When planning your estate, a fundamental decision is often the choice between a will and a trust. Both tools are designed to pass on your assets, but they function differently. In many circumstances, a trust offers numerous advantages over a will. Let’s delve deeper into the benefits of trusts and illustrate with case studies.
Trusts Preserve Privacy
Upon your passing, your will becomes public record during probate. In contrast, trusts maintain privacy, ensuring the transfer of assets is not disclosed to the public.
Case Study: Mr. Patterson, a successful entrepreneur, valued his family’s privacy. He created a trust, ensuring his estate was passed to his children seamlessly, away from public view.
Trusts Bypass Probate
Probate is a legal process where your will is validated and executed. It serves a purpose, but it creates potential difficulties for the rightful heirs the estate.
First, there is the matter of money. Clearly, you want your loved ones to receive the maximum amount that is possible after you are gone. Unfortunately, during probate, a lot of expenses pile up, and this reduces the inheritances that will eventually be distributed.
In addition, probate is time-consuming. The exact duration will depend on the relative complexity of the case in question, but it will typically take eight or nine months at minimum. Since the inheritors do not receive anything while the process is underway, this is a significant negative.
Plus, there can be more than one probate process to navigate. If you own property that is located out of the state that you live in, an ancillary probate procedure would be necessary in that state.
Case Study: Mrs. Bennett owned properties in several states. If she relied solely on a will, her estate would undergo multiple probate proceedings. By establishing a trust, she expedited the transfer of properties to her heirs, avoiding multiple probates.
Trusts Permit Conditions on Inheritances
Trusts allow you to set conditions for distribution. For example, you could stipulate that a beneficiary only receives their inheritance upon reaching a specific age.
An incentive trust is another example. With this type of trust, you include incentives that must be satisfied before the beneficiary will receive distributions from the trust.
Some people will use this type of trust to guide loved ones toward higher education and to develop a work ethic after graduation. An incentive trust can also be used to incentivize the beneficiary to steer clear of self-destructive tendencies.
Case Study: The Parkers wanted to leave their assets to their young adult grandchildren but had concerns about them handling significant wealth responsibly. By creating a trust that distributed the assets when they turned 30, they ensured financial maturity before their grandchildren received the inheritance.
Trusts Facilitate Disability Planning
Trusts protect your assets and provide for your care in the event of incapacity, without the need for court intervention. A trustee can manage your trust for your benefit.
Case Study: After being diagnosed with a progressive medical condition, Ms. Richards created a trust, appointing her sister as the trustee. This ensured her well-being and financial security should she become incapable of managing her affairs.
Trusts Can Reduce Estate Taxes
The federal estate tax can take a heavy toll on your legacy if you have been very successful from a financial standpoint. It carries a 40 percent maximum rate, and is applicable on the portion of an estate that exceeds the credit or exclusion.
In 2023, this exclusion is $12.92 million. There is a gift tax in place that is unified with the estate tax, so lifetime gift giving is not the ultimate solution.
Plus, while we are on the subject, we should point out the fact that the estate tax exclusion is scheduled to be reduced at the beginning of 2026. At that time, the current exclusion will sunset, and it will go down to the 2017 level of $5.49 million indexed for inflation.
Case Study: Mr. Anderson, with a high-value estate, wanted to minimize estate taxes. By creating an irrevocable trust, he effectively reduced his taxable estate, resulting in significant tax savings and protecting his children’s inheritance.
A Trust Can Be Part of a Medicaid Plan
Just over 50 percent of seniors will require paid long-term care at some point in their lives. Nursing homes are extremely expensive, and in-home caregivers are costly as well, and some people require care for extended periods of time.
Medicare does not cover a stay in a nursing home or professional in-home custodial care, so there is a big gap to fill. Medicaid is the solution for many, but you cannot gain eligibility unless you have limited resources in your own name.
A Medicaid trust would be at the core of a nursing home asset protection plan. You convey assets that generate income into the trust, and you can continue to receive that income while you are living independently. However, the principal would no longer be accessible to you.
After five years, the assets in the trust would not count if you apply for Medicaid. On the other hand, if you maintain possession of all of your assets with the understanding that you will pass them along in your will, you would not be able to qualify for Medicaid.
Case Study: Mr. Washington conveys his sizable portfolio into an irrevocable Medicaid trust when he is 75 years old. It generates more than enough income for him to help him live comfortably.
When he is 82, his doctors recommend nursing home care because his needs are considerable. He applies for Medicaid coverage, and he is approved because he has limited assets in his direct personal possession.
In Closing
While wills are useful in estate planning, trusts provide added flexibility, privacy, and control. Trusts can facilitate the immediate transfer of assets, provide for disability, stipulate conditions on inheritances, and may offer tax benefits.
Schedule a Consultation Today!
The above case studies underscore the strategic advantages of trusts. However, it’s important to note that every individual’s situation is unique. It’s crucial to consult with an attorney for personalized advice.
If you are ready to do just that, our doors are open. We will provide personalized attention, and you will emerge from the interaction with a custom crafted plan that ideally suits your needs.
You can call us at 843-815-8580 to schedule a consultation at our Bluffton, South Carolina estate planning office, and you can alternately send us a message through our contact page.
Hunter is a member of the South Carolina Bar Association, the Beaufort County Bar Association, and has served on charitable and advisory boards in the Bluffton/Hilton Head area.
Hunter graduated from Hilton Head High School. He then earned his Bachelor of Science Degree in Economics from Clemson University, in Clemson, South Carolina.
Hunter graduated Cum Laude from Regent University School of Law in Virginia Beach, Virginia, having earned a Juris Doctor Degree. He also wrote his doctorial thesis on Estate Planning Dynasty Trusts.
Hunter has called Beaufort County home for since 1984, where he lives with his wife and two children.In his spare time he dabbles in automobiles, reading history, hunting and fishing.
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