Why Should I Create a Living Trust?

There are several good reasons for creating a living trust, in addition to simply avoiding probate.  Some of the most important benefits of a living trust are being able to protect property for your beneficiary, reducing estate taxes, planning for incapacity and avoiding a will contest.  Understanding how a living trust can provide these and other benefits, will help you in making the decision to include a living trust in your comprehensive estate plan.

Protecting Property for Minors and other Beneficiaries

Perhaps one of the most important reasons to create a living trust, as opposed to simply drafting a will, is the ability to provide protection of the inheritance for certain beneficiaries that may need assistance in managing those assets.  Since we cannot anticipate when our time will come, it is possible that our intended beneficiaries are still minors at the time they inherit.  In that unfortunate case, your beneficiary may not be able to handle their inheritance properly.

In fact, in most states, minor children are not allowed to own property because they are too immature to manage it appropriately.  In those cases, a guardian is appointed to hold the property until the child reaches the age of majority in that state.  Creating a trust allows you to leave your money and property to whomever you choose, while protecting it for them at the same time.  However, minors are not the only ones susceptible to making poor choices about their finances.  If any of your beneficiaries are incapable of handling large sums of money prudently, then a revocable living trust should be a component of your estate plan.

Reducing or Eliminating Estate Taxes

Although there are no specific provisions in federal tax laws that exempt revocable living trusts from estate taxes, they can be used to take advantage of certain deductions and credits.  For instance, the “unified credit” for 2014 is $5.34 million.  In addition to this important credit, any property that is passed on directly to a surviving spouse is deducted before the calculation of the federal estate taxes is made, pursuant to the unlimited marital deduction.  However, any amount of an estate that is not sheltered by either of these credits and deductions would be subject to federal estate tax, which is currently 40%.

This tax could very easily be eliminated with a revocable living trust.  Instead of leaving a spouse all of your property, thereby using the deduction, you could provide in your revocable living trust that your spouse would be the primary beneficiary during his or her lifetime, making the money accessible as needed.  The remaining amount could pass to your children or other heirs at your spouse’s death.  That way, no federal taxes will be paid upon your death because the property in the revocable living trust is exempt from federal estate taxes under the unified credit.  The same would be true when your spouse dies.  The portion that is being held in trust is not considered a part of her estate, and will not be taxed either.

If you have questions regarding a revocable living trust, or any other estate planning needs, please contact Wilcox Attorneys, PA online or by calling us at (479) 443-0062.