Sponsored
Family Trust Planning – Doing it Right

by Dan A. Baron, Baron Law LLC

It’s a common misconception that a simple will passes on your legacy efficiently. A simple will does not avoid probate and does not offer asset protection. Therefore, there are several reasons for considering a family trust. The majority of clients we meet with initially believe that you have to be rich in order to create a trust. This is completely false. Even if you’re not Warren Buffet, there are many advantages for using trusts for the common family. Although the situations for needing a trust are very different, here are a few common scenarios where you might benefit.

Young Children

By law, a child cannot inherit if they are under the age of 18. Moreover, USA Today reports that over a third of children under the age of 40 who receive $100,000 or more blow their inheritance within six months. A family trust will eliminate these concerns by placing a person in charge of your child’s inheritance (known as a trustee). The trustee ensures the estate is spent on the health, maintenance, education and support of the child while preserving assets, regardless of age, for their lifetime.

Second Marriages

With divorce rates over 50%, individuals in their second marriage commonly create a trust. In this scenario, there is nothing preventing a surviving spouse from disinheriting children from a prior marriage. 

Famous last words: “I would never get remarried!” A trust would solve these concerns entirely. By creating what is known as a “bloodline trust,” a person can provide for their spouse but restrict the spouse from disinheriting children from a prior marriage. After the death of the second spouse, the estate must be passed to children and cannot be passed to anyone else. In essence, you can control your estate even after you’ve passed. You can also ensure your children will never be cut out of the estate, even if it were the unintentional result of your loving spouse. And if this were not a second marriage, a trust might still make sense for couples who want to keep the estate within the family and avoid remarriage concerns.

Special Needs Children and/or Adults

If you have a special needs child then creating a trust is a must. Special needs individuals normally receive federal assistance in the form of Social Security income and/or Medicaid. To be eligible for this assistance, you must stay below income limits. Receiving an inheritance is considered income; therefore, creating the risk of being kicked off your benefits because you’re exceeding the maximum monthly income allowance. The need for a special needs trust for anyone receiving SSI/Medicaid is absolute. Failing to plan in a special needs situation – whether adult children or adolescent – would be an expensive tragedy.

Tax Savings for Children

Receiving an estate comes with taxable consequences. Although the federal exemption is at a historical high, current legislation proposes to reduce the federal estate tax exemption to nearly $3 million. In other words, if your estate is in excess of $3 million, your children will incur a “death tax” of 40%. To reduce or eliminate this concern, families can implement various trust planning strategies. Through the use of A/B and QTIP trusts, the death tax can be significantly reduced, if not eliminated. This particular type of trust planning strategy was very common in the 1990’s and early 2000’s when the estate tax exemption was only $100,000.

Asset Protection

Family trusts can protect against creditors and litigation. A properly drafted trust will have provisions limiting payments to beneficiaries if they are in a pending litigation or have creditor concerns. So long as there is discretion given to the trustee, the trust principal cannot be attacked by creditors or litigation. However, payments for the child’s health, education, maintenance and support would always still continue. In other words, if a child ends up in a lawsuit, the trustee can cease payments to the child so that the money is protected from the lawsuit while also keeping them off the streets.

Divorce

In Ohio, marital assets accumulated during marriage are split 50/50 in a divorce. It doesn’t matter whether one spouse cheated or did something horrible to the other. Ohio courts will divide all assets 50/50, including an inheritance if the inheritance is commingled in a joint account. So, if your child inherits $1 million dollars from your estate, and then deposits the money in their joint investment account, the ex-spouse could potentially receive $500,000. Using the same example above, you can protect your child’s inheritance by creating a revocable living trust.  Here again, the trustee can turn off the income stream to prevent a disgruntled son-in-law from receiving his unearned share.

Control

No matter how they’re raised, it’s not uncommon for children to be irresponsible or need at least some level of guidance. With a trust you can create payment terms so that children don’t blow their inheritance on impulsive decisions. For example, many trusts stipulate that children may only use funds for “health, maintenance, education, and support” until they reach the age of 25, thereafter payments made over time to protect against divorce, litigation and creditors. This method is very common and puts parents at ease even with responsible children.

Conclusion

There are a number of different trusts available and the choices are infinite depending on the client’s goals. With every scenario, careful consideration of every trust planning strategy should be considered for maximum asset protection and tax savings. For more information, you can contact Dan A. Baron of Baron Law LLC at 216-573-3723 or
dan@baronlawcleveland.com.

Sponsored By

Baron Law LLC
Crowne Centre, Suite #600
5005 Rockside Road
Independence, Ohio 44131
216-573-3723
www.baronlawcleveland.com

Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.