Sponsored
Family Trust Planning – Doing it Right Copy
by Dan A. Baron, Baron Law LLC
It is a common misconception that a simple will efficiently passes on your legacy. In reality, a basic will does not avoid probate and does not provide asset protection. Therefore, there are several compelling reasons to consider a family trust. Many clients we meet initially believe that trusts are only for the wealthy, but this is entirely false. Even if you are not as affluent as Warren Buffet, there are numerous advantages to utilizing a trust, regardless of your financial status. While the reasons for establishing a trust can vary widely, here are a few of the most common scenarios in which a family trust could be highly beneficial.
Young Children
By law, children under the age of 18 cannot inherit property directly. Additionally, USA Today reports that more than half of individuals under 40 who inherit $100,000 or more end up spending their entire inheritance within six months. A family trust can alleviate these concerns by designating a trustee to manage the child’s inheritance. This trustee ensures that the estate is used for the child’s health, education, maintenance, and support, while also preserving the assets for the child’s lifetime, regardless of age.
Second Marriages
Given that divorce rates exceed 50%, many people in second marriages choose to establish a trust to protect their children from a previous marriage. Without a trust, a surviving spouse may legally disinherit children from a prior marriage. Even if a spouse asserts, “I would never get remarried,” a trust can prevent this situation. By creating a “bloodline trust,” you can provide for your spouse while ensuring that your children from a previous marriage are not disinherited. After the second spouse’s death, the estate must be passed to the children and cannot be diverted elsewhere. This type of trust allows you to maintain control over your estate even after death, ensuring that your children are not unintentionally excluded. Even in the case of a first marriage, a trust may still be a wise decision for couples wishing to keep the estate within the family and mitigate concerns regarding remarriage.
Special Needs Children and Adults
If you have a child with special needs, creating a trust is essential. Special needs individuals often receive federal assistance, such as Supplemental Security Income (SSI) or Medicaid, which is subject to strict income limits. Receiving an inheritance may disqualify them from these benefits, as the inheritance would be considered income and could exceed the allowable threshold. A special needs trust ensures that your loved one continues to receive necessary federal assistance while also benefiting from your estate. Failing to plan for a special needs situation – whether for adult children or adolescents – can lead to significant financial and emotional challenges.
Tax Savings for Children
Inherited estates often come with tax liabilities. While the federal estate tax exemption is currently at a historic high, legislation is being proposed to reduce this exemption to nearly $3 million. If your estate exceeds a newly passed threshold, your children could face a “death tax” of approximately 40%. To minimize or eliminate this tax burden, various trust planning strategies can be implemented. Through the use of A/B and QTIP provisions within a family trust, the death tax can be significantly reduced or avoided altogether. These strategies were commonly used in the 1990s and early 2000s, when the estate tax exemption was only $600,000.
Asset Protection
Family trusts can provide protection against creditors and litigation. A well-drafted trust includes provisions allowing the trustee to limit payments to beneficiaries involved in litigation or facing creditor issues. As long as the trustee has discretion, the trust’s principal cannot be accessed by creditors or seized in a lawsuit. However, the trustee will still be able to provide for the beneficiary’s health, education, maintenance, and support. For example, if a beneficiary becomes embroiled in a lawsuit, the trustee can suspend payments, protecting the assets while ensuring the beneficiary’s well-being.
Divorce
In Ohio, marital assets accumulated during the marriage are divided equally in the event of divorce. This includes any inheritance that has been commingled with marital assets. If a child inherits $1 million and deposits it into a joint account, their ex-spouse may be entitled to half of it. To protect your child’s inheritance from such a division, a bloodline trust can be established. In this case, the trustee can stop payments to prevent a former spouse from claiming any portion of the inheritance.
Control
Regardless of how they are raised, some children may struggle with financial responsibility or require guidance in managing their inheritance. A trust allows you to establish conditions for disbursements, ensuring that funds are used responsibly. Many trusts stipulate that payments are made for specific purposes, such as “health, maintenance, education, and support,” until the beneficiary reaches a certain age – often 25. After this age, payments may be made gradually to safeguard against issues like divorce, litigation, or creditor claims. This approach offers peace of mind, even for children who are considered financially responsible.
Conclusion
There are numerous types of trusts available, and the options are vast depending on your specific goals. It is essential to carefully consider each trust strategy to ensure maximum asset protection and tax savings. For more information, please 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.