The primary advantage of setting up a family trust is to ensure your immediate family members get the financial resources they need after you die. Family trusts do an outstanding job of protecting assets such as your home, automobiles, and liquid financial instruments.
An irrevocable trust offers your assets the most protection from creditors and lawsuits. Assets in an irrevocable trust aren't considered personal property. This means they're not included when the IRS values your estate to determine if taxes are owed.
Selecting the wrong trustee is easily the biggest blunder parents can make when setting up a trust fund. As estate planning attorneys, we've seen first-hand how this critical error undermines so many parents' good intentions.
Trusts offer amazing benefits, but they also come with potential downsides like loss of control, limited access to assets, costs, and recordkeeping difficulties.
Parents and other family members who want to pass on assets during their lifetimes may be tempted to gift the assets. Although setting up an irrevocable trust lacks the simplicity of giving a gift, it may be a better way to preserve assets for the future.
Once your home is in the trust, it's no longer considered part of your personal assets, thereby protecting it from being used to pay for nursing home care. However, this must be done in compliance with Medicaid's look-back period, typically 5 years before applying for Medicaid benefits.
Disadvantages of a Family Trust
The initial setup fees and ongoing administrative costs can add up over time, making it a less attractive option for some families. Loss of control: Once assets are placed in a family trust, the original owner relinquishes control over them.
Once dominant in a market, critics alleged, the trusts could artificially inflate prices, bully rivals, and bribe politicians.
There are a variety of assets that you cannot or should not place in a living trust. These include: Retirement accounts. Accounts such as a 401(k), IRA, 403(b) and certain qualified annuities should not be transferred into your living trust.
Consider a living trust if you: Want to avoid probate: Living trusts allow assets to be distributed directly to beneficiaries without going through the probate process, which can be time-consuming and costly. Value privacy: Trusts are private documents, whereas wills become public records when they go through probate.
Adding Someone to Title as Joint Owner or Joint Tenant. You can add another person on your bank account as a joint owner or your real estate as a joint tenant. The benefit of this type ownership is that when you pass away, the property will pass to the other joint owner without probate.
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential?
There is no minimum. You can create a trust with any amount of assets, as long as they have some value and can be transferred to the trust. However, just because you can doesn't necessarily mean you should. Trusts can be complicated.
The main benefit of putting your house in a trust is to bypass probate when you pass away. All your other assets, regardless of whether you have a will, will go through the probate process. Probate in real estate is the judicial process that your property goes through when you die.
There are also some potential drawbacks to setting up a trust in California that you should be aware of. These include: When you set up a trust, you will have to pay the cost of preparation, which can be higher than the cost of preparing a will. Also, a trust doesn't provide special asset or estate tax protection.
With a trust, there is no automatic judicial review. While this speeds up the process for beneficiaries, it also increases the risk of mismanagement. Trustees may not always act in the best interests of beneficiaries, and without court oversight, beneficiaries must take legal action if they suspect wrongdoing.
One of the most significant disadvantages of a trust is its complexity. Generally, trusts use very specific language, which can be difficult to understand for those who are not often involved in estate law. Because trusts were once written in Latin, there are many legal terms that still carry over.
A trust is prohibited from being created for an illegal purpose or one that is contrary to public policy. A common impermissible purpose is a trust created to defraud creditors. In this type of scheme, a settlor will transfer property to a trust for the purpose of hiding it from creditors.
A family trust ensures that your assets are managed according to your wishes on behalf of your beneficiaries. So let's say you have $5 million in assets and you want to divide it between your children. You can use a family trust to specify when they can access their share of your assets and under what terms.
The trust loss provisions generally don't apply to trusts that have validly elected to be a family trust. This is except for the income injection test, which applies in certain circumstances. If the trust terminates before the losses can be offset against income, they are permanently lost.
A trust is subject to tax in California “if the fiduciary or beneficiary (other than a beneficiary whose interest in such trust is contingent) is a resident, regardless of the residence of the settlor.” See Cal.
Once assets are placed in an irrevocable trust, you no longer have control over them, and they won't be included in your Medicaid eligibility determination after five years. It's important to plan well in advance, as the 5-year look-back rule still applies.
Establishing legal trusts: Though usually related to estate planning, trusts legally shift ownership of assets whenever you decide. This can help protect your assets from the government, as you will not own certain assets anymore.