Contrary to popular belief, a simple will is not the best estate planning choice for many people. There are trusts that are utilized by high net worth individuals who have certain concerns, and there are other types of trusts that are useful for people of relatively ordinary means.
We are going to look at some of the reasons why people use trusts in this post, and we will then follow up with a second installment.
Nursing Home Asset Protection
It can be hard to envision a time when you will not be able to take care of all of your own needs for an extended period of time. However, when you objectively think about life expectancies, you may emerge with a sober perspective.
After you reach the age of 67, your life expectancy is 85 years if you are a man, and it is 87 years for a woman. Clearly, most people expect to live long enough to collect Social Security, so this mathematical equation paints a clear picture.
According to the United States Department of Health and Human Services, 35 percent of elders will require nursing home care at some point in their lives.
Since Medicare is intended to satisfy the health care needs of seniors, you would assume that the program would cover long-term care. This is a head scratcher for many, but in fact, Medicare does not pay for the custodial care that nursing homes deliver.
These facilities come with some hefty price tags, so the expenses can consume a sizable portion of the legacy that you want to pass along to your loved ones.
Fortunately, there is a solution in the form of the Medicaid program. Since it is a need-based benefit, you cannot qualify if you have more than $2000 in countable assets.
You could convey resources into a Medicaid trust in an effort to shape the appropriate financial profile. If and when you apply for Medicaid, the assets would not count.
The trust would be irrevocable, and you would not be able to access the principal or act as the trustee. However, you could receive distributions of the trust’s earnings as long as long as you are living independently.
Inheritance Protection Upon Remarriage
If you are getting remarried as a parent, you may have concerns about the inheritances that you want to leave your children. This dynamic is amplified if you are financially successful and you are marrying someone who will probably outlive you.
A premarital agreement can be part of the plan, and another device that can be quite useful under these circumstances is the qualified terminable interest property (QTIP) trust.
To implement this strategy, you fund the trust and you name a trustee to act as the administrator. Your spouse would be the initial beneficiary of the trust, and your children would be the successor beneficiaries.
If you predecease your spouse, they would receive income that is earned by the trust, and they would be able to use property that is owned by the trust. The surviving spouse would have no ability to change the terms of the trust in any way.
After their passing, the children would inherit the assets that remain in the qualified terminable interest property trust.
Estate Tax Efficiency
There is a federal estate tax in the United States that carries a 40 percent rate, so it can have a very significant impact. The good news is the fact that you can transfer $11.58 million before the tax would be applied on the remainder.
We should point out the fact that there are 12 states in the union that have state-level estate taxes, and the exclusions are considerably lower. For example, the exclusions in Oregon and Massachusetts are just $1 million.
People who are exposed to estate taxes have to implement tax efficiency strategies. There are a number of different types of irrevocable trusts that can be utilized to achieve these goals.
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As you can see, there are multiple tools in the estate planning toolkit. We can gain an understanding of your situation, explain your options, and guide you in the right direction.
If you are ready to get started, you can send us a message to request a consultation appointment, and we can be reached by phone at 913-262-2000.