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Trusts as a Shield

By William D. Block of Block Legal Services, LLC posted in Trusts on Wednesday, February 1, 2017.

Some types of trust can be used to safeguard your assets and protect you from having to spend down your estate. In this post I'll look at three ways trusts can protect the nest egg you've worked so hard to create and maintain.

In my last post, I talked about some of the ways that a revocable trust can be used as a diverse tool to accomplish your estate-planning goals. In this post I will discuss protections available through provisions within a revocable trust and through other types of trust.

Protection from Estate Taxes

Before the estate taxation laws changed in 2012, one of the main purposes of a revocable trust was to help decrease the amount you needed to pay in estate taxes. In 2012, however, the laws changed to vastly increase the size an estate needed to be before estate taxes would be due (it's now $5,000,000 per person adjusted for inflation), and it also introduced what's called Portability, which allows one spouse to use their deceased spouse's exemption. Previously, Portability could only be accomplished using a carefully-crafted trust.

If your estate is large enough that you are concerned about estate taxes, there are sophisticated tax planning trusts that can decrease the size of your taxable estate. Because of the complexity of this type of planning, it is recommended that you contact an experienced estate planner that has experience with these types of trust.

Benefits Protection

With the Baby Boomer generation reaching retirement age, more and more people are thinking about how to pay for nursing home expenses. The best way to prepare for these expenses is to start planning long before you actually face these costs. Programs like Title 19 Medicaid have income and asset limitations, but there are categories of assets that are not counted towards your limit. Another way to plan for this is to remove assets from your direct control. This can be done with an irrevocable trust, which puts your assets into the control of someone else with the instructions to use the assets for your benefit in a way that won't cause you to lose your Medicaid benefits.

Asset Protection

One of the concerns that many people have when planning their estate is that their beneficiaries will waste the money, or that they will have to drain their inheritance to pay off debts. First, if the assets are kept in a revocable trust instead of being distributed outright, a trustee is in charge of deciding what the assets should be used for. With this type of oversight, there is much less concern that a beneficiary will be able to spend their inheritance unwisely. Eventually, though, most trusts eventually distribute the assets so that the beneficiary has full control. However, this distribution doesn't have to happen all at once. Breaking this payout into two or three chunks, paid out some years apart, can help avoid some of the wasteful spending that comes with a larger windfall.

Secondly, such a trust can include what's called a Spendthrift Clause. This provision prohibits the beneficiary from using their share of the trust as collateral for a loan or signing it over it to someone else for an immediate lump-sum payout. It also prevents creditors from trying to collect directly from the trust.