

James S. Rizzo is an attorney with the law firm of Hilton Estate & Elder Law, LLC, with offices in Rome, Utica, Lowville and Boonville. He has over 23 years of legal experience and concentrates in Estate Planning matters, including Wills, Revocable and Irrevocable Trusts, Powers of Attorney, Health Care Proxies, Asset Protection and Nursing Home/Medicaid applications and planning. He can be reached at jsr@hiltonlawny.com or (315) 624-9600 for a free, confidential initial consultation. Also visit us on the web at: www.hiltonlawny.com.

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