Revocable Living Trusts are an excellent estate planning tool, but there are common misconceptions about them. A Revocable Living Trust is set up by you, during your lifetime.
Misconception: A Revocable Living Trust is Only for the Rich. Reality: There are several reasons to consider a Revocable Living Trust that have nothing to do with your wealth. For example, Trust assets avoid probate. That means that your trust assets will be distributed by your hand-picked trustee, without court involvement, to the persons you’ve named in the Trust document. Also, a Revocable Living Trust is a private document whereas a Will is a public document. Moreover, a Revocable Living Trust can help married Minnesotans capture the maximum exemption from Minnesota’s estate taxes allowed under Minnesota law. Further, a Revocable Living Trust can provide for a gradual disbursement of trust assets to your children – at ages 25, 30 and 35, for example – rather than a lump sum distribution. This gradual distribution allows for your children to gain financial maturity. Should a child make a major financial error, only part of the inheritance may be jeopardized. And, a Revocable Living Trust can provide for seamless management of a business owned by a sole proprietor, should the business owner become incapacitated or die.
Misconception: A Revocable Living Trust Will Avoid Income Taxes. Reality: You, as the creator of the Revocable Living Trust, will pay taxes on income earned from assets held in your Trust as if the income was earned by you individually. The good news is that you’d don’t need to file a separate tax return or have a separate tax identification number. Instead, everything is filed with your regular annual income tax return.
Misconception: A Revocable Living Trust Will Hide Assets from Estate Taxes. Reality: Your Trust assets aren’t hidden. They are still counted as part of your assets in determining whether your estate owes federal or Minnesota estate taxes. However, because of the way the Minnesota estate tax works, married Minnesotans may be able to take advantage of the $1 million exemption from Minnesota estate taxes for each spouse by using a Revocable Living Trust.
Misconception: A Revocable Living Trust Protects Assets for Medical Assistance Purposes in Minnesota. Reality: By its nature, you have control over your Revocable Living Trust during your life. That control means that the assets in your Revocable Living Trust are considered part of your assets. In contrast, assets that are outside the reach of Medical Assistance are assets that you’ve given away five or more years prior to the time that you are applying for Medical Assistance. Those assets are no longer under your control.
Misconception: A Revocable Living Trust Protects Your Assets from Your Creditors. Reality: Your creditors have access to assets held in your Revocable Living Trust. However, after you die, a so-called “spendthrift provision” in your Trust means that your beneficiaries’ trust assets can’t be accessed by creditors, bankruptcy trustees or divorcing spouses while the trust property remains in the Trust. When income and principal are distributed to the beneficiary – typically over a period of time – the protection ends regarding the amount disbursed. Some states make exceptions to beneficiary asset protection to allow for alimony and child support payments. However, Minnesota does not make an exception for alimony or child support because Minnesota courts view the purpose of the spendthrift provision as protection of the intent of the trust’s creator rather than protection of the beneficiary’s assets.
An estate planning attorney can help you determine if a Revocable Living Trust is right for you.
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