People who don’t understand all the facts sometimes harbor misconceptions about estate planning and the different options that are available. Most individuals are aware of the fact that you can use a will to express your wishes regarding the way that you want your assets transferred after you are gone, and the majority of people have heard of trusts as well. They think that wills and trusts are two legal devices that accomplish the same objectives.
There is a shred of truth there, but in fact, there are some profound differences between wills and trusts. Wills cannot satisfy some estate planning objectives that trusts can address, but all trusts do not accomplish the same aims.
Let’s look at some of the details.
A last will is a very limited estate planning device. If you create a last will, you can nominate an executor in the document to handle the estate administration tasks after you are gone. The heirs that you name will all be receiving lump sum inheritances.
This is not necessarily the ideal way to facilitate asset transfers. For example, you may have someone on your inheritance list who is not good at handling money. With a will, you are simply leaving this person a direct inheritance. The inheritor would be free to go forward with the money and do whatever he or she wanted to do with it.
There is also the matter of government benefit eligibility. Many people with disabilities rely on Medicaid and Supplemental Security Income. These programs are only available to financially needy people, so eligibility can be lost if a benefit recipient was to receive a significant direct inheritance through the terms of a will.
In addition to these limitations, a will would be admitted to probate. The Surrogate’s Court would supervise the administration of the estate. This will take at least eight months, and the heirs would not receive their inheritances during this interim.
Things are different if you utilize a trust, and as we have stated previously, there are different types of trusts. A revocable living trust is a commonly used estate planning device that provide benefits for people who are not necessarily extremely wealthy.
Assets in a living trust can be transferred outside of probate, and this is one advantage. Plus, a trustee would manage the assets in the trust for the benefit of the heir or heirs. The assets would be managed by a professional fiduciary or a trusted friend or family member, so you would have a steady hand at the helm. If you wanted to, you could instruct the trustee to distribute limited assets over an extended period of time instead of lump sums.
We touched upon the life situation of people with special needs in the previous section. There is a different type of trust that can be used to provide assets for the benefit of a person who is enrolled in need-based government benefit programs. This would be a supplemental needs trust. The trustee could use assets in the trust to make the beneficiary more comfortable, but benefit eligibility would not be impacted.
Estate taxes can be a factor as well. The federal estate tax is applicable on asset transfers that exceed $5.45 million in 2016, and here in New York we also have a state-level estate tax with an exclusion of $3.125 million (it will go up by just over $1 million on April 1st).
If you maintain direct personal possession of your property throughout your life, and its value exceeds the amount of these exclusions, estate taxes would reduce the amount of the inheritances that your heirs would be receiving. To prevent this, you could convey assets into a wealth preservation trust of some kind.
There are various different trusts that protect assets from estate taxes. A qualified personal residence trust can be used to transfer your home at a tax discount. You can gain tax efficiency through the creation of a generation-skipping trust, and grantor retained annuity trusts can be useful for tax efficiency purposes if you are in possession of highly appreciable assets.
These are just a few of the trusts that can be more beneficial than a will under some circumstances, but there are others. Every case is different, so you should discuss your unique personal situation with a licensed estate planning attorney so that you can take all the right steps.
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Estate planning is an ongoing process. Your current estate plan may not be up-to-date given year present life situation, so we would like to invite you to use our questionnaire to measure the relevance of your current plan. You can click this link to get started: Estate Planning Checkup.
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