Living trusts are very helpful and essential estate planning documents. With a living trust, you are able to avoid probate and keep your affairs in order while you are ill and when you pass. Unfortunately, they do not accomplish everything, and it is important to be aware of their limitations. In this article, we will go over four things that living trusts do not accomplish.
Do Not Dictate Medical Decisions
Sometimes the terms living trust and living will are mistaken for each other. A living trust states how you want your assets to be distributed. Whereas a living will let you set out how you wish to be treated if you are terminally ill or in a vegetative state. If you wish to name agents to make health care decisions for you, you would need to execute a Durable Health Care Power of Attorney. In some trust packages, like ours at Wealth Guardian Group, healthcare documents are part of the estate plan.
No Creditor Protection
Living Trusts are revocable, or changeable documents. Due to this, you still maintain control over all assets you put in the trust and you have unrestricted access to them. Since you still have easy access to those assets, so do your creditors. The only potential way to avoid this from happening is with an irrevocable trust. This is the case because you lose control over any assets that you place into an irrevocable trust. It is important to be aware that this process is very complicated and should be approached very carefully.
Does Not Qualify as Medicaid Planning
To qualify for long-term care through Medicaid your income and assets must fall below certain limits. To qualify, some people use trusts to shelter their assets. Revocable living trusts do not accomplish this purpose, only irrevocable trusts do. If you are hoping to qualify for Medicaid benefits this way you will need to set up a specific kind of irrevocable trust. Additionally, the trust agreement must follow specific rules set out by Medicaid in your state.
Does Not Affect Your Income Taxes
It is a common misunderstanding that creating a living trust will complicate your tax situation. This is not the case. While you are alive you use your social security number as the identifying number of your trust. You will still file your income tax returns as normal. Any tax changes will not take place until after you pass. When you pass your successor trustee will have to file for a separate tax identification number for the trust. Then the trustee will have to file a separate trust tax return. Additionally, they will have to provide beneficiaries with Schedule K-1s, so they can report their share of a profit or loss in the trust fund on their own tax return.
Understanding Your Trust
It is very important that you understand your living trust document and how it works. This includes understanding the things that living trusts do not accomplish. This will help you to prepare successfully for the future of both you and your beneficiaries.
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