There are a number of different scenarios that would call for the use of a trust instead of a will. In this post, we will look at three of them, and we will examine some additional utilizations in future posts.
Special Needs Planning
Most people are aware of the fact that Medicaid is a government health insurance program that serves as a safety net for people that have very limited financial resources. A significant percentage of people with disabilities rely on Medicaid as a much-needed source of coverage.
Supplemental Security Income (SSI) is another need-based program that provides a modest amount of monthly cash for people with disabilities.
When someone is granted eligibility for these programs, it is not necessarily permanent. A change in financial status can cause a disruption in the benefits. For this reason, you would not want to name a person with a disability in your will.
However, there is a solution in the form of a supplemental needs trust. To implement this strategy, you fund the trust, and you name a trustee. This can be a person that you know, but you can alternately engage a professional trustee. Trust companies and the trust departments of banks provide trustee services for a fee.
Under the rules of these programs, the trustee can use assets in the trust to make the beneficiary more comfortable in various different ways. As long as the rules are followed correctly, benefit eligibility would not be negatively impacted.
Remarriage Concerns
When you are getting remarried as a parent, you may want to take steps to protect inheritances that you want to leave to your children from your previous marriage. If you leave your assets to your new spouse, your children could be disinherited or shortchanged.
To account for this dynamic, you can establish a qualified terminable interest property (QTIP) trust. Your spouse would be the first beneficiary of the trust, and your children would be the final beneficiaries.
After your passing, income that is earned by the trust would be distributed to your spouse. You would also have the ability to give the trustee the discretion to distribute portions of the principal.
Your spouse would also be able to use property that is technically owned by the trust. For example, they could live in a home that you signed over to the trust.
The surviving spouse would have no ability to change the terms of the trust. After their death, the children would step into the beneficiary’s role, and they would inherit the assets.
Estate Tax Efficiency
High net worth individuals have to be concerned about the potential impact of the federal estate tax. It carries a 40 percent top rate, so we are talking about a heavy hit.
Fortunately, there is a credit or exclusion that is relatively generous at $13.61 million in 2024. This is a record high exclusion, and it is temporary. It is scheduled to go down to about half of what it is right now in 2026.
If you are exposed to the estate tax, there are different types of irrevocable trusts that can be used to gain estate tax efficiency. Your home could be transferred at a tax discount if you establish a qualified personal residence trust, and a generation-skipping trust can be part of the plan as well.
These are couple of the options that are available to you, but there are others. The ideal course of action will depend on the circumstances.
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