There are many different tools in the estate planning toolkit, and the right choice will depend on the circumstances. This is why you should consult with an estate planning attorney when you get serious about the process.
When you do this, you may find out that you should use an asset transfer vehicle that you have never heard of before.
Revocable vs. Irrevocable Trusts
Generally speaking, there are two different types of trusts: revocable trusts, and irrevocable trusts. The names of these devices are more or less self-explanatory.
You have the power to dissolve a revocable trust. Therefore, you can take back direct possession of the assets you conveyed into it. With an irrevocable trust, generally speaking, you do not have the ability to rescind the established trust.
Why would you want to take the risk of placing assets into an irrevocable trust if you have another option? This is a good question, and you can continue reading to get the answers.
Estate Tax Efficiency
If you have been extraordinarily successful from a financial standpoint, you have to be concerned about the potential impact of the federal estate tax. It is applicable on asset transfers that exceed $12.92 million, and the maximum rate is 40 percent.
We should point out the fact that you are allowed to transfer assets of any value to your spouse tax-free. This is because of the unlimited marital deduction.
You can take steps to gain estate tax efficiency, and your plan can include the utilization of an irrevocable trust, or multiple irrevocable trusts.
When you convey assets into this type of trust, they are no longer part of your estate for tax purposes. Some of the trusts that are used for estate tax efficiency include generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable lead trusts.
Special Needs Planning
Many people with special needs rely on the Medicaid program as a source of health care insurance. There is another government program called Supplemental Security Income that provides an ongoing stream of income to qualified people with disabilities.
These programs are intended to provide a safety net for individuals with very sparse resources, so there are low income and asset limits.
If you have someone on your inheritance list that is relying on these programs, you have to take ongoing eligibility into account. A sudden windfall of money could trigger a period of ineligibility. To account for this, you could convey assets into an irrevocable supplemental needs trust.
When you do this, the trustee you’ve named would be able to use assets in the trust to satisfy the supplemental needs of the beneficiary. These would be needs that are not being met by the government programs. As long as the trustee follows all the rules correctly, they would not jeopardize eligibility for these benefits.
Nursing Home Asset Protection
Most senior citizens will eventually need long-term care, and many will spend their final days in nursing homes. These facilities are extremely expensive, and Medicare will not help with nursing home costs. A married couple might have two rounds of long-term care expenses.
Medicaid will pay for long-term care, but once again, there are low income and asset limits. To position resources out of your name in an effort to qualify for Medicaid, you could convey them into an income-only Medicaid trust. This would be an irrevocable trust, so you would not be able to touch the principal or dissolve the trust.
However, until and unless you apply for Medicaid to pay for long-term care, you could continue to receive distributions of the earnings from appreciable assets that have been conveyed into the trust.
Schedule a Consultation!
If you would like to discuss a comprehensive plan for aging with a Tulsa, OK estate planning licensed attorney, we are here to help. You can send us a message to set up a consultation, or you can reach us by phone at 631-265-0599. And if you are in the Oklahoma City area, give us a call at 405-843-6100.
Since founding Parman & Easterday in 1985, Larry has led over 1,000 free, community-service education programs and helped more than 10,000 Oklahoma families go from putting off their estate plan to getting it done. His goal for every client is the same: to become the person their family calls "the one who took care of everything."
Larry is the author of three books: The Straight Shooter's Guide to Estate Planning; Estate Planning Basics; and Guiding Those Left Behind in Oklahoma. He served as Oklahoma's Secretary of State and Secretary of Commerce, and his firm is the only member of the American Academy of Estate Planning Attorneys in the state.
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