A lot of people think that when you create your estate plan, you draw up a will, and that’s the end of the story. This is one way to approach it, but in fact, a trust can be a better choice in many cases. Trusts can address certain objectives that a will cannot, and we will look at four of those scenarios here.
Estate Tax Efficiency
People that have been very successful financially should consider the potential impact of the federal estate tax. It carries a 40 percent rate, and it is applicable on the portion of an estate that exceeds the exclusion. In 2022, the exclusion is $12.06 million.
We should point out the fact that the exclusion is going down to $5.49 million indexed for inflation in 2026 if there are no legislative changes in the meantime. There is a federal gift tax, so you cannot give large gifts to avoid the estate tax.
Here in Connecticut, we have a state-level estate tax as well. The exclusion this year is $9.1 million. We are also the only state in the union with a state-level gift tax.
If your estate is going to be exposed to taxation, there are irrevocable trusts that can facilitate transfers at a tax discount. These would include the grantor retained annuity trust, qualified personal residence trust, generation-skipping trust, and charitable lead trust.
Nursing Home Asset Protection
Over one third of seniors will require nursing home care, and you can pay close to $200,000 for a year in a private room in a quality Hartford area nursing home. Medicare does not cover the custodial care that nursing facilities provide.
Medicaid does extend to long-term custodial care. To gain eligibility, you could potentially convey income producing assets into an irrevocable trust. You would no longer have control of the principal, but you could accept distributions of the trust’s earnings.
As long as you fund the trust at least five years before you apply for Medicaid, the assets in the trust would not count.
Special Needs Planning
Many people with special needs rely on Medicaid for health insurance, and they get income from the Supplemental Security Income program. If someone that is enrolled in these programs comes into money through a direct inheritance, eligibility could be lost.
With this in mind, if you are going to be leaving a bequest to someone with a disability, you can establish a supplemental needs trust. The beneficiary would not be able to access the funds directly, but the trustee that you name would use the assets to make the beneficiary more comfortable.
Benefit eligibility would not be impacted if all the rules are followed correctly. Plus, Medicaid is required to seek reimbursement from the estates of deceased beneficiaries. When you establish a third party supplemental needs trust with your funds, the assets would be protected during the recovery phase.
If you leave an inheritance to someone through the terms of a will, there are no spending safeguards, and there is no asset protection. On the other hand, if you utilize a revocable living trust with a spendthrift provision, you can change the playing field.
After your passing, the trust becomes irrevocable. The beneficiary would not be able to reach the assets directly, and this would also apply to their creditors, so there would be asset protection. In addition, you would dictate the nature of the distributions in the trust declaration. For example, the beneficiary could receive a particular dollar amount each month until they reach a certain age.
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These are just some of the trusts that can be utilized to address specific objectives. When you work with our firm, we will make sure that you are apprised by your option so you can make informed decisions.
If you are right to get started, you can call us at 860-548-1000 to set up an appointment at our estate planning offices in Glastonbury, or Westport, Connecticut. There is also a contact form on this site you can use to send us a message.
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