Before you understand all of the facts, you may naturally assume that you should use a last will as your primary estate planning document. A will can be useful under very simple circumstances, but there are many different reasons why you may want to use a trust instead of a will.
Let’s look at some of the scenarios.
Special Needs Planning
People with special needs often rely on Medicaid (called Medi-Cal in California) for health insurance. This is a program that is only available to people with limited financial resources. A benefit recipient could lose eligibility if he or she was to come into some money.
To account for this, you could make a loved one with a disability the beneficiary of a special needs trust. Assets in the trust could be used by the trustee to make the beneficiary more comfortable, but benefit eligibility would not be jeopardized.
You may be concerned about possible legal actions. There are certain trusts that can be used to shield assets from creditors and claimants.
If you have concerns about an heir who is a spendthrift, you could use a spendthrift trust to protect the assets that you are passing along.
Estate Tax Efficiency
High net worth individuals may be exposed to the federal estate tax. You can transfer unlimited assets to your spouse tax-free if your spouse is an American citizen, but transfers to others are potentially taxable.
The amount of the federal estate tax exclusion is $5.43 million in 2015. Transfers that exceed this amount could be subject to the estate tax.
There are a number of different irrevocable trusts that can be used to provide estate tax efficiency.
When a last will is used to transfer personally held property, the will must be admitted to probate after the death of the testator. The heirs that are named in the will could not receive their inheritances until after the estate was probated by the court.
This can take somewhere in the vicinity of a year, even if things run quite smoothly, so the time lag is a problem for many people. Plus, there are expenses that accumulate during probate, and these expenditures reduce the value of the estate before it is transferred to the heirs.
If you were to use a revocable living trust instead of a last will, the trustee that you name in the trust declaration would be able to distribute assets in a more timely manner, because the distributions would not be subject to the probate process.
We have provided some food for thought in this post. If you would like to discuss things in detail with a qualified and experienced estate planning attorney, send us a message through our contact page to set up a consultation.