A lot of people assume you should use a will as your asset transfer method when you are devising your estate plan. In fact, there are some good reasons to use a trust instead, and we will look at three of them here.
Nursing Home Asset Protection
A significant percentage of seniors require nursing home care at some point in time. Medicare does not pay for the custodial care that these facilities provide, and they are very expensive.
In the lowcountry of South Carolina, you can expect to pay $80,000 or more for a year in a nursing home, and costs have been rising over recent years. Married couples are looking at two different potential sets of nursing home bills, so the impact on your legacy can be significant.
Medicare does not pay for long-term care, so this is not the solution. Medicaid does cover these costs, and since it is a need-based program, there are very low income and asset limits.
You could implement a proactive nursing home asset protection plan as a response, and many people will utilize a Medicaid trust as the centerpiece of the plan. This would be a trust that you cannot revoke, and you would not be able to act as the trustee or access the principal.
However, you would be able to continue to receive income that is generated by assets in the trust while you are still living independently. If you submit an application for coverage, the assets in the trust would not be counted, but you have to fund the trust at least five years before you apply.
Streamlined Estate Administration
If you use a will to state your final wishes, it would be admitted to probate. This is a legal process that takes place under the supervision of a court.
The validity of the will is determined during probate, and creditors are given an opportunity to come forward seeking payment. Assets are identified and inventoried by the executor, and they are prepared for distribution to the heirs.
This is all necessary and proper, but it does not necessarily benefit the rightful inheritors. It is time consuming, there are expenses that accumulate, and there is a loss of privacy.
You could choose to use a living trust as an alternative. There would be no loss of control, because you would act as the trustee, and you would be able to change the terms at any time.
In the trust declaration, you name a successor trustee to assume the role after passing, and your heirs would be the beneficiaries. When the time comes, the trustee would distribute the assets to the beneficiaries, and the probate court would not be involved.
Estate Tax Efficiency
There is a federal estate tax, but very few families have to pay it because there is an exclusion that can be used to transfer a certain amount tax-free. For the rest of this year, the exclusion is $12.06 million, and there will be an inflation adjustment next year.
It is worthwhile to point out the fact that it is scheduled to go down to $5 million adjusted for inflation at the end of 2025.
High net worth individuals that are exposed to the estate tax can use irrevocable trusts of various kinds to mitigate their exposure.
In addition to the federal estate tax, 12 states and the District of Columbia have their own estate taxes, and the exclusions in these states are not as high as the federal exclusion. For example, Massachusetts and Oregon have estate taxes, and the exclusions in those states are just $1 million. We do not have state-level estate tax in South Carolina.
There are five states that have state-level inheritance taxes. This is a tax that can be levied on distributions to each individual inheritor. These states are Kentucky, Nebraska, Maryland, New Jersey, and Pennsylvania.
Schedule a Consultation Today!
As you can see, there are many different approaches that can be taken. The right way to proceed will depend upon the circumstances, and this is why you should discuss your options with an attorney.
If you are ready to have that conversation, we are here to help. You can set up an appointment at our Bluffton, SC estate planning office if you call us at 843-815-8580, and you can fill out our contact form if you would like to send us a message.
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