In the previous two newsletters I discussed some reasons why a person might want to set up a trust:

1) When  a beneficiary is  unable to handle his or her own finances,

2) When an heir is receiving SSI and Medicaid,

3) Where the person who is deciding whether to have a trust wants to control what happens to his/her property for a period of time after death

4) To avoid Estate taxes on large estates.

In this newsletter, I’ll discuss purposes for which a revocable trust may or may not be useful:

A. To save on income taxes or protect the creator of the trust from liability in case of a lawsuit.

Most trusts are set up so that they can be revoked by the person who created and put money and property into them (the Settlor), and so that the Settlor can make decisions about how the assets are used.   This kind of trust does not save on income taxes for the Settlor, because the IRS considers the trust assets to still “belong” to the Settlor, and the income from those assets to be taxable to him or her.

For similar reasons, if a person with a revocable trust is sued, most courts will treat the trust assets as belonging to the Settlor, so that they may be taken to pay off a judgment.

The only way to avoid either of these results is to set up an “irrevocable” trust, which will give the power to manage and distribute the trust assets to a Trustee who is different from the Settlor, and which cannot be terminated.  This may be a useful tactic for someone with a very large estate who is certain to not need the use of the assets, but is not practical for most people.

B. A trust may or may not be useful to simplify the process or reduce the expense of settling one’s estate after death.

Property that is put into a trust does not have to go through a probate.   This can save time and money after the death of the person who set up the trust. Also, property that is held in a trust is immediately accessible by the trustee without any court proceeding.  However, creating a trust in the first place, and transferring property to it, can be as expensive as probating an estate.  And, although property is held in a trust, it still has to be managed, sold, distributed, as instructed by the trust documents.

Other methods of transferring real estate, such as putting the title injointtenancy, or by use of a transfer on death deed, can avoid some of the expense and inconvenience of probate or settling up a trust, but do not give the amount of control over the way the property is managed after death that a trust gives.

To discuss whether a trust or other planning method is right for you, call your New Mexico Legal Shield Provider, and ask to speak to one of our attorneys.