People often harbor misconceptions about trusts. The first one is the idea that they are only useful for very wealthy individuals. This is true, but you have to take out the word “only.”
There are a number of different trusts that can be utilized, and they serve varying purposes. Generally speaking, they are broken down into two broad categories: revocable and irrevocable trusts. Let’s look at the differences and why someone may want to use either type of trust.
As the name would indicate, you cannot rescind or dissolve an irrevocable trust once it has been established. If you create a trust, you are referred to as the “grantor.” The grantor cannot act as the trustee of this type of trust.
Why would you surrender control of your assets in this manner? In some cases, giving up incidents of ownership is a very good thing.
Self-Settled Asset Protection Trusts
If you wanted to protect assets from potential future creditor claims, you could convey them into a self-settled asset protection trust. You would be giving up direct possession of the assets, because it would be irrevocable. As a result, future creditors would not be able to touch these resources.
There are 15 states in the union that allow these trusts, but California is not one of them. However, you could establish this type of trust in a state that does recognize asset protection trusts, such as Nevada.
In addition to the utilization of Medi-Cal by disabled people and others with limited assets, this program is key in another way. The majority of elders will need long-term care eventually, and about 35 percent of them will reside in nursing homes.
You can expect to pay well over $100,000 for a year in a Los Angeles area nursing home, and Medicare does not cover the custodial care that nursing homes provide. Medi-Cal will pick up the tab, but as we have explained, it is only available to people with sparse resources.
To gain eligibility, you could convey assets into an irrevocable Medi-Cal trust. You would not be able to touch the principal, but you could receive income that is generated by assets in the trust. The principal would not be counted if and when you apply for Medi-Cal.
Estate Tax Efficiency
We have a federal estate tax in the United States that can present a major challenge for high net worth individuals. It is only a factor for the wealthy because there is a high credit or exclusion. This is the amount that you can transfer before the estate tax would be applied on the remainder.
At the time of this writing in 2020, the exclusion is $11.58 million. There are a number of different types of irrevocable trusts that can be used to gain estate tax efficiency if you are exposed.
Revocable Living Trusts
The most commonly utilized type of trust is the revocable living trust. You can in fact revoke or rescind the trust at any time for any reason. Because of this, you retain incidents of ownership, so this type of trust would not be the right choice if you have any of the concerns we looked at above.
What are the benefits? One of them is the avoidance of probate. This is a costly and time-consuming process that would enter the picture if you use a last will to state your final wishes.
You can include spendthrift protections for beneficiaries when you have a revocable living trust, and you can name a disability trustee to manage the trust in the event of your incapacity. These are a handful of the advantages, but there are others.
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You can send us a message to request an appointment, and we can be reached by phone at 310-337-7696.
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