You should explore your options when you are planning your estate, because there are many tools in the estate planning toolkit. There are a number of situations that would call for a trust of some kind instead of a will, and we will look at some of them in this post.
Estate Tax Efficiency
There is a federal estate tax that can take a big bite out of your legacy because it carries a 40 percent top rate. We also have a state-level estate tax to contend with as New Yorkers, and it has a graduated rate that maxes out at 16 percent.
The good news is that most families not have to worry about these taxes because you can transfer a certain amount tax-free before the estate tax would be levied on the remainder.
This is called the exclusion, and on the federal level, it is $11.7 million. The exclusion on the state level in 2021 is $5.93 million.
If you are exposed to the estate tax, you would not want to leave direct inheritances through the terms of a will. When you convey assets into an irrevocable trust instead, you are removing them from your estate for tax purposes.
There will be some taxation as the assets are being transferred, but there would be tax discounts.
When a will is used as an asset transfer vehicle, the inheritors receive direct lump sum bequests unless there is a testamentary trust embedded in the will. This can be a cause for concern if you are leaving resources to someone that is not good with money.
As a response, you could establish a revocable living trust. You would be the trustee while you are living, and you would name a successor to assume the role after you are gone. This can be someone you know, or you could use a trust company or another professional fiduciary.
A spendthrift clause would be included in the trust declaration, and the trust would become irrevocable after your death. The beneficiary would not have direct access to undistributed assets in the trust, and their creditors would be in the same position, so there is built-in asset protection.
Creditors would be able to reach resources that have been distributed, but to account for this, you can instruct the trustee to provide limited distributions on an incremental basis. The money would be gone before the creditors can act, and the beneficiary’s spending would be reined in.
Special Needs Planning
Most people with special needs rely on Medicaid as a source of health insurance, and Supplemental Security Income (SSI) serves as a modest source of ongoing income. These are need-based benefits, so a windfall of money can cause a loss of eligibility.
To account for this, you can establish a supplemental needs trust. The trustee would be able to use the funds to make the beneficiary more comfortable, and there would be no forfeiture of benefits.
Protect Your Children’s Inheritances
If you are getting remarried as a parent and you leave most of your assets to your new spouse, can you be sure that your children will get their fair share? Your spouse may treat your children as though they were their own, but there are no guarantees.
This is especially true if you are getting remarried relatively late in your life and your children are adults.
A qualified terminable interest property trust can be used to cover all your bases. If you predecease your spouse, the trustee would distribute the trust’s earnings to your spouse for the rest of their life. They would also be able to use property that is owned by the trust.
Your surviving spouse would be comfortable, but would not be able to change the terms of the trust. After they pass away, your children would become the beneficiaries of the trust.
Schedule a Consultation Today!
We are here to help if you are ready to work with a Smithtown, Long Island estate planning attorney to put a plan in place. You can send us a message to request a consultation appointment, and we can be reached by phone at 631-265-0599.