Many people assume that a will is the right asset transfer device to use unless you have a very complicated situation. In reality, this is a misconception, because there are many different straightforward objectives that can be satisfied through the utilization of a trust of some kind.
If you leave someone an inheritance through the terms of a will, they would receive their bequest in lump sum. There would be no asset protection going forward, and they would have absolute freedom with regard to the way they use the funds.
This can be a source of concern if you have someone on your inheritance list that is not a strong money manager. Under these circumstances, you can make the individual in question the beneficiary of a revocable living trust.
While you are living, you would act as the trustee, so you would not lose control of the assets. You would name a successor trustee to act as the administrator after your passing, and this can be someone that you know personally or a professional fiduciary like a trust company.
You can include a spendthrift clause, and the trust would become irrevocable at the time of your passing. The beneficiary would not have access to the principal, and the assets would be out of the reach of their creditors.
In the trust declaration, you could instruct the trustee to provide incremental distributions on a monthly basis over an extended period of time to prevent reckless spending.
There is no reason why you would want your loved ones to wait for eight months or so to receive their inheritances. This is exactly what would happen if you state your final wishes in a simple will.
A will would be admitted to probate, which is a time-consuming legal process that takes place under the supervision of a court. It will usually take approximately eight or nine months at minimum to run its course, and no inheritances are distributed until the estate has been probated.
This is just one of the drawbacks, but there are a couple of other significant negatives. Probate records are available to the general public, so there is a loss of privacy, and probate costs consume a portion of the estate.
If you use a living trust as your estate plan centerpiece, the trustee would be able to distribute assets in in a timely manner outside of probate.
Medicare does not pay for long-term care, and just over 50 percent of seniors will need paid living assistance. Nursing homes are exorbitantly expensive, and in-home caregivers also come with hefty price tags.
The Medicaid program will cover custodial care if you can gain eligibility, but you cannot qualify if you have more than $2000 in countable assets in your name. With this in mind, you could convey assets into an income only irrevocable Medicaid trust.
You would be able to receive distributions of the trust’s earnings until you apply for Medicaid, but the principal would not count when and if you submit your application for coverage. Timing is key because you have to fund the trust at least five years before you apply for Medicaid.
Estate Tax Efficiency
If you have been very successful from a financial standpoint, you have to be concerned about the potential impact of the federal estate tax because it carries a 40 percent top rate.
The exclusion is the amount that you can transfer before the estate tax would become applicable on the remainder. In 2021, the exclusion is $11.7 million, but there could be a change in the near future.
Senator Bernie Sanders has introduced the For the 99.5 Percent Act that would shrink the exclusion to $3.5 million. Even if this measure does not pass, the exclusion is going down to $5.49 million when a provision in the Tax Cuts and Jobs Act expires at the end of 2025.
There are certain types of irrevocable trusts that can be used to gain estate tax efficiency if your estate will be exposed to the federal estate tax.
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Our doors are open if you are ready to work with a Hilton Head, South Carolina estate planning lawyer to develop a personalized plan that ideally suits your needs. You can send us a message to set up a consultation appointment, and we can be reached by phone at 843-815-8580.