There are many different tools in the estate planning toolkit. As a layperson, there is no reason why you would have a thorough understanding of every option that is available to you. This is why you should definitely seek legal counsel before you make any decisions.
Trusts can be used to address many different situations, and there are multiple different types of trusts. In this post, we will look at three reasons why you may want to use a trust, and we will cover others in a future post.
Estate Tax Efficiency
We have a federal estate tax in the United States, and it can take a heavy toll on your legacy because it carries a very hefty 40 percent maximum rate. Fortunately, most people do not have to pay the tax, because there is a rather high credit or exclusion.
The exclusion is the amount that can be transferred before the estate tax would be applied on the remainder. At the time of this writing, the estate tax exclusion is $11.7 million. There are annual adjustments to account for inflation, so the number will be somewhat higher next year.
There is a federal estate tax marital deduction. You can leave any amount of property to your spouse free of taxation as long as you are married to an American citizen. The exclusion is portable, so a surviving spouse can use the exclusion that was allotted to their deceased spouse.
You could use a trust to divest yourself of direct personal possession of assets in an effort to mitigate your estate tax exposure. One of them is the qualified personal residence trust. This device can facilitate the transfer of your home at a tax discount.
Generation-skipping trusts are also used by people that have estate tax concerns. Your children would be able to benefit from assets that you have been conveyed into the trust, but they would not be the owners.
After the death of the children, your grandchildren would become the beneficiaries of the trust. The estate tax would be applicable at that time, but there would be just one round of taxation over two generations.
These are a couple of the trusts that can be used to gain estate tax efficiency, but there are others.
Special Needs Planning
Many people with disabilities rely on Medicaid as a much needed source of health care insurance. Supplemental Security Income is another need-based government benefit that provides a modest source of income for people with special needs.
Since these programs are only available to folks with very sparse resources, an improvement in financial status could cause a loss of eligibility. If you have someone with a disability on your inheritance list, this can present a challenge.
The challenge can be met through the creation of a supplemental needs trust. If you establish this type of trust, you would name a trustee to act as the administrator. The beneficiary would be the person with a disability that you want to help out.
Under the rules of these programs, the trustee would be allowed to use assets in the trust to satisfy the unmet needs of the beneficiary. As long as everything is done correctly, there would be no loss of government benefits.
About 70 percent of seniors will need living assistance eventually, and 35 percent of them will reside in nursing homes. You can expect to pay over $100,000 for year in a nursing home in our area, and costs have been rising year-by-year.
Medicaid does pay for long-term care, but as we have stated, it is a need-based program. You could convey assets into an income-only Medicaid trust to stay under the asset limit.
As the name would indicate, you would be able to continue to receive income from the trust’s earnings until you apply for Medicaid coverage. If and when you seek eligibility, the assets would not count if you fund the trust at least five years before you submit the application.
Schedule a Consultation Today!
We are here to help if you would like to discuss your estate planning needs with a Troy, MI estate planning attorney. You can send us a message to request a consultation appointment, and we can be reached by phone at 248-251-1001.