You have some decisions to make when you are planning your estate, and the asset transfer vehicle will be at the top of the list. Most people assume that they should use a will because they do not fully understand the reasons why you may want to utilize a trust.
In this post, we will look at a few of the objectives that can be satisfied if you use a trust to facilitate asset transfers after you are gone.
Nursing Home Asset Protection
Long-term care costs are a looming threat your legacy. The Department of Health and Human Services tells us that 35 percent of seniors will require nursing home care eventually. You can expect to pay about $100,000 for a year in a Naperville area nursing home.
If you are thinking that you are not concerned because Medicare will come to the rescue, you should understand an inconvenient truth. The Medicare program will pay for convalescent care after an injury or illness, but it does not cover the custodial care that nursing homes provide.
Medicaid is another government health insurance program that will pick up the tab for nursing home care. It is a need-based benefit, so you cannot qualify if you have more than $2000 in countable assets in your name.
You could convey assets into an irrevocable, income only Medicaid trust to shape a financial profile that will lead to eligibility. After you establish the trust, you would have no access to the principal, but you could receive distributions of the trust’s earnings.
As long as you fund the trust at least five years before you apply for Medicaid, the assets would not count.
When a will is used as an asset transfer device, the inheritances are distributed all at once in lump sums, and there are no spending safeguards going forward. This can be disconcerting if you will be leaving an inheritance to someone that is not good with money.
You can erect guardrails if you use a revocable living trust. There would be no loss of control of the assets while you are living, because you would act as the trustee.
A spendthrift clause would be included, and the trust would become irrevocable after your death. The beneficiary would have no access to the principal; the trust would be administered by the trustee that you designate.
Creditors of the beneficiary would be in the same position with regard to access to the funds, so the assets would be protected. With regard to the distributions, you could instruct the trustee to distribute a limited amount each month to limit the beneficiary’s spending ability.
Special Needs Planning
Obviously, people with disabilities need health insurance. Most insured individuals in the United States receive their health insurance through their employers, but many folks with disabilities cannot work, so this is not an option.
Medicaid is the widely embraced solution, and people with disabilities that qualify for Medicaid also receive Supplemental Security Income. If you leave a direct inheritance to a benefit recipient through the terms of a will, their eligibility could be lost.
As a response, you could fund a supplemental needs trust. The trustee would use the assets in the trust to provide goods and services to the beneficiary, and ongoing eligibility for these need-based benefits would not be impacted.
Estate Tax Efficiency
The federal estate tax carries a 40 percent top rate, so it can take a big chunk out of your legacy, but most families do not have to worry about this tax. You can use the exclusion to transfer a certain amount tax-free, and it stands at $11.7 million this year.
In Illinois where our practice is located, there is a state-level estate tax with a $4 million dollar exclusion. If you are exposed to estate taxes, there are irrevocable trusts that you can use to mitigate the damage.
Schedule a Consultation Today!
Our doors are open if you are ready to work with a Naperville, Illinois estate planning attorney to put a custom crafted plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 630-568-8611.
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