Now that we have taken the time to explore the key terms you should know in Estate Planning in our previous blog, let us take a look into why a revocable living trust might make sense for your lifestyle.
What is a Trust, and How Does it Differ from a Will?
According to Investopedia, Trust is a separate legal entity a person sets up to manage his assets. Trusts are set up during a person’s lifetime to assure that assets are used in a way in which the person setting up the Trust deems appropriate. Once assets are placed inside a trust, a third party, known as a trustee, manages them.
When someone passes away, it is essential to figure out what to do with the deceased persons’ possessions and assets. The possessions and assets are known as the estate. When the decedent dies without having put a Will or Trust in place, things have the potential to get complicated. After all, how should anyone know what to do with someone’s estate if they did not lay out rules or regulations regarding their states’ intent?
That is why it is crucial to have a Will and Trust in place. A Last Will and Testament is a legal document that details one’s wishes for the division of assets after their passing. However, you must understand that Trust goes further than a will. A Trust can clearly define what happens to one’s assets so that their beneficiaries can obtain their rightful claim to support without having to get courts involved in a probate process. Trusts not only work to help an estate navigate any legal hurdles, but a Trust can also help navigate tax hurdles as well.
A living trust ensures that a trustee must manage Trust in accordance with guidelines laid out when the Trust was formed or last updated. The person who creates the Trust is known as a grantor, and the Trust is essentially the document designed to ensure grantors wish is carried out as they intend them to be.
Revocable Trust vs. Irrevocable Trust
A revocable trust can save you time and money and provide you with control of your assets, but it is important to discover the different types of trusts to know which type is best for your situation.
First, the Revocable Trust goes by the name Revocable Living Trust or a Living Trust. Then, there is an Irrevocable Trust. The owner of a Revocable Trust may change its terms at any time. He or she also can remove beneficiaries, designate new ones, and modify stipulations as to how the assets within this Trust are managed. The terms of an Irrevocable Trust are set in stone the minute it is signed. Under rare circumstances, changes may be made to an Irrevocable Trust, but that is rare.
In knowing this, you can understand why a Revocable Trust is a sensible option; but why should you then have an Irrevocable Trust? After all, wouldn’t you want to maintain control of your assets for as long as possible? It is because it all comes down to taxes. The main reason individuals choose to select an Irrevocable Trust structure is taxes. Irrevocable Trusts remove assets from a benefactor’s taxable estate, meaning they are not subject to estate tax upon death. They also relieve the benefactor of tax responsibility for acquired assets.
The top estate tax rate is a sizeable amount at 40%, but it only applies to estate taxes larger than the estate tax exemption amount established by the federal government. In recent history, the amount exempted from estate taxes has been high.
In 2020, estates with less than 11.58 million might not have to pay any federal estate tax should they be unmarried. Couples, on the other hand, have the amount doubled. That means that a married couple with an estate valued at less than $23.16 million could pay zero in estate tax.
If your estate is close to these limits, an Irrevocable Trust makes sense for your situation. An Irrevocable Trust can help decrease a grantors estate’s size to help reduce the impact of estate taxes. However, if estate taxes are not a concern for you, it may make sense for a grantor to choose a Revocable Trust so that he or she may have complete control of their Trust up until death.
When the threshold for estate taxes was lower in years past, Irrevocable Trusts were the most common option for individuals. However, in 2018 such Trusts were deemed to be no longer necessary, and by 2018 only 1,900 of the estimated 2.7 million people who died that year were subject to such Estate Taxes. Of course, laws have the ability to change, but until they do, a Revocable Living Trust is likely to be the best option for most people.
States Tax Estates
Many states choose to tax estates as well, and although the estate tax rate may, in fact, be lower at the state level, so might be the threshold for exemption. This is yet another reason why retirees choose to relocate to states such as Florida, which is one of the 32 states that will no collect estate taxes as of 2020. For those of you who reside in Oklahoma as we do, you should be relieved to know that our state collects neither a state estate tax nor an inheritance tax under current laws. However, it is always best to consult with a professional about your specific situation if you find that taxes are a concern for you.
A Trust You Can Trust
In conclusion, a Revocable Living trust can avoid the public, costly and time-consuming court process at death and incapacity. It can allow you to provide for your spouse without disinheriting your children, which can be an important fact in second marriages. And it can protect inheritances for children and grandchildren from the courts, creditors, spouses, divorce proceedings, and irresponsible spending.
A Revocable Living Trust is a legal document that contains your instructions for what will happen with your assets when you die, just like a will. But unlike a will, a living trust can avoid probate at death, control your assets, and prevent the court from being able to control your assets should you become incapacitated. A Revocable Living Trust will also allow the grantor to remain in control of the Trust and its assets until death.
At Trust Company of Oklahoma, we have Will and Trust guidance as part of our Estate Planning Advisory Service and Trust Services. Please know, you do not have to make these important decisions alone. Our specialists are here to help you every step of the way. After all, we are Oklahoma’s largest and oldest independent trust company. We serve as trustee or co-trustee for most trusts, personal representative in probate proceedings, guardian of your property, and an agent for you individually. With our help, we aim to help you build and protect your assets so they will not be squandered at your death or incapacity. Our Proven method works to protect and direct your assets in order to create Trust.
Are you ready to get started? Contact us today!