When you hear the term “estate planning,” you may immediately think about the creation of a will. Indeed, you can use a will to facilitate asset transfers after you are gone, but there are many other options.
A trust can be a better choice under various circumstances, and we will take a look at some of the scenarios in this post.
Reining In a Spendthrift
Let’s say that you have someone in the family who is not very good with money. They have approached you on more than one occasion looking for financial assistance, and when you are gone, they will have nowhere to turn when the going gets tough.
This can be a major source of concern when you are developing your estate plan. If you leave them a lump sum inheritance through the terms of a will and they burn through it too quickly, they would be on their own.
Fortunately, there is a relatively simple solution. You can make a poor money manager the beneficiary of a revocable living trust with a spendthrift provision.
After your passing, the trustee you name in the document would administer the trust, and the beneficiary would not have direct access to the funds. In the trust declaration, you can instruct the trustee to provide incremental distributions over time to prevent reckless spending.
The principal would not be accessible to the beneficiary’s creditors, so there would be a level of asset protection. You could allow for larger distributions when the beneficiary reaches a certain age on the presumption that the beneficiary will mature over time.
Qualify for Medicaid
The majority of seniors will need some type of long-term care eventually, and just over one third of elders will reside in nursing facilities. Medicare does not pay for the custodial care that nursing homes provide, and as you might imagine, the rates are very high.
Medicaid will cover long-term care if you can gain eligibility, but you cannot qualify if you have more than $2000 in countable assets in your name. As a response, you could convey assets into an irrevocable, income-only Medicaid trust to develop the right financial profile.
After you establish and fund the trust, you would no longer have access to the principal, but you could receive distributions of the trust’s earnings. As long as you fund the trust at least five years before you apply for Medicaid, the principal would not count.
Special Needs Planning
Many people with disabilities rely on Medicaid for health insurance, and they receive some monthly cash through the Supplemental Security Income (SSI) program. If you leave a benefit recipient an inheritance in a will, eligibility for the benefits could be lost.
Under these circumstances, you could fund a supplemental needs trust. The beneficiary would have no direct access to the funds, but the trustee would be able to use the assets to improve the beneficiary’s quality of life. Government benefit eligibility would not be impacted.
Estate Tax Efficiency
The federal estate tax carries a 40 percent top rate so it can consume a significant portion of your legacy. That’s the bad news, but the good news is that there is a large credit or exclusion that you can use to transfer a certain amount tax-free.
At the present time, the exclusion is $11.7 million, but there is a piece of legislation making its way through Congress that would reduce the exclusion to $3.5 million. Plus, even if this measure does not pass, the exclusion is going down to about $5.5 million on January 1, 2026.
If your estate is going to be exposed to this tax, there are irrevocable trusts that you can use to ease the burden. We should point out the fact that some states have state-level estate taxes, but Kentucky and North Carolina are not among them (though Kentucky has an inheritance tax for some beneficiaries).
Schedule a Consultation Today!
As you can see, there are different approaches you can take when you are planning your estate. The ideal course of action will depend on the circumstances, and this is why it is important to work with an attorney to put a custom crafted plan in place.
If you are ready to do just that, our doors are open. You can schedule a consultation at our Charlotte, North Carolina or Huntersville, North Carolina estate planning office if you call us at 704-944-3245.
The number in Ashland, Kentucky is 606-324-5516, and the number in Florence, Kentucky is 859-372-6655. You can also use our contact form if you would like to send us a message.