You may equate estate planning to the creation of a will, but there are other options. In many cases, a trust of some kind will be preferable, and we will look at some of these scenarios in this post.
Special Needs Planning
Most people with disabilities rely on Medicaid for their health insurance, and individuals that are in this position typically receive Supplemental Security Income as well. These are need-based programs, so you cannot qualify if you have significant assets in your name.
If you leave someone an inheritance through the terms of a will, they would receive the bequest all at once in a lump sum. As a result, a person with a disability that is a beneficiary of these government programs could lose their eligibility if they receive a sizable inheritance.
Fortunately, there is a solution in the form of a supplemental needs trust. To execute this strategy, you fund the trust, and you name a trustee to act as the administrator.
Under the rules of the programs, the trustee would be able to make purchases that improve the life of the beneficiary.
Benefit eligibility would not be lost, and assets that are left in the trust after the passing of the first beneficiary would be transferred to a successor that you name in the trust declaration.
Nursing Home Asset Protection
While we are on the subject to Medicaid eligibility, we will move on to the matter of long-term care. Seven out of ten seniors will need some type of living assistance, and 35 percent of elders will reside in nursing homes according to the Department of Health and Human Services.
Genworth Financial tells us that the median charge for a private room in a Hartford area nursing home in 2020 was $167,900. Medicare does not cover the custodial care that nursing facilities provide, but Medicaid will pick up the tab if you can gain eligibility.
To develop the right financial profile, you could convey assets into an income only, irrevocable Medicaid trust. You could receive distributions of the trust’s income, but you would not have access to the principal.
The assets in the trust would not count if you apply for Medicaid, but you have to act in advance, because there is a five-year look back period. You must fund the trust at least five years before you submit your application for Medicaid eligibility.
Estate Tax Efficiency
Financial success is a beautiful thing, but high net worth individuals have to be concerned about estate taxes. There is a federal estate tax with a 40 percent top rate, and here in Connecticut, we have a state-level estate tax.
On the federal level, the exclusion is $11.7 million in 2021. This is the amount that you can transfer before the estate tax would become applicable on the remainder. The Connecticut estate tax exclusion is $7.1 million this year.
With regard to the federal exclusion, we should point out the fact that the For the 99.5 Percent Act that has been introduced by Senator Bernie Sanders would reduce the exclusion to $3.5 million.
Even if this measure never receives the necessary support, there is a reduction looming. The provision in the Tax Cuts and Jobs Act that established a record high exclusion will sunset or expire at the end of 2025. On January 1, 2026, it will go down to $5.49 million.
If your estate is going to be exposed to either or both of these taxes, there are irrevocable trusts that you can use to ease the burden. The ideal course of action will depend on the circumstances, and we are in a position to guide you in the right direction.
As we have stated, beneficiaries receive lump sum inheritances when a will is used to transfer assets. This can be a problem if you have someone in the family that is not good with money. As a response, you can utilize a revocable living trust with a spendthrift provision.
You would be the trustee while you are living, and you would name a successor to assume the role after your death. When that event occurs, the trust would become irrevocable, and the principal would be protected from the beneficiary’s creditors.
In the trust declaration, you can leave instructions for the trustee with regard to the nature of the distributions. For example, the beneficiary could receive incremental distributions of the trust’s income, and you could allow for portions of the principal to be added if you choose to do so.
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Our doors are open if you are ready to work with a Glastonbury, Connecticut estate planning lawyer to develop a personalized plan that is custom crafted to suit your needs. You can send us a message to request a consultation, and we can be reached by phone at 860-548-1000.