One of the reasons why personalized attention is important when you are creating your estate plan is because every family is different. The right way to proceed for one person may not make sense for the next.
As a layperson, you will not understand all the estate planning tools that are available and why you should use one instead of another.
In this post, we will demonstrate this point by explaining three distinct scenarios that require different approaches.
Providing for a Spendthrift Heir
If you have someone who is not good at handling money on your inheritance list, you may be concerned about leaving this individual a direct inheritance with no strings attached. Many people have been faced with this situation. The good news is there are ways to provide spendthrift protections.
One potential course of action would be the creation of a revocable living trust with a spendthrift provision. The beneficiary would not have direct access to the principal, which provides one level of control.
In the trust declaration, you can instruct the trustee to distribute limited assets over an extended period of time. If you choose to do so, you could allow the trustee to provide additional distributions on a discretionary basis.
Through the inclusion of a spendthrift provision, you would protect the principal from the beneficiary’s creditors, which is another form of protection.
Preservation of Government Benefits
People with special needs often rely on Medicaid as a source of health care insurance. Income for disabled individuals is provided through the Supplemental Security Income (SSI) program.
Medicaid and SSI are need-based programs, so applicants cannot qualify if they have more than $2000 in countable assets. For this reason, a direct inheritance could trigger a loss of eligibility for these government benefits.
How do you proceed under these circumstances? The estate planning solution is a supplemental needs trust.
The way that it works is you fund the trust, and you name a trustee to act as the administrator. Of course, the person you want to help would be the beneficiary. Under program rules, the trustee could use assets in the trust to satisfy the supplemental needs of the beneficiary.
Approved expenditures include education expenses, vacations, transportation expenses, household items, and countless other types of goods and services. As long as the rules are followed correctly, benefit eligibility would not be impacted.
Estate Tax Efficiency
There is a federal estate tax in the United States, and it has an eye-catching maximum rate of 40 percent. Fortunately, very few families ever have to pay it, because there is a high exclusion. This is the amount you can transfer before the estate tax would become applicable.
At the time of this writing in 2022, the exclusion is $12.06 million. You may see a slightly higher figure next year if an inflation adjustment is added.
The few people who are exposed to estate taxes have to take steps to gain tax efficiency. This is typically accomplished through the utilization of certain types of irrevocable trusts. When you convey assets into this type of trust, they are no longer part of your estate.
Trusts that are used for this purpose include generation-skipping trusts, charitable lead trusts, grantor retained annuity trusts, and qualified personal residence trusts, just to name a handful.
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