A lot of people assume that a will is the best estate planning tool to use if the situation is not extremely complex. In reality, a trust of some kind can be preferable under a number of different circumstances, we will look at a handful of them in this post.
Protecting a Spendthrift Heir
Let’s say that you have a son that is not good with money. He has come to you for bailouts over the years, and you are concerned about the way he will handle his inheritance.
If he spends all the money too quickly, you will not be around to provide support if he gets into financial hot water. Transfers through the terms of a will are distributed in lump sums, so you would be taking a risk if you go in this direction.
On the other hand, you can include surefire safeguards if you use a living trust as the centerpiece of your estate plan. You would be the trustee while you are living, and you would name a successor to administer the trust after your death.
A spendthrift clause would be included, and after your passing, the trust would become irrevocable. The beneficiary would not have direct access to the assets, and their creditors would be in the same position, so there would be a layer of asset protection.
With regard to the distributions, you could instruct the trustee to distribute the trust’s earnings in monthly increments to prolong the viability of the trust. If you choose to do so, you could allow for portions of the principal to be added to reach a specific predetermined monthly payout.
The trustee could be instructed to distribute larger lump sum distributions when the beneficiary reaches certain age thresholds on the presumption that your son will mature later in his life.
Government Benefit Preservation
A high percentage of people with disabilities get health insurance through Medicaid, and people in this position typically qualify for Supplemental Security Income as well. If a benefit recipient was to receive a windfall through a direct inheritance, they could lose their eligibility.
With this in mind, you could establish a supplemental needs trust for the benefit of a loved one with a disability. The trustee would be able to use the assets to make the beneficiary more comfortable in many ways, and benefit eligibility would not be impacted.
Medicaid Eligibility
Just over half of seniors will need some form of paid long-term care eventually, and Medicare does not pay for custodial care. A year in a nursing home will come with a six-figure price tag in the Burlington, Vermont area, and the average length of stay is approximately 12 months.
Medicaid is the widely embraced solution, because this program will pay for nursing home care, and there is a Medicaid waiver that will cover in-home care that is provided by a home health aide.
Once again, Medicaid is a need-based program, so you cannot qualify if you have significant assets in your name. You could convey resources into an irrevocable, income-only Medicaid trust to develop a financial profile that will lead to eligibility.
As the name clearly indicates, you could receive income that is generated by the principal until you apply for Medicaid. If you fund the trust at least five years before you submit your application, the assets in the trust would not count.
Estate Tax Efficiency
The federal estate tax is a looming threat to your legacy if you have enjoyed a high level of financial success. It is only a factor for high net worth individuals because there is a credit or exclusion that can be used to transfer a certain amount tax-free.
This year, the exclusion is $11.7 million, but the For the 99.5 Percent Act that is being considered by Congress would reduce it to $3.5 million. Plus, it is going down to $5.49 million in 2026 when a provision contained in the Tax Cuts and Jobs Act expires.
Here in Vermont where we practice, there is a state-level estate tax to contend with as well, and the exclusion is $5 million this year.
There are irrevocable trusts that you can use to gain estate tax efficiency if either or both of these taxes will be a factor when your estate is being administered.
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We are here to help if you are ready to work with a Essex Junction, Vermont estate planning lawyer to put a custom crafted plan in place. You can register for one of our upcoming webinars to request learn more about Trusts, Wills and Medicaid Planning.
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