We usually explain why you may want to take certain estate planning actions, but in this instance, we are going to take a different approach. We will explain some of the reasons why you would not want to use a revocable living trust as the centerpiece of your estate plan.
1.) Estate Tax Efficiency
You would probably like to think that you can leave inheritances to your loved ones without being taxed for your generosity. After all, the assets that comprise your estate are going to be resources that you had left after you paid taxes all of your life.
Many people share this perspective, but we do have estate taxes in the United States. There is a federal estate tax, and there are also a number of states in the union that impose state-level estate taxes.
You can transfer unlimited assets to your spouse tax-free, but transfers to others could be subject to death taxes. On the federal level, the first $5.45 million can pass tax-free through the utilization of the exclusion, but transfers that exceed this amount could be subject to taxation. The maximum rate of the federal estate tax is 40 percent.
It would be natural to consider lifetime gift giving to avoid this tax, but this window is closed, because there is also a gift tax. It is unified with the estate tax, and the $5.45 million exclusion is a unified exclusion that applies to lifetime gifts along with your estate.
Some people think that you separate yourself from assets that you convey into any type of trust. This can lead to the belief that assets that you place into a living trust would no longer be part of your estate for tax purposes. In fact, assets in a living trust would be part of your estate, because you retain incidents of ownership when you establish a revocable living trust.
We practice law in the state of Connecticut, and our state is one of the 14 states with a state-level estate tax. The exclusion on the state level is just $2 million, and the top rate is 12 percent.
You would not want to use a revocable living trust if you are looking for estate tax efficiency. There are other types of trusts that can potentially mitigate your estate tax burden. Generation-skipping trusts, grantor retained annuity trusts, qualified personal residence trusts, and charitable lead trusts are some of the trusts that can reduce your estate tax burden.
2.) Asset Protection
There are people out there who like to file lawsuits, so you may have concerns about asset protection. You may want to protect assets for your own benefit, and you may also be concerned about legal actions against people on your inheritance list.
Assets that are contained within a living trust can be attached by litigants seeking redress, because once again, you are retaining incidents of ownership with this type of trust. A living trust would not provide asset protection, but there are irrevocable trusts that can be used for asset protection purposes.
3.) Medicaid Eligibility
When you start to get serious about your retirement planning efforts, you will probably uncover some rather disturbing facts about Medicare. There are out-of-pocket expenses for the things that are covered, and they can be quite noticeable, so you should understand the lay of the land when you are creating a retirement budget.
In addition to the out-of-pocket expenses, there is a looming expense that is not covered at all. The Medicare program does not pay for custodial care, which is the type of care that nursing homes and assisted living communities provide.
A significant majority of senior citizens will someday need assistance with their day-to-day needs, so this is something that is relevant to all of us. Long-term care is very expensive, so paying out-of-pocket is not a very pleasant proposition. In Connecticut, the median annual charge for a private room in a nursing home is well over $100,000.
Medicaid is the solution for many, because this program does pay for long-term care. To qualify, you have to get assets out of your own name, because it is a need-based program. The limit on countable assets is just $2000.
Assets that have been conveyed into a revocable living trust would be counted, so you cannot qualify for Medicaid if you have significant assets in a living trust. The good news is that you could establish and fund an irrevocable Medicaid trust if you want to divest yourself of personal ownership of property so that you can qualify for Medicaid to pay for long-term care.
Attend a Free Seminar!
We offer free seminars on an ongoing basis, and you can click this link if you would like to sit in so that you can learn more about your estate planning options: Hartford, CT Estate Planning Seminars.