Far too many people think that a will is all you need when you are planning your estate. They know that a trust is a possibility, but they assume that they are for people with very complicated holdings. In reality, this is simply not the case.
A trust can be better than a will in many instances, and the motivation will vary depending on the circumstances. With this in mind, let’s look at three reasons why you may want to use a trust instead of a will to facilitate postmortem asset transfers.
Efficient Inheritance Distributions
A lot of people do not understand the fact that a will must be admitted to probate after the passing of the testator. The executor is responsible for the hands-on administration of the estate, and the tasks are completed under the supervision of the probate court.
During probate, the court will examine the will to determine its validity. If anyone wanted to contest the will, the could make their case while the estate is being probated.
The executor must notify creditors about the passing of the decedent, and they are given time to file claims.
Property that comprises the estate will be identified and inventoried by the executor, and it is prepared for distribution. This will typically involve appraisals and liquidation.
As you might expect, all of this takes time. The minimum duration will be about seven months, and it can take considerably longer. No inheritances are distributed while the estate is being probated by the court, so the inheritors have to play a rather uncomfortable waiting game.
In addition to the time consumption, probate expenses will shave down the value of the estate, and anyone who wants to access probate records can find out what transpired.
If you use a living trust as the centerpiece of your estate plan, these negatives will never enter the picture. The trustee that you name would be able to distribute the assets to the beneficiaries outside of probate.
Provide Incentives
When you are going to leave a sizable inheritance to a loved one that is not fully developed, you may take pause. If they do not have to work for what they get in life, will they fall short of their true potential?
A lot of people have these concerns, and if you are one of them, you can utilize an incentive trust to guide a loved one in the right direction. As the name would indicate, you include incentives that must be met before the beneficiary can receive distributions from the trust.
For example, let’s say that you are going to be leaving an inheritance to your grandson. You assume that you will pass away before he is old enough to attend college.
Under these circumstances, you could fund an incentive trust and make your grandson the beneficiary. You would name a trustee to act as the administrator, and this can be a family member, friend, or associate. Some people will use a trust company or the trust department of a bank.
You could instruct the trustee to pay college tuition and provide distributions to cover expenses as long as your grandson remains in college. The trust terms could include greater incentives for graduate school attendance, and you could match every dollar that the beneficiary earns on the job after graduation.
These trusts are also used to guide people away from self-destructive actions. On the downside, you have to weigh the potential resentment factor, so this is a decision that should not be made lightly.
Estate Tax Efficiency
We have a federal estate tax in the United States that can significantly erode your legacy because it carries a 40 percent top rate. That’s the bad news, but the good news is that you probably don’t have to worry about this death tax.
The exclusion in 2024 is $13.61 million. This is the amount you can pass along before the estate tax would be applied on the remainder. We should point out the fact that there is a gift tax that is unified with the estate tax, so this exclusion also applies to lifetime gifts.
There are 12 states in the union that have state-level estate taxes, and Washington D.C. has an estate tax of its own. Here in Louisiana where we practice law, there is no state estate tax. However, if you own property in a state with an estate tax, it would apply to you.
Of course, the value of the property would have to exceed the exclusion in that state. The state-level exclusions are typically much lower than the federal exclusion. For example, Oregon and Massachusetts have $1 million exclusions.
People that are exposed to estate taxes use irrevocable trusts to mitigate the damage. Generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable lead trusts are some of the estate tax efficiency tools that are used.
Special Needs Trusts: Protecting Loved Ones With Disabilities
A special needs trust is a strategic tool designed to benefit individuals with disabilities. Its primary function is to manage resources while maintaining the beneficiary’s eligibility for public assistance benefits like Medicaid and Supplemental Security Income (SSI).
Here’s why it could be a valuable addition to your estate plan.
Preserve Government Benefits: Assets held in a special needs trust do not count against the beneficiary’s eligibility for means-tested government programs. This feature is crucial because direct inheritance might disqualify them from these benefits.
Financial Security and Quality of Life: The trust can cover costs that government benefits do not, such as personal care attendants, out-of-pocket medical expenses, and recreational activities. This ensures a higher quality of life for the beneficiary.
Flexibility and Control: You can appoint a trusted person as a trustee to manage the trust’s assets. This ensures that the beneficiary’s needs are met according to your wishes, even when you are no longer there to provide care.
Qualified Terminable Interest Property Trusts
For parents who are remarrying, a qualified terminable interest property trust offers a way to ensure that their new spouse is taken care of, while also protecting the inheritance rights of children from previous marriages.
Let’s examine the key benefits.
Provide for Your Spouse and Children: This trust allows you to provide income for your surviving spouse during their lifetime. After their death, the assets are then passed on to your children or other designated beneficiaries. It’s a balanced approach to taking care of both your spouse and children.
Estate Tax Benefits: A qualified terminable interest property trust can offer significant tax advantages, particularly in reducing or postponing estate taxes. If you are a high-net-worth individual, this is compelling.
Control Over Your Estate: It enables you to dictate how your assets will be distributed after your spouse’s death, ensuring that your children from a previous marriage are not disinherited.
We Are Here to Help!
Today is the day for action if you are going through life without an estate plan. You can schedule a consultation appointment at our Metairie, LA estate planning office by giving us a call at 504-831-2348, and you can use our contact form to send us a message.
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