While a Living Trust is a valuable estate planning tool that can protect beneficiaries from the hassle and expense of probate, it does not automatically protect assets from estate taxes or creditors.
Currently, the Federal estate tax exemption is set at $3.5 million, meaning that only assets above that amount will be subject to Federal estate taxes. The estate tax will be repealed in 2010 and reinstated in 2011 with a $1 million exemption. If a Trust contains more than $3.5 million in assets, then those assets will be subject to estate taxes when they are distributed. Furthermore, the New York estate tax exemption is $1 million, so assets above that amount will be subject to New York estate taxes. A good estate planning attorney can help draft a plan for minimizing estate taxes using both Trusts and other planning tools.
Creditors can also go after property that is being held in a Trust if the creditor wins a lawsuit. Property in the trust will be treated just as if it is still owned in your name. Distributing assets from a trust does not legally prevent a creditor from collecting those assets directly from the beneficiaries.