That headline will sure get your attention! Relax- we are not accusing your attorney of lying to you. Far from it. What we mean by the phrase "Living Trust Lie" is this- it's a lie to assume that just because you have a living trust, all is well and your assets are protected. Years ago I wrote a booklet on this subject to educate clients about the limitations of living trust planning alone. It's out of print now and outdated because of numerous tax law changes, but the concepts still remain relevant even today. Some of my attorney friends were initially pretty upset with me for writing this booklet until they read it and fully understood the point I was trying to make.
As most people know, trusts are an important foundation of any good estate plan and a “must” for anyone wanting to avoid probate and potential estate taxes at death. In many cases a living trust is a great tool and at Hood Financial we highly recommend them to our clients when appropriate. But, while there are many things a living trust will do, there are a lot many more it will not do. For years, I've thought these things were worth giving equal time and attention to. Hence, the controversial, yet catchy title.
During my 30+ years of working with clients, I've found a common thread among those with living trusts. Namely, that despite the best work of estate planning attorneys, there were still major parts of clients' estates left completely unprotected. Not because the attorney wasn't doing their best, it's just that the protections offered by living trusts alone are very limited. I meet people all the time who usually need advanced estate and financial planning strategies, beyond what living trusts can provide, to completely protect their estate in the way the client intended. Think of it this way- there is a legal side to estate planning- wills, trusts, documents, etc, and a financial side. Not having the financial side in order has a far greater negative impact to a surviving spouse and heirs, than does not having the legal side in order. And yet, most people begin with the legal side and their planning usually ends there. We offer pre-legal counseling sessions to anyone considering living trust planning or a trust review to make sure that the all-important financial side of their estate planning also gets the attention it deserves.
Constant tax law changes and the passing of the SECURE Act on December 20, 2019 continue to remind us of the limitations of living trust planning alone. Almost everyone with IRA's & 401(k)'s will be affected. These changes can be costly to IRA beneficiaries and guess what? Living trusts can't fix it. This is #4 of my "10 Things". As more and more people accumulate money in tax-deferred retirement plans this will be a goldmine for the government and a tragedy to those wishing to preserve their wealth. Frankly, it's never made sense to me that you spend all the time, effort, and money to put together a living trust only to see one of your largest assets- your retirement accounts- still subject to income and potentially estate taxes upon your death. While there are special IRA trusts that can help to protect IRA funds from beneficiary creditors, these special trust do nothing to protect retirement accounts from taxes- something everyone can agree on is a bigger problem. Consider this; what percentage of your heirs will have creditor issues as opposed to what percentage of your heirs will pay taxes on these retirement funds? You get the picture. The good news is, with proper planning, you can solve both of these problems but it requires more than just living trust planning alone. And that's where we, at Hood Financial, come in. Let us help you further protect your estate beyond what your living trust can do. You heirs will thank you!
Here are the "10 Things" I've identified. (There may be more, but 10 sounded like a good, round number) See how many of these fit your situation...
A Living Trust Will NOT-
1. Protect lost income at death- (pensions, Social Security, etc) to surviving spouse and/or heirs.2. Create a fair distribution of assets to children of second marriages.3. Reduce or eliminate estate taxes- beyond current tax laws.4. Reduce or eliminate income taxes on IRA's & 401(k)'s, etc. at death.5. Reduce or eliminate income taxes on annuities at death.6. Protect income and assets from a long term care illness.7. Enhance or optimize your life insurance death benefits to loved ones.8. Guarantee an income you can never outlive.9. Replace investment losses to spouse and heirs.10. Simplify estate distribution to your heirs in ways other tools can.
If you'd like to learn more about the limitations of your living trust and how we can help you to fix them, call us at 760-752-7848, email us here, or click on this calendar link to set up a 10-15 "Get Acquainted" Phone Call.