New York Estate Planning & Elder Law Blog
If you’re creating a plan for what will happen to your estate after you pass away or become incapacitated, you’ve likely familiar with the advantages you can realize by creating a living trust. Items positioned in a trust do not pass through probate, which can be a costly and time-intensive process. Living trusts (also referred to as revocable trusts) let a person appoints a trust administrator to look after an estate after the creator passes away.
Living trusts often simplify how assets in estates are passed on. Unfortunately, countless opportunities exist to make errors, especially if you’re tasked with transferring items to a trust. Certain kinds of accounts should never pass into a trust. These certain accounts should not pass into a trust even in situations where they represent the majority of an estate. This category includes retirement accounts like 401(k) plans as well as other types of retirement accounts.
If you pass on assets to a trust, the Internal Revenue Service will classify the interaction as a distribution and you will be required to pay income taxes.
You can appoint a trust beneficiary for your retirement account, which can prove helpful. Appointing a trust to act as a beneficiary lets you decide how assets are passed on to beneficiaries and could also guard assets against creditors. In 2019, Congress passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, requires non-spouse beneficiaries to use up inherited Individual Retirement Accounts (IRAs) within a decade and generated uncertainty in regards to how much time a trustee has to deplete an IRA remaining in a trust.
Many other assets can be placed in a trust. Some assets should be excluded from trusts, though. Because vehicles including cars and boats often do not pass through probate and must be retitled if placed in a trust, it’s often easier to leave them outside of a trust.
Because most accounts with financial institutions belong in trusts, you should exclude accounts that you utilize to pay recurring bills. Unfortunately, some organizations including utility companies refuse payments unless it’s in your name. Additionally, your bank might require you to close your account and open a new one in the trust’s name. As a result, it’s sometimes easier to keep assets outside of a trust.
Some Big Myths Exist about Living Trusts
Methods exist to lower your federal and state estate taxes, but unfortunately, a living trust is not one of these. If your estate is substantial enough to leave you exposed to estate taxes, you should consider utilizing various techniques to lower your estate’s size.
Currently, the federal estate tax threshold is $12.06 million. Unless Congress acts beforehand, the federal estate tax threshold is $12.06 million. The exemption will lower to $5.5 million in 2025. Additionally, 12 states and the District of Columbia instituted an estate tax and some states have lower exemptions than the federal level.
You will not likely include everything you own in your trust. You might decide to assets between when you create your living trust and when you pass away. Your lawyer will likely suggest you utilize a “pour over” will, which will transfer to the trust anything you excluded.
Besides a will, you will likely require other estate planning essentials. This includes a financial power of attorney as well as a healthcare proxy. If you have minor children, you will also be required to appoint a guardian.