Many people assume that they should use a will as their estate planning centerpiece because they harbor misconceptions about trusts. The most common one is the idea that you lose access to assets that you convey into a trust.
To some extent, this is the case with irrevocable trusts, but under certain circumstances, this can be a good thing.
The revocable living trust is in a different category altogether. You would have direct control of the assets in this type of trust because you would act as the trustee while you are alive and well.
In this post, we are going to look at three reasons why a trust would be preferable to a will. There are so many situations like this, we will add a follow-up post to explain three more scenarios that would call for the use of a trust.
Estate Tax Efficiency
We have a federal estate tax in the United States that carries a 40 percent maximum rate, so it can have a significant impact on your legacy. Fortunately, most people do not have to pay the tax, because you can transfer up to $12.06 million tax-free via the exclusion.
The tax can only be levied on the portion of the estate that exceeds this amount. We should point out the fact that this is the highest exclusion that we have ever had in the United States. It is scheduled to go down to $5.49 million adjusted for inflation in 2026.
Some states have state-level estate taxes with the exclusion is the lower than federal exclusion. Fortunately, we do not have a state estate tax in California. However, if you own property in a state with an estate tax, it will apply to your estate.
You can use different types of irrevocable trusts to mitigate the damage if you are exposed to estate taxes. Assets that are held by this type of trust would not be part of your taxable estate, and the assets would eventually be transferred at a tax discount.
If you have concerns about the money management capabilities of someone on your inheritance list, you can make this person the beneficiary of a living trust with a spendthrift clause.
As we have stated, you would be the trustee while you are living, and you would have complete access to the resources. You would be able to change the terms as you see fit, and you would have the ability to move assets into or out of the trust at any time.
After you pass away, the trust would become irrevocable. The successor trustee that you name in the trust declaration would act as the administrator, and the beneficiary would have no direct access to the assets.
Because the beneficiary would not be able to reach the principal, the same arrangement would apply to their creditors, and this is part of the asset protection. The creditors could go after assets after they are distributed, but you can account for this factor.
When you establish the trust declaration, you can instruct the trustee to distribute a certain amount each month or decide on some other arrangement. The beneficiary would never be holding a great deal of money at any one time, and this would protect them from their own bad habits.
Special Needs Planning
Most people with special needs rely on Medicaid as a much-needed source of health insurance. People with disabilities that qualify for Medicaid also receive Supplemental Security Income (SSI).
These are need-based benefits, so a significant direct inheritance would cause a loss of eligibility. As a response, you can provide for a loved one with special needs through the creation of a supplemental needs trust.
Medicaid does not cover every type of therapeutic, medical, or dental procedure that someone may want or need, and SSI benefits are paltry. Under the rules of these programs, the trustee would be able to use assets in the trust to satisfy the unmet needs of the beneficiary.
There are certain restrictions, but a wide range of different goods and services could be purchased. After the death of the beneficiary, a successor beneficiary of your choosing would inherit any assets that may remain in the trust.
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We are here to help if you are ready to work with a Burbank, CA estate planning lawyer to put plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 818-937-2335.