To many people, the whole process of estate planning boils down to the statement of your final wishes in a last will. In reality, a will could suffice under very simple circumstances, but in many cases, more advanced estate planning techniques should be utilized.
In this blog post, we will look at three of them.
Spendthrift Protections and Asset Protection
You have to understand something about a last will. With a will, you are simply slicing up pieces of a pie. The people who receive slices walk away with the whole slice that they were given. To continue on with this analogy, they have the freedom to eat that slice in one sitting, and they would then have nothing left for later on.
Clearly, when you are not used to having a significant amount of money at your disposal, you may have the tendency to spend impetuously and buy things that you really do not need. This can feed on itself, and before long, an inheritor could look around and see a number of things, but his or her bank account may be bare. This kind of thing helps to keep pawnshops in business.
To prevent inheritance squandering, you could employ some advanced estate planning strategies. One way to protect a spendthrift would be to use a revocable living trust instead of a will. While you are living, you would control the assets in the trust, and you could revoke it if you wanted to.
After you pass away, the trust would become irrevocable. The trustee that you name in the trust declaration would manage the assets in the trust, and you do not have to name a family member or friend. You could use a corporate trustee who would be a professional money manager with no emotional ties.
In the trust declaration, the trustee could be instructed to mete out assets in any way that you choose, and you could give the trustee certain discretionary powers. Through the inclusion of a spendthrift provision, there would also be a certain level of asset protection if creditors were to seek satisfaction from the beneficiary.
If you have wealth, why would you have to preserve it when you are planning your estate? We can provide a two word answer: death taxes. The estate tax is not applicable on transfers between spouses who are American citizens, but other transfers could be taxable.
In 2016, the first $5.45 million that is transferred can be passed along tax-free. This figure is called the estate tax credit or exclusion. The rest could be subject to the estate tax, a tax that carries a 40 percent maximum rate.
When estate tax exposure is present, there are advanced techniques that can be utilized to ease the burden. Irrevocable trusts are often part of the equation. Assets in this type of trust are removed from your estate for tax purposes, because you surrender incidents of ownership when you convey assets into an irrevocable trust.
Nursing Home Asset Protection
When you think about advanced techniques, you may envision complicated circumstances that often involve very wealthy people. This is not always the case. There is a particular estate planning issue that requires a special brand of planning that is quite relevant to just about everyone.
This sounds like an overstatement of the obvious, but you can’t leave anything to your loved ones if you don’t have anything to leave. About one fourth of people who are at least 85 are residing in nursing homes, and half of people who are 95 years of age and up require nursing home care.
These facilities are extremely expensive, and Medicare will not pay for long-term care. As an estate planning strategy, you could aim toward Medicaid eligibility. This government program does pay for long-term care, but you have to get assets out of your own name to qualify, because there is a countable asset limit of $2000.
It would be possible to convey assets into an irrevocable Medicaid trust if you wanted to prepare yourself for long-term care costs. You could continue to receive income that is earned by the principal in the trust, but the principal would not count if you were to apply for Medicaid to pay for long-term care.
Schedule a Consultation
These are a handful of the scenarios that can be addressed through intelligent and informed planning, but there are many others. If you would like to discuss your own situation with a licensed professional, send us a message through our contact page or call us at (701) 738-0060 to schedule a consultation.