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Home » What if You Make the Wrong Kind of Trust?

What if You Make the Wrong Kind of Trust?

October 3, 2017Trust in Indianapolis

Indianapolis Trust Attorney

An Indianapolis trust attorney will provide help with selecting the correct type of trust to create. Trusts are versatile and powerful legal tools that can help you to achieve many different goals, from protecting your wealth to protecting your loved ones. But, the very versatility that makes trusts so useful can also make it difficult for individuals to create trusts without getting legal advice. The problem is, far too many people make the wrong type of trust and end up not getting the benefits and protections they were actually expecting to receive as a result of trust creation. 

Frank & Kraft can help you to make certain that you make the correct trust type so you get the protections that you created the trust in order to provide. We can also assist you with the process of actually creating your trust document and making sure you follow all legal formalities and make your instructions clear. You should definitely work with an Indianapolis trust attorney in the process of creating a trust because mistakes could end up costing you a fortune and could cost your family security. We can help to make sure that this does not happen to you.

What are the Consequences of Making the Wrong Type of Trust?

If you make the wrong kind of trust, the biggest consequence is that the trust may not accomplish whatever you expected it to do in terms of protecting your wealth. For example, many people decide to create a trust because they are trying to protect their money and property from being lost if they require nursing home care.

If you need nursing home care, Medicaid is probably the only source of payments for this care because Medicare and private insurance only pay for skilled services and not for the routine care that most nursing home residents need. Since Medicaid is for low income people, there are resource limits.

If you have too many assets, you won’t be able to get coverage. If your goal is to protect your wealth from being lost and to make sure you can get covered by Medicaid when you need coverage, you may decide to create a trust. Unfortunately, if you create a living trust and you still have control over trust assets, the assets will still count for determining if you can get Medicaid so you won’t get the expected protections. You could end up not qualifying for Medicaid even though you thought that you would, which can result in you losing out on the protections that you expected to receive.

This is just one of many examples of how making the wrong kind of trust could cause you to experience substantial financial loss. The same problems could arise if you make a trust to try to avoid estate tax, as many people wrongly believe that a living trust allows them to avoid these taxes since assets held within the living trust pass outside of probate. However, while the assets in the living trust don’t have to go through the probate process, the assets do still count when determining if estate tax is owed and in what amounts.

Mistakes like these often are not discovered until it is too late to correct the problem and make the proper type of trust. By the time it is discovered that the trust which was created will not keep wealth safe, you may already need Medicaid and be ineligible for it or the trust creator who intended to use the trust to avoid estate tax may have already passed away. You don’t want to take a chance on mistakes that could cost you and your family a fortune so you should get the right legal help from the start to avoid costly errors.

Getting Help from An Indianapolis Trust Attorney

An Indianapolis trust attorney at Frank & Kraft will listen closely to your goals for protecting your family and assets and will help you to make a choice on whether a trust is right for you as well as on the type of trust that you should create. We can also provide you with guidance on the actual process of creating and funding your trust to help you ensure that your trust is legally valid and made in accordance with state requirements.

To find out more about how an Indianapolis trust attorney at Frank & Kraft can help you with all legal issues related to creating a trust, join us for a free seminar. If you are ready to get personalized help creating your trust, give us a call at 317-684-1100 or contact us online today.

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Paul A. Kraft, Estate Planning Attorney
Paul A. Kraft, Estate Planning Attorney
Paul Kraft is Co-Founder and the senior Principal of Frank & Kraft, one of the leading law firms in Indiana in the area of estate planning as well as business and tax planning.

Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
Paul A. Kraft, Estate Planning Attorney
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Trust Administration Steps
To ensure that your estate doesn’t lose assets to federal gift and estate taxes you may need to include tax avoidance strategies in your estate plan. One estate planning tool that can provide tax avoidance benefits is a Grantor Retained Income Trust, or GRIT. Always consult with your estate planning attorney before deciding what tools to incorporate into your estate plan. In the meantime, however, the Indianapolis trust attorneys at Frank & Kraft explain how a Grantor Retained Income Trust works and why you might want to include one in your estate plan. What Is a GRIT? A GRIT is a specialized type of irrevocable trust that allows the Grantor (creator of the trust, also referred to as the “Settlor”) to transfer assets into the trust while retaining the right to receive all of the net income from the trust assets for a fixed term of years, referred to as the “initial term.” Income from the trust is distributed to the Grantor at least annually during the initial term. At the end of the initial term, the remaining principal is either distributed to the trust beneficiaries or remains in the trust for the benefit of those beneficiaries. The primary benefit of a GRIT is that if (this condition is important) the Grantor survives the initial term, the value of the principal held in the GRIT is excluded from the Grantor’s estate for federal gift and estate tax purposes. How Does a GRIT Help with Tax Avoidance? The tax avoidance benefit of a GRIT is found in how the value of the trust principal is determined because those assets are valued at a discount. The value of the discount depends on the length of the initial term of the GRIT, and the applicable federal rate in effect at the time the GRIT is established. The transfer of assets to a GRIT constitutes a gift equal to the total value of the assets transferred to the GRIT, less the present value of the retained income interest held by the Grantor for the initial term. If the Grantor survives the initial term, the assets comprising the GRIT will pass to the designated remainder beneficiaries at a reduced gift tax value. GRIT Beneficiaries Section 2702 of the Internal Revenue Code determines who you cannot name as a beneficiary in a GRIT. Excluded beneficiaries include your spouse, your ancestors or the ancestors of your spouse, any lineal descendant of yours or your spouse, any sibling of yours or your spouse, or the spouses of any of the foregoing persons. You can name lineal descendants of siblings, (nieces and nephews) relatives even more distant than nieces and nephews, or friends of yours or your spouse as beneficiaries of a GRIT. How a GRIT Works in Practice Imagine that you establish a 15-year GRIT and transfer $100,000 of assets into the trust and that the applicable federal rate is five percent. As the Grantor, you will receive the income from the GRIT during the initial term. The present value of the retained income interest is $66,007, making the value of the gift $33,993. If you survive until the end of the initial term, however, the remainder beneficiaries will receive $100,0000 plus all capital growth. Your estate, however, will only need to acknowledge a lifetime gift in the amount of $33,993 (the applicable value of the gift at the time it was made). Disadvantages of Using a GRIT Just like most tax savings tools and strategies, there are some disadvantages to relying on a GRIT. First, it is an irrevocable trust, meaning if your personal circumstances change, you cannot make corresponding changes to the trust. Second, if you do not survive the initial term the advantages gained by creating a GRIT do not apply. Contact the Indianapolis Trust Attorneys For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about establishing a Grantor Retained Income Trust, contact the experienced Indianapolis trust attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.
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