Informed planning is a must if you want to take all the right steps to provide for your family after you are gone. You have to look into the subject of estate planning rather deeply if you want to make the right choices.
This may seem self-evident because you do research before you make any big financial decisions during your life. In spite of this, a remarkable percentage of people have spent no time at all planning ahead for this inevitable event that has enormous financial implications.
A study that was conducted recently found that 51 percent of people who are between 55 and 64 years of age do not have estate plans in place. When you look at the 10 year age group that is comprised of people that are between 45 and 54, the unpreparedness figure is 62 percent.
Since so many people do not make any effort at all, when they do finally decide to put some type of plan in place, they quickly decide on a last will, and many will use online tools to create do-it-yourself last wills. Oftentimes, family members wind up paying a heavy price.
There are other options, and a last will is not always going to be the best choice. With this in mind, let’s look at a compelling reason why a living trust could be much more effective.
Spendthrift Safeguards and Asset Protection
If you were to create a revocable living trust, you would have the power to amend or revoke it as the name suggests. While you are living, you could revoke the trust, and you could take back direct personal possession of the assets. You could also act as the trustee.
Assets in the trust would not be protected if there was a legal judgment against you because you would have the ability to revoke the trust. However, things are different after you pass away.
When you establish a living trust, you name a successor trustee to take over for you after you are gone, and you name your beneficiaries. Once you pass away, the trust would no longer be revocable. The beneficiaries would not have the ability to dissolve the trust.
Because of this, and assets in the trust would be protected from legal judgments if you include a spendthrift provision. Plus, there are various ways that you can structure the trust with regard to the discretion that you give to the trustee to distribute assets. It is possible that some distributions to the beneficiaries could also be out of the reach of creditors.
When it comes to spendthrift protections, you can instruct the trustee to distribute limited assets on an incremental basis to prolong the viability of the trust. Once again, the exact nature of the distributions can be calculated with asset protection in mind if this is a concern for you.
None of this would be possible if you were to use a last will as your vehicle of asset transfer. With a will, you would be facilitating lump sum asset distributions to the heirs, and that would be the end of it. There would be no spendthrift safeguards, and there would be no asset protection.
A Living Trust Is Not a Cure-All
There are certain benefits that can be realized if you were to use a living trust instead of a last will, but some objectives cannot be satisfied by a living trust. This is because you can revoke the trust while you are living.
You are retaining incidents of ownership when you establish a living trust. This is why the assets would not be protected from creditors while you are living, and they would also be part of your estate for estate tax purposes. The federal estate tax carries a 40 percent maximum rate so it is a very big concern for high net worth families (though married couples often use a revocable trust to preserve their combined estate tax exclusions).
Nursing home asset protection is another consideration. Many people apply for Medicaid to pay for long-term care late in their lives because Medicare does not pay for it. You cannot qualify for Medicaid if you have significant assets in your own name. Assets in a living trust would be counted because of the ownership factor.
There are irrevocable trusts that can be used for estate tax savings, nursing home asset protection, and other purposes.
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