There are many different tools in the estate planning toolkit, and the right course of action will depend upon the circumstances. This is why it is very important to sit down and have a meaningful conversation with an estate planning attorney when you get serious about the process.
When you do this, you may find out that you should use an asset transfer vehicle that you have never heard of before.
Generally speaking, there are two different types of trusts: revocable trusts, and irrevocable trusts.
The names of these devices are more or less self-explanatory. You have the power to dissolve a revocable trust at any time to take back direct personal possession of any assets that you conveyed into it. With an irrevocable trust, you do not have the ability to rescind the trust after it has been established.
Why would you want to take the risk of placing assets into a trust that you cannot revoke if you have another option? This is a good question, and you can continue reading to get the answers.
Estate Tax Efficiency
If you have been extraordinarily successful from a financial standpoint, you have to be concerned about the potential impact of the federal estate tax. It is applicable on asset transfers that exceed $11.58 million, and the maximum rate is 40 percent. We should point out the fact that you are allowed to transfer assets of any value to your spouse tax-free, because there is an unlimited marital deduction.
Here in New York where we practice law, there is a state level estate tax to add into the mix. The exclusion is considerably lower at $5.85 million.
There are steps that can be taken to gain estate tax efficiency, and the plan can include the utilization of an irrevocable trust, or multiple irrevocable trusts.
When you convey assets into this type of trust, they are no longer part of your estate for tax purposes. Some of the trusts that are used for estate tax efficiency include generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable lead trusts.
Special Needs Planning
Many people with special needs rely on the Medicaid program as a source of health care insurance. There is another government program called Supplemental Security Income that provides an ongoing stream of income to qualified people with disabilities.
These programs are intended to provide a safety net for individuals with very sparse resources, so there are low income and asset limits.
If you have someone on your inheritance list that is relying on these benefits, you have to take ongoing eligibility into account. A sudden windfall of money could trigger a period of ineligibility. To account for this, you could convey assets into an irrevocable supplemental needs trust.
When you do this, the trustee that you name in the document would be able to use assets in the trust to satisfy the supplemental needs the beneficiary. These would be needs that are not being met by the government programs. As long as all the rules are followed correctly, eligibility for these benefits would not be jeopardized.
Nursing Home Asset Protection
Most senior citizens will eventually need long-term care, and many will spend their final days in nursing homes. These facilities are extremely expensive, and Medicare will not help with nursing home costs. If you are married, there can be two rounds of nursing home expenses to contend with, and you are looking at $190,000 for a yearlong stay in a nursing home in our area.
Medicaid will pay for long-term care, but once again, there are low income and asset limits. To position resources out of your name in an effort to qualify for Medicaid, you could convey them into an income-only Medicaid trust. This would be an irrevocable trust, so you would not be able to touch the principal or dissolve the trust.
However, until and unless you apply for Medicaid to pay for long-term care, you could continue to receive distributions of the earnings from appreciable assets that have been conveyed into the trust.
Learn More About Estate Planning!
If you would like to build on your knowledge, there are some great learning opportunities coming up in the near future. Our firm has scheduled a number of webinars, and there is no charge to attend the sessions. To see the schedule and obtain registration information, visit the following page: Smithtown, NY Estate Planning Webinars.
- What You Need to Know about Medicaid’s “Look-Back” Rule - February 1, 2023
- What You Need to Know about Elder Financial Exploitation - January 25, 2023
- What Is an Asset Protection Trust? - January 18, 2023
A Look at Probate-Free Asset Transfers
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