People often mistakenly believe that trusts are for rich people. But you're about to find out that the trusts are used these days by all classes of people, and in some scenarios, trusts can benefit the middle class more than they can benefit the wealthy.
The following are seven common reasons people in Louisiana use trusts:
(1) Avoid Probate. Probably the most common reason nationwide why people use trusts. When you die with assets in your name, whether you have a last will or not, your assets are frozen. Your executor and your heirs will hire attorneys who will guide the family through the government-supervised probate (also called "Succession") process. Most people believe that this proceeding is too burdensome, costly, time-consuming, and just an overall pain in the behind. In some cases, it tears families apart. You can establish your revocable living trust and name trustees and beneficiaries of your trust, re-title assets into your trust while you are alive, so that when you die, your trustee disburses your trust assets to your beneficiaries, all outside of the government and legal system interference.
(2) Avoid Nursing Home Poverty. The biggest threat to many people's life savings these days is not taxes or probate, but long term care expenses. With people living longer, if you own assets and need long term skilled care, you will be forced to pay for all of your own care out of your own savings until you have less than $2,000 remaining. If you work with the right people and set things up the right way, at the right time, and you get it right the first time, then you can protect your home and life savings from a forced spend-down in the event you need long term care in the future.
(3) Protect Irresponsible Heirs. Many people we work with want to leave an inheritance to their children or grandchildren, but they fear or they know that leaving a lump sum to certain individuals will enable them to squander the inheritance and spend it on the wrong things. You can establish a trust so that when you die, the inheritance for the financially immature heir can be doled out to him or her over time, or perhaps provide for a monthly stipend, or provide that someone else would have the discretion to determine when the heir is financially responsible enough to handle an inheritance.
(4) Blended Family Situation. The biggest worry about blended families and estate planning is that when the first spouse dies, the worry is that all of the assets will go the surviving spouse. And then when the surviving spouse dies, all assets will go to the surviving spouse's children. The children of the first spouse to die won't get a penny. If you are a spouse in a blended family situation, you can establish a trust so that when you die, your assets are available for your spouse, but when your surviving spouse later dies, remaining trust assets go back to your children. This helps blended families protect assets for the right people.
(5) Special Needs Trust. If you leave assets outright to someone who is getting government benefits, then the inheritance you leave them may get them kicked off of their benefits. By leaving the inheritance to what is commonly referred to as a "Special Needs Trust," you can arrange things in a way so that your heir continues to receive the valuable benefits, but also benefits from the inheritance that you left them the right way in a trust.
(6) Minors. Don't ever leave anything outright to a minor. When you leave life insurance or part of an estate to a minor, then that inheritance, while the child is a minor, must be directly supervised by a judge, and a judge must approve every expenditure of the inheritance on behalf of the minor, and then when the child turns 18, the remainder of the inheritance gets dumped in the child's lap. You can set up a trust so that you name a trusted friend or relative, or perhaps a company, to be the "Trustee" of a trust for the benefit of your minor child or grandchild. This will further make sure that what you leave to the minor is used for the right reasons outside of government interference, and is doled out the right way as the minor gradually turns into an adult.
(7) Avoid Taxes. Some people set up trusts to avoid taxes. The wealthy often establish trusts to move money from their "taxable estate" to an arrangement whereby assets are "out of the estate." It is important to note, however, that this estate tax affects only a small number of families. When an individual dies with an estate of less than $5.5 million, the estate is not required to file a federal estate tax return. Married couples can double the amount they can protect.