My parents already have a trust, can I just use theirs?
No, generally, you should never use someone else’s trust for your own estate planning purposes. There are way too many negative implications and risks associate with putting your own asset in someone else’s trust.
Here are four reasons why you should be creating your own trust and not using someone else’s existing trust.
4 Reasons You Shouldn’t Place Your Assets in a Parent’s Trust
You don’t control the trust. Generally, for revocable living trusts, the Grantor (or the trust-maker / creator of the trust) controls how the trust functions. This means you are effectively gifting away the asset. Even if the current instructions of the trust are aligned with your current wishes, there is nothing preventing the trust from being amended in a way that would contradict your wishes (in other words, if they change the trust terms, there’s nothing you can do about it). Similarly, if your wishes or your intentions change - meaning you want to change how the asset will be managed or used under that trust structure - you have no direct ability to update the trust to reflect your new intentions. You’re stuck.
Negative Tax Implications. There could be an entire book written on this one (and there certainly are), but the long story short is that if you transfer an asset to another person’s trust, you are likely going to put your family in a worse tax position. There are a few reasons for this:
#1 - you’ll lose a potential step-up cost basis - meaning your kids will pay income taxes that they may have otherwise been able to avoid
#2 - if the asset is income generating, or could be converted / sold to produce an income generating asset, then the grantor of the trust (or the trustee) will now have to deal with paying income taxes at potentially much higher marginal income tax brackets
#3 - you may inadvertently increase the estate tax liability of your family unit as a whole. If you are transferring an asset to someone else's trust that would qualify for estate inclusion (which is just a fancy way of saying, you are adding to their estate value), then when that person dies, they now have to factor in whether the added value of that asset will push them over the esate tax threshold. In other words, if your parent lives in Massachusetts, and you just gifted an asset to their revocable trust (or an irrevocable trust that has estate tax inclusion provisions like a power of appointment), then you may have pushed them over the $2 million exemption threshold for the state. If they are already over $2 million, then you’ve added to their estate tax liability and that asset will be taxed at an even higher rate because of the progressive estate tax structure of Massachusetts (goes up to 16% at the time of this writing). And if you’ve added assets to someone who already has $7 million in assets, then once the expected tax law change comes into effect in 2026, then you could have just created a 40% estate tax liability. That’s bad.
Traded one risk for a bunch of other ones. I don’t mean to make anyone uncomfortable with this analogy, but I think most of us are aware that when you take a pill to solve one problem, there are many potential side effects (or other risks) that are associated with taking that new drug. Similarly, when you transfer assets to another person’s trust, there are different risks that the asset may be subject to. What if the grantor / trust-maker of the trust needs to go to a nursing home? What if he or she gets divorced? What if he or she gets sued or runs into other financial problems? What the grantor becomes incompetent? This circles back to point #1 - you generally have no direct control over the other person’s trust to amend it to take into account such changing circumstances, and now you are stuck with the unknown outcome.
The Trust Will Terminate - Then What? Most trusts are designed to terminate or distribute assets upon the grantor’s death. What would then happen to your asset when that person (e.g., your parent if it’s your parent’s trust) dies? Who does the asset go to and in what contingencies are in place if that person is no longer alive or in a good position to take control of that assets (e.g., a minor grandchild, a child going through a divorce, a child receiving financial support, a child with disabilities or other health concerns). All of these issues come to the forefront eventually, so by transferring property to another person’s trust you are just kicking the can down the road for more complications that, even in the best case scenario, would require you to do what you should have done from the very beginning - create your own trust.
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Joseph M. Lento, J.D.
Your Local Estate Planning Attorney
www.PerennialEstatePlanning.com
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Stoneham, MA 02180
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