A Trust is often a foreign and intimidating concept for non-Attorneys. Depending on what may have been heard on the radio or shared by a friend, it may be tempting to allow fear to dissuade someone from learning more about this important planning tool.
Below, we explore a few trust planning myths that we at Burroughs|Elijah law firm often encounter and dispel for our clients.
1) Trusts are only for the super wealthy. The Tax Cut and Jobs Act raised the federal estate tax threshold to $10,000,000 (before taking into account the necessary inflation adjustment), leaving most estates well under the new limit and eliminating the need for complicated estate tax planning for the vast majority of the population (Neither Georgia nor South Carolina impose an Estate or Inheritance Tax). However, trust planning may still be necessary for a number of other reasons, including special needs planning, probate avoidance, long term care planning and asset protection.
2) Beneficiary designations are a suitable alternative to trust planning. In many cases, beneficiary designations are a simple way to make sure that assets pass to beneficiaries outside of probate; however, a trust may be necessary to ensure that a spendthrift beneficiary’s assets are not squandered, prevent the interruption of a special needs beneficiary’s Medicaid or SSI benefits, or shelter a beneficiary’s inheritance from divorce proceedings and creditor claims.
3) Trusts are expensive to maintain. The majority of the expenses associated with trust planning will be paid on the front end, when documents are drafted and executed. After document execution, a client should rarely need to meet with an attorney more than once every three to five years (which should be done even if a client only has a Last Will and Testament). Trustee fees are a non-issue during the client’s lifetime unless a third-party Trustee is named. Trustee fees can be negotiated but are typically kept at or around 1% of the value of the trust estate or less for a Trustee who will ultimately be a beneficiary.
4) Trusts are too complicated. While some legwork is required to initially organize a trust, managing the trust assets as the Trustee and lifetime beneficiary is actually quite simple. Furthermore, a typical living trust will be designed as a “Grantor Trust,” allowing trust income to be taxed to the Grantor and relieving the Trustee of the burden and expense of filing a trust tax return.
5) Gifting to children works as well as Trust Planning. Gifting to children for the purpose of asset protection often creates more problems than it solves. Not only do lifetime gifts cause the donor to forfeit control, they expose the gifted assets to a child’s creditors (divorce, bankruptcy, lawsuit). Such gifts may also cause some unintended tax consequences. For example, the recipient of a lifetime gift would forfeit the “step-up” in tax basis that typically applies when assets are inherited upon death, resulting in capital gains tax liability that could have been easily avoided.
