A lot of people think that estate planning is a simple matter of drawing up a will. In reality, this is one of many different asset transfer methods that can be utilized. The optimal choice will depend upon the circumstances, so there really is no one-size-fits-all estate plan.
Let’s look at some of the situations that will call for a particular course of action.
Special Needs Planning
Most people with disabilities rely on Medicaid for health insurance, and they receive income through the Supplemental Security Income (SSI) program. These are need-based benefits that are only available to people with limited financial resources.
An improvement in financial status can potentially cause a loss of eligibility. With this in mind, you should take pause before you leave a direct inheritance to someone that is in this position.
There is a solution in the form of a supplemental needs trust. After you fund the trust, you name a trustee to administer the trust. The beneficiary would not be able to directly access the assets; they would be the property of the trust. However, the trustee could use the assets to enhance the well-being of the beneficiary in innumerable ways.
Because the beneficiary is not the direct owner of the assets, benefit eligibility would not be impacted. Plus, the assets will be protected when Medicaid initiates the recovery process after the beneficiary’s passing.
Let’s say that you are not comfortable with the money management capabilities of one of your children. For this reason, you are reluctant to leave them a direct inheritance through the terms of a will.
Under these circumstances, you could potentially establish a living trust with a spendthrift provision. While you are living, you would control the assets in the trust on every level. It would be revocable throughout your lifetime, but it would become irrevocable at the time of your death.
Going forward, the spendthrift beneficiary would not be able to reach the assets. The successor trustee that you named when you established the trust would have control. Since the beneficiary would not be able to directly access the assets, the same arrangement would apply to their creditors.
You could instruct the trustee about the way you want the assets to be distributed. For example, you could provide a certain set monthly amount for a number of years until the beneficiary reaches a certain age.
An incentive trust is somewhat self-explanatory. The terms include incentives that must be met before the beneficiary will receive distributions.
For instance, you could set up an incentive trust to guide someone away from self-destructive behavior. This type of trust can alternately be used to instill a work ethic in someone that is on your inheritance list. These are a couple of possibilities, but you can include any incentives that satisfy your concerns as long as you are not requiring the beneficiary to do something illegal.
Estate Tax Efficiency
Most families do not have to think about the federal estate tax, but for those that do, it is a big deal. This tax carries a 40 percent top rate that can significantly erode your legacy.
It won’t impact the majority of people because there is a relatively high exclusion. This is a set amount that can be transferred before the tax will be applied on the remainder. In 2023, the exclusion is $12.92 million.
You cannot give lifetime gifts to avoid the estate tax because there is a gift tax. It is unified with the estate tax, and this multimillion dollar exclusion applies to large lifetime gifts and your estate.
There are trusts that can be used to gain estate tax efficiency. These would include the generation-skipping trust, qualified residence trust, charitable lead trust, and grantor retained annuity trust.
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Today is the day for action if you are interested in working with a Burbank, CA estate planning lawyer to develop a custom crafted plan. You can send us a message to set up a consultation appointment, and we can be reached by phone at 818-937-2335.