Most people do not have estate plans in place, and one of the underlying reasons is the assumption that estate planning involves one simple act. You draw up a will at some point when you are old and gray, and you have taken care of the responsibility.
This is a shortsighted point of view on multiple levels. First, responsible adults of all ages should have estate plans in place, and it is a must if you have people depending on you. Secondly, a will is not always the best asset transfer vehicle to utilize, and we will examine the subject here.
Some people have no experience handling large sums of money. There are others that have had experiences, but they have demonstrated poor money management capabilities. It can be quite disconcerting to leave an inheritance to someone that is not prepared to handle it.
If you use a simple will as an asset transfer vehicle, the people that are named in the document would in fact receive their inheritances after the estate has been probated by the court. There would be no asset protection or spending safeguards going forward.
You do not have to settle for this arrangement and hope for the best because there is a relatively straightforward, efficient alternative. A revocable living trust can be established, and if you implement this strategy, you will still have total control of your resources.
When you draw up the trust declaration, you designate a trustee to administer the trust after your passing. This can be a person that you know, and you can alternately use a professional fiduciary like a trust company or the trust department of a bank.
Your trust can include a spendthrift clause, and it would become irrevocable at the time of your death. The beneficiary would not be able to directly access the principal, and this would also apply to their creditors, so there would be a solid layer of asset protection.
When it comes to the distributions, the schedule would be entirely up to you. The trust can potentially remain active for years, distributing limited assets on an incremental basis until the beneficiary reaches a certain age.
This is one of the benefits that living trusts provide, and probate avoidance is another one. A will must pass through probate, which is a time-consuming and expensive legal process.
Estate Tax Efficiency
Former Zappos CEO Tony Hsieh died in 2020 with an estate that was valued at an estimated $500 million. He did not have a will or any other estate planning documents, but even if he did have a simple will, the federal estate tax would have devoured a large portion of his estate.
This tax carries a 40 percent top rate, and it is applicable on the portion of an estate that exceeds the exclusion. This year, the exclusion is $12.06 million, and in 2020 it was $11.58 million. That is a lot of money, but it doesn’t go far when it is applied to a $500 million estate.
There are trusts that can be used by high-net-worth individuals with estates that are going to be subject to the estate tax. The generation-skipping trust is one of them, and grantor retained annuity trust and charitable lead trust are a couple of the others.
Special Needs Planning
Many people with disabilities qualify for Medicaid because they have limited resources, and they get a small amount of income from the Supplemental Security Income program. If a benefit recipient is suddenly catapulted into a better financial position, eligibility could be lost.
This would be the situation if you leave a person with a disability a direct inheritance in a will. As a response, you can use a supplemental needs trust as an alternative.
The trustee that you name in the document would be able to use assets in the trust to improve the beneficiary’s quality of life. Since the beneficiary would not own the assets in the trust, they would be able to retain their eligibility, so all bases would be covered.
We will look at special needs planning in greater depth in an upcoming blog post.
Take Action Today!
As you can see, there are different approaches that can be taken, and the right course of action will depend on the circumstances. Personalized attention is the key to a properly constructed plan, and this is what you will receive when you choose our firm.
You can schedule a consultation via Zoom or at our Naperville or North Aurora, IL estate planning offices if you call us at 630-568-8611. If you would prefer to reach out electronically, fill out our contact form and we will get back in touch with you promptly.