One of the most widely embraced misconceptions about estate planning is the idea that a will is almost always going to be the best asset transfer device. In fact, there are circumstances that can call for the utilization of some type of trust, and we will look at some of them here.
Efficient Asset Transfers
There is a foundational drawback that comes along with the utilization of a will as your asset transfer vehicle. You probably want your loved ones to receive their inheritances in a timely manner after you pass away, and this won’t happen if you use a will.
It would be admitted to probate, and the court would provide supervision during the administration process. In most areas, it will take eight or nine months to a year at minimum, and no inheritances are distributed during this interim.
On the other hand, if you use a living trust as your estate plan centerpiece, you would act as the trustee while you are living. You would name a successor to assume the role after your death.
After your passing, the trustee would distribute the assets to the beneficiaries in a timely manner outside of probate. Clearly, if you would like to make sure that your heirs do not have to play a waiting game, you may want to use a living trust to facilitate asset transfers.
Spending Safeguards and Asset Protection
Do you have concerns about the money management capabilities of someone on your inheritance list? If you would answer this question in the affirmative, there is no reason to use a will because the beneficiaries will receive lump sum inheritances.
There would be no spending safeguards going forward, and once the assets are in their hands, they would not be protected from creditors or other litigants.
Once again, if you use a living trust instead of a will, you do not have to provide inheritances all at once. You can instruct the trustee to provide limited distributions on an incremental basis over time, and the principal would be protected from the beneficiary’s creditors.
Preserve Your Privacy
Financial matters are usually handled in a confidential manner, and no one wants the general public to know how they decided to pass along their assets. When an estate is subject to probate, the records are available to anyone that wants to access them, so there is a loss of privacy.
Since the administration of a living trust is not subject to probate, the details are not available to the public.
Most seniors will need paid long-term care eventually, and Medicare does not cover custodial care. Medi-Cal will pay for a stay in a nursing home, and a Medi-Cal waiver can potentially be obtained to cover in-home care costs.
Of course, Medi-Cal is only available to people with less than $2000 in countable assets. To develop a financial profile that will lead to eligibility, you could convey assets into an irrevocable income-only Medi-Cal trust.
As the name would indicate, you could accept distributions of the trust’s earnings, but the principal would not count if and when you apply for Medi-Cal coverage.
Estate Tax Efficiency
The federal estate tax can take a hefty bite out of your legacy because it carries a 40 percent maximum rate. Fortunately, most people do not have to pay it, because you can transfer a rather large amount tax-free before this tax would be applicable on the remainder.
This dollar figure is called the exclusion, and in 2021, it stands at $11.7 million. However, there is a bill going through Congress right now that would reduce it to $3.5 million. And even if this measure fails, the exclusion is scheduled to go down to $5.49 million in 2026.
If you are exposed to the estate tax, there are different types of irrevocable trusts that you can use to mitigate damage.
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