Most people think of a will as the “right” estate planning document. After all, we’re all familiar with wills. They appear in movies, television shows, and even novels. You may have one yourself.
It has been our experience that people are less familiar with trusts. Who uses a trust for estate planning? What does a trust look like? Is a trust right for you? In this post, we will look at some reasons why you may want to facilitate asset transfers (estate planning) through the terms of a trust.
Let’s say you’re leaving part of your estate with someone who is not “good” with money. You may have concerns. After all, this person could burn through their bequest too quickly and have no resources left when they face later hardship.
This situation is not uncommon. If you leave an inheritance through the terms of a simple will, there would be no spending safeguards or asset protection going forward. Some people choose to roll the dice and hope for the best. This is not a prudent course of action, and it doesn’t usually give people much peace of mind.
Revocable living trusts are one estate planning option to address these situations. The trust assets are accessible to you while you are alive and well, so there is no loss of control.
Your trust can include a spendthrift clause, which would become irrevocable after your death. You can also instruct the trustee to provide limited distributions over an extended period of time.
How would these distributions work? As an example, you could allow for monthly distributions of the trust’s earnings with a portion of the principal added to reach a certain dollar amount. The exact nature of the distributions would be up to you. This is only one example of the ways you can include “guardrails” when you have a living trust.
If you use a will to state your final wishes, you must name an executor in the document to act as the administrator after you are gone.
Unless you have a small estate, this individual will be required to admit the will to probate (the court process to change title to estate assets). Then the court will supervise while the estate is being administered. Probate is time-consuming, and no inheritances are distributed while the estate is being probated.
Further, probate is a public proceeding. This means that any nosy parties who want to find out how the assets were distributed can access the records. There are also a number of expenses that accumulate when the estate is being probated, and these expenses reduce the inheritances that will eventually be received by the heirs.
The administration of a living trust, however, is not subject to probate. Many of the drawbacks we just discussed are avoidable if you use a trust to facilitate postmortem asset transfers.
Estate Tax Efficiency
People with significant assets may be exposed to the federal estate tax– with a 40% maximum rate (as of the year this article was published). This tax is applicable on the portion of an estate that exceeds the exclusion for the current year.
This exclusion is supposed to lower to $5.49 million in 2026, just 4 years from the date of this article.
Irrevocable trusts may be used to ease the burden if your estate is going to be exposed to this tax. The ideal way to protect your estate will depend on the circumstances, and we can make the appropriate recommendations after a personal meeting.
Medicare is the source of health insurance for the vast majority of seniors in our country. Unfortunately, there is a major gap in this coverage. Let’s examine it:
Most seniors will need some type of long-term care, and a full 35 percent of elders will end up residing in nursing homes. The Medicare program will not cover the custodial care that nursing homes provide. It also won’t pay for in-home care.
Medicaid will, however, pick up the tab if you can gain eligibility. You cannot qualify if you have more than $2000 in countable assets in your name. One option to protect yourself is to convey assets into an income only, irrevocable Medicaid trust to prepare yourself for future eligibility.
The “future” qualifier is key, because the trust must be funded at least five years before you submit your application for Medicaid coverage.
Schedule a Consultation Today!
Our doors are open if you are ready to work with an Austin, Texas estate planning lawyer. We’d love to put a plan in place to protect your legacy. You can send us a message to request a consultation appointment, or you can give us a call at 512-258-9455.