Most members of this community have established a revocable living trust. It is fundamental, something of a necessity because of the many benefits. But is your trust right for you?
The fact is that most trusts are “vanilla,” in the sense that they rely on many assumptions and include pages of presumptive language. Following are some points to seriously consider. For most, it will move you to review your trust and make some changes.
Don’t leave money directly to children
You are probably thinking, “What is he thinking?” With the rarest of exceptions, it makes more sense to leave money to trusts you establish for the benefit of your children rather than leaving assets directly to them. The purpose or goal is to protect inherited assets first for the benefit of your children and then for the benefit of your grandchildren.
Establish dynasty trusts for children
Dynasty trusts are not only for the mega-wealthy – they are for all of us. By leaving assets in such a trust rather than directly to your children, three powerful benefits can be captured:
• Divorce protection. Assets inherited in such trusts are segregated and avoid the division of assets if your child endures a divorce.
• Litigation protection. These trusts own assets, your children do not. The level of litigation protection is very high.
• Estate tax avoidance when your children die. All or most of the assets you leave your children in these trusts will not be counted as part of their taxable estates. They can grow to virtually any amount and pass intact for the benefit of those perfect grandchildren. Your grandchildren enjoy the same protections, ensuring that assets will be there for the great-grandchildren as well. This can save millions of dollars for your family.
While your children are living, they can enjoy assets in their dynasty trust. Alternatively, you can limit their access or use of assets in the trust.
Establish a special-needs trust
If you leave money directly to a child with a disability, your child will lose eligibility for needs-based government programs like Supplemental Security Income and Medi-Cal. Any amount of money can be left to a properly drafted special-needs trust, and eligibility for such programs is undisturbed. Such trusts create a lifelong safety net for your child with a disability.
Other questions to consider:
• Does your trust address estate tax avoidance? Starting in 2026, the individual level of estate tax protection will be approximately $5.5 million. That is $11 million for a couple. If your estate is at or close to either of those levels, you need to think about steps you can take to avoid the 40% estate tax. Don’t be complacent!
For a single person, a revocable trust provides no estate tax protection at all. For a couple, a revocable trust provides limited estate tax protection.
• Did you choose the right successor trustee? Don’t choose your oldest child just because he or she is your oldest child. Choose the individual who is most responsible.
Keep in mind that your successor trustee will manage your assets and effectively take care of you for years if you become incapacitated.
It takes time and thought to review these and other elements of your revocable living trust. Be sure that your trust is thoughtfully created and responsive to your family needs.
Michael Gilfix, Esq., is a partner at Gilflix & La Poll Associates in Palo Alto. For more information, call 493-8070 or email [email protected]