You may wonder why anyone would use a trust instead of a last will. After all, a will is simple and easy to create, and the executor can transfer assets to the inheritors quickly and efficiently, right?
In reality, this is a widely held misconception. Let’s look at the differences between wills and trusts.
Will Limitations and Drawbacks
If you use a last will, the executor who you name in the document would admit the will to probate. The court would oversee the proceedings, and during probate, creditors would have a chance to come forward seeking satisfaction.
The executor would identify and inventory the assets, and when everything is in order, the court would close the estate. Your executor would then be empowered to distribute assets to the heirs in accordance with your wishes.
Do you want your loved ones to get their inheritances in a timely manner? This is something that will not happen when you use a last will. At minimum, it will take eight or nine months for the court to probate the estate.
There are expenses that accumulate during probate, and anyone who wants to find out how the assets were distributed can access probate records. This process also opens up a window of opportunity for disgruntled parties who may want to challenge the will.
If you use a last will to state your final wishes, you would be allowing for lump sum inheritances to the people who are named in the will. You may not feel comfortable with this arrangement if you are leaving an inheritance to someone who is not good with money.
Revocable Living Trust
A commonly used alternative to a last will is a revocable living trust. When you establish a living trust, you can act as the trustee and the beneficiary while you are alive and well. There is no loss of control, and you can revoke or rescind the trust if you ever choose to do so.
The trustee who you name to succeed you after you pass away would be allowed to distribute assets in the trust to the beneficiaries outside of probate. As a result, all the pitfalls that we looked at above would be avoided, and this is one major benefit.
With regard to the poor money management scenario, you can account for this if you have a living trust. You can include a spendthrift provision, and this would protect the principal from the beneficiary’s creditors.
It would also be possible to instruct the trustee to mete out limited distributions over an extended period of time to prolong the viability of the trust. In addition to these benefits, all of the assets would be consolidated, and this would streamline the estate administration process.
Other Types of Trusts
There are other types of trusts that can satisfy different aims. For example, if you left a direct inheritance to someone with a disability who is relying on Medicaid for health insurance, it could cause a loss of eligibility.
On the other hand, if you convey resources into a supplemental needs trust, the trustee would be able to use the assets to make the beneficiary more comfortable. Benefit eligibility would not be impacted.
Many elders endeavor to qualify for Medicaid to pay for long-term care, because Medicare does not cover custodial care. Since there is a low asset limit, you could convey assets into an irrevocable Medicaid trust with future eligibility in mind.
Since you would not have the ability to revoke the trust, you would be surrendering incidents of ownership. As a result, Medicaid would not count the assets in the trust.
These are a couple of the different types of trusts that can be useful when certain circumstances exist, but there are number of others.
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