Our estate planning attorneys frequently meet with clients who are under the impression that they need to have a trust. However, this is often not the case. While trusts are sometimes appropriate, after legal consultation many clients realize a trust is not right for them. What are the reasons to form a trust?
There are many different types of trusts which serve many different purposes. A trust can be irrevocable or revocable. A trust can be a living trust effective while the settlor of the trust is still alive or a trust can be a testamentary trust created in a will that becomes effective only upon the death of the settlor.
One of the main reasons clients think they need a trust is to avoid estate taxes. In 2021, the estate and gift tax exemption is $11.7 million per individual, up from $11.58 million in 2020. That means an individual could leave $11.7 million to heirs and pay no federal estate or gift tax, while a married couple could leave $23.4 million without paying federal estate or gift tax. The concept of “portability” also allows the surviving spouse to inherit the deceased spouse’s estate and gift tax exemption if certain rules are followed, including the filing of a federal estate tax return for the deceased spouse even if one would not otherwise be required.
Under the current tax law, the estate and gift tax exemption will sunset on December 31, 2025. Starting January 1, 2026, the exemption will return to $5 million adjusted for inflation unless Congress acts to renew the legislation. There is also the possibility Congress could act before the current tax law expires and could lower the estate and gift tax exemption. While the law has the potential to change, the consistent trend over the last 25 years or so has been to increase, rather than decrease, the amount of the exemption. The best approach at this juncture may be to wait and see what happens. A lifetime exemption of over $5 million per person is still significant and essentially rules out federal estate tax for most people, especially considering the annual gift exclusion discussed below. Even if the tax law does significantly change, estate plans can be updated to include a trust, if necessary.
The annual gift exclusion amount for 2021 is $15,000. The annual gift exclusion allows you to give $15,000 in 2021 to as many people as you’d like without those gifts counting against your $11.7 million lifetime exemption. Furthermore, a married couple can currently make nontaxable annual gifts to individuals of up to $30,000. If your annual gifts exceed the amount of your annual gift exclusion, it will reduce your lifetime estate and gift tax exemption by the excess amount of the gifts but the donor is not required to pay gift tax unless and until the lifetime exemption is exhausted. Furthermore, there is no longer any inheritance tax under Louisiana law.
Considering the current estate and gift tax exemption, the ability to utilize the annual gift tax exclusion, and there being no inheritance tax in Louisiana the vast majority of Louisiana residents do not need a trust to protect their estates from estate or inheritance taxes.
Another reason clients often feel they need a trust is to avoid the “probate” process. Probate is the legal process of administering a person’s estate after his or her death. While avoiding probate is a legitimate concern in many states, such is not really the case in Louisiana. Several years ago, Louisiana adopted a streamlined procedure allowing for “independent administration” of estates or successions that allows the executor or executrix of a succession to take action without court approval and greatly reduces the costs of administering estates. In general, the legal fees and costs associated with opening a succession and administering an estate are reasonable and do not necessarily need to be avoided as forming a trust to avoid probate comes with its own costs. Independent administration can be provided for by including the necessary language in your will. In some cases, a succession can be completed quickly through a “simple putting in possession” without the necessity of an administration.
Additionally, Louisiana allows qualifying small successions where the decedent’s property in Louisiana has a gross value of $125,000 or less as of the date of death to transfer the estate of the decedent via a small succession affidavit, without judicially opening a succession. In general, the small succession affidavit procedure is only available when the decedent dies intestate (without a will). However, there is an exception for a person who dies leaving a will, but no immovable property, where the probate of the will would have the same effect as if the deceased had died intestate.
To avoid probate, many individuals place their property in a revocable living trust. This makes the trustee of the trust the legal owner of the property in the trust, making probate unnecessary. As demonstrated above, the expense and potential hassle or forming and administering a revocable living trust is probably not worth the effort to avoid estate tax or probate. Furthermore, as a revocable living trust can be revoked at any time, the property in the trust is not protected from claims of creditors.
There are reasons to form certain trusts that are unique to Louisiana due to its succession laws providing for forced heirship. A forced heir is any child of a decedent under the age of 24 at the death of the decedent or a child of any age who is incapable of caring for his/her person or administering his/her estate due to a physical or mental infirmity. Grandchildren of the decedent can also be considered forced heirs if their parent (the decedent’s child) died before the decedent and at the time of the decedent’s death would have been under age 24 or permanently incapacitated. Forced heirs are entitled to a certain portion of a decedent’s estate referred to as the “forced portion” or “legitime.” If the decedent has only one forced heir, that heir will be entitled to 25% of the estate. If the decedent has more than one forced heir, the forced heirs will receive half of the estate. These rules are subject to some limitations not addressed in this article. Forced heirs also have the right to demand what is called “collation” of gifts made by the decedent within 3 years of death, which could require such gifts to be refunded to the estate.
One of the ways to restrict forced heirship rights is to leave the forced portion to a trust. The trust can be created by a will and must meet certain requirements to be valid or else it must be reformed. As forced heirs are sometimes children or grandchildren with disabilities receiving government benefits (such as Medicaid), it may also be necessary to create a Supplemental or Special Needs Trust so that the inheritance of the forced portion by the forced heir does not disqualify that heir from receiving government benefits. Supplemental or Special Needs Trusts can be provided for in a will and must be carefully drafted and administered so as not to disqualify the heir from receiving government benefits.
Another scenario where an individual or married couple may want to consider forming a trust is when they have minor children. Assume a widow remarries with children from her previous marriage and would prefer her property to be left to her children rather than her second spouse or that her spouse not control the property she leaves to her children. In such instances, the property can be left to the children in trust with a family member or professional trustee (such as a bank) appointed to administer the trust.
Parents, especially high net worth individuals, may also want to create a testamentary trust to restrict their child’s access to their inheritance until they reach a suitable age out of fear that the child may spend the funds irresponsibly in their teens or early twenties. Such a trust can be created to provide that the trust will remain in effect and distribute only the funds necessary for the health, education and support of the beneficiary until the beneficiary reaches a suitable age with the trust then terminating and all trust property being distributed to the child.
While there are other reasons to form trusts not discussed herein, this article demonstrates why trusts (especially revocable living trusts) are not necessary for many Louisiana residents. Due to Louisiana’s unique succession laws, it is advisable for almost all individuals to create a last will and testament. Whether to include a trust in the will depends on your particular circumstances.
An experienced estate planning attorney should be consulted when determining whether a trust is right for you and your estate plan.
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