Simple efficient estate planning tools:
Wills are what you can use to pass assets after death in probate if you haven’t made other designations on accounts for beneficiaries such as a beneficiary on bank account or life insurance. Financial and Medical Power of attorneys can to take care of you if you became incapacitated or had diminished faculties.
What is a living trust?
A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called a beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust.
A “living trust” (also called an “inter vivos” trust) is simply a trust you create while you’re alive, rather than one that is created at your death.
Different kinds of living trusts can help you avoid probate, reduce estate taxes, reduce exposure to creditors, or set up long-term property management. You can create Irrevocable trusts to further protect assets.
Can a living trust reduce estate taxes?
A simple probate-avoidance living trust has no effect on estate taxes.
Currently, only estates worth more than $5 million will owe estate taxes. This means that very few people have to worry about this tax.
In the past, AB trusts were used to help couples save on estate taxes. However, the large personal exemption and “portability” for spouses make AB trusts largely unnecessary.
Does a living trust protect property from creditors?
Yes and No. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.
Generally, after your death, all property you owned — including assets held in a living trust — is subject to your lawful debts. For example, if your house is held in trust and passes to your children at your death, a creditor could demand that they pay the debt, up to the value of the house. Ownership of real estate is always a matter of public record, so creditors can always find out who inherited real estate. It can be more difficult for creditors to know who inherits other property, however (because a trust document, unlike a will, is not a matter of public record), and they may not bother tracking it down.
On the other hand, probate can also offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they’re out of luck forever .
Trusts do not limit the rights of the beneficiary’s creditors to the income or property the trust distributes to him after it is received by the beneficiary from the trustee, but his creditors cannot compel the trustee to pay them directly. This means that any of the beneficiary’s creditors can seek to have the money the spendthrift has already received applied to satisfy their claims, but creditor’s claims to future payments under the trust, however, are denied. The beneficiary’s creditors cannot reach the $15,000 that he is to be paid in a subsequent year until it is actually paid out to him. If the beneficiary could dispose of his right to receive income or principal from the trust, his incompetence or carelessness might lead him to sell his interest in the trust and transfer it to a lender or purchaser and creditors the right to receive future income as it became due.
By providing in the trust that no beneficiary can sell, pledge or otherwise give someone rights to his rights in the trust, no creditor of the beneficiary can do anything with the income until it is paid into his hands by the trustee. Therefore, he is more likely to be protected, at least to some extent, against losing what his father wanted to leave to him.
Now, how does this kind of a trust help a Settlor to protect his or her assets from a creditor since he or she cannot transfer assets into a trust with spendthrift provisions and remain a beneficiary and protect it from his or her creditors? The answer is you wouldn’t use this technique for assets that you need to support yourself. Those assets that are not already exempt under Texas law should be put in an LLC that you control and in which you still own the lion’s share of the equity. But once you have accumulated sufficient assets in your exempt buckets (IRA, 401(k), annuities, etc) and then in your LLC, to provide for your future needs, the spendthrift irrevocable trust for your children or other loved ones is the best vehicle to protect excess assets. This trust is much better than an LLC
because you no longer own the assets that you put in the trust. They never appear on your balance sheet or estate, if properly implemented.