Using a trust can help you and your family. Yet sometimes your situation may not call for the benefits a trust can give you. You should get an honest evaluation of your situation and then a recommendation of whether to use a will or trust as the center of your estate planning.
Trusts can give you tax or protection benefits (non-tax)
You can use trusts to gain tax benefits or for non-tax reasons, such as protecting a future beneficiary from their less than desirable habits.
Pro: Estate tax savings if you are married and live in MA
Many married persons, with over $1 million in total wealth in MA, will use a MA revocable living trust to pave the way for the family to pay less in MA estate tax.
This is because at the first death, up to $1 million (cash or property) can be put into a Family Trust - usable for the surviving spouse's benefit - but NOT become part of the surviving spouse's taxable estate on the second death.
In this way, a Family Trust funded at the first death can be part of the overall estate plan. And by doing this each spouse can use their own $1 million exemption from MA tax.
So, with a married person's living trust, you can protect up to $2 million from MA estate taxes.
Pro: Non-tax reasons to have a trust (protecting the beneficiary)
Sometimes you want to leave money or assets to a person whom can't control themselves, say, by (almost) uncontrollable spending, or having divorce or drug/alcohol problems.
You have the choice, through using trust terms in your estate planning documents, to leave the desired amount or portion of your wealth 'in trust' for the beneficiary's benefit.
Or the beneficiary is receiving, or will likely get in the future, government benefits that are given only if the beneficiary's assets are low. A supplemental needs trust is a type of trust that can be used here.
Another example: a person of any sized wealth may have a son or daughter with a serious drug problem. If assets are left outright to the drug addict - as the sole or one of many beneficiaries - the money can be spent, basically uncontrollably, within months.
Alternatively, if that some amount of assets are put into a trust at the parent's death, then the trustee can pay for the beneficiary's rent and food but not allow the bulk of the funds to be lost. Eventually, hopefully, the problem will pass, the beneficiary’s situation improves, and the trustee can give the balance to the recovered loved one. Or continue to hold it in a controlled way.
Pro: You can change the terms of the revocable trust
A major difference between a Massachusetts revocable living trust and an irrevocable trust is this: you can change the revocable living trust at a future date, perhaps many years after it gets established by signing it. This is unlike an irrevocable trust that can be changed but only with much more effort.
Pro: You can protect assets from a trust
People have long used trust provisions to take 'off the table' some assets from a beneficiary's creditors. This protection is generally available for persons other than the person creating the trust. And the law has exceptions to the protection of such a trust, based on public policy. Still, it can be highly useful when properly used. Asset protection for someone other than the person creating the trust may be a reason to create a MA revocable living trust.
Con: A trust generally does not give the trust creator assets protection
The law makes it difficult to get asset protection for a trust you set up to benefit yourself. This is deemed a 'self-settled trust' and courts will not generally allow you to protect YOURSELF from creditors if you can receive money from the trust. The law says it 'wouldn't be fair' to allow that situation.
Pro: You can lower income taxes by creating a trust
The income taxation of trusts is a subject I have lectured on nationally for several years. It can be a complex topic.
Simply put, when a trust distributes income to a beneficiary then the income is taxable to the beneficiary at the rate of the beneficiary. If the rate is lower than the rate payable by the trust creator, the family pays a lower overall income tax rate.
So, by having trust beneficiaries whom are in lower income tax brackets, can mean lower income taxes for the family as a whole.