Estate Planning and Administration
The First Pillar - Trust Planning
Most people today know that a revocable living trust is a substitute for a will but, unlike a will, the trust does not need to be probated at death, avoiding a potentially costly and/or lengthy court proceeding. Less well known is that since the trust takes effect while you’re living, it allows you to state who your successor or back-up trustee will be in the event of incapacity. Since about half of all people today are expected to have a period of disability during their lifetimes, it is of the utmost importance to have a lifetime plan. Without a plan, the client risks a court appointed guardian or conservator who may be a stranger or, even though related, someone whom the client would not have chosen to act for them. Additionally, in a long-term care situation, a legal guardian may be required to use all of the assets for the incapacitated person’s care instead of taking advantage of Medicaid rules allowing significant transfers to children and other beneficiaries . The well drafted revocable living trust provides that, in the event of incapacity, the back-up trustee is authorized to transfer out of the ill person’s name whatever assets the Medicaid law allows. With the assistance of an elder law attorney, this will allow at least one-half of the assets to be protected through a technique known as “half-a-loaf” planning.
A relatively new concept, known as the Heritage or Dynasty Trust, solves a relatively new set of planning problems namely, current divorce rates of about fifty percent and the fact that middle-class people today are leaving gifts of hundreds of thousands of dollars to their children.
Here’s the problem: let’s say after the client dies (or after the second spouse dies, if they’re married) they leave an estate of $500,000 in equal shares to their two children, Bobby and Mary. Now, when Bobby or Mary dies, who inherits the $250,000 from them? The client’s son-in-law or daughter-in-law first. Can they then get remarried and share the client’s $250,000 with a complete stranger? Sure. And with people living a lot longer this is occurring more often.
With the greatly increased size of estates today, in order to protect assets and keep them in the family, many retirees are setting up trusts for their children that (1) protect the assets in the event of a divorce (2) may provide creditor protection, if desired, and (3) while giving the son or daughter lifetime access to income and principal, pass whatever’s left by blood (usually to the client’s grandchildren) instead of by marriage.
Not to be overlooked is the use of trusts to save estate taxes for estates valued over $1,000,000 (including life insurance held in the client’s name).
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