You Need a Trust When…(Part 1)

There are a number of different scenarios that would call for the utilization of a trust instead of a will. We are going to look at three of them in this post. We will follow up with three more in our next entry.

Special Needs Planning

If you leave a direct inheritance to someone with a disability through the terms of a will, it could actually have a negative impact. Many people with disabilities rely on Medicaid as a source of health insurance. They also receive Supplemental Security Income (SSI).

These are need-based benefits, so a windfall of money could cause a loss of eligibility. As a response, you could establish a supplemental needs trust and make your loved one the beneficiary.

Supplemental Security Income payouts are very modest, and Medicaid does not cover every medical, dental, and therapeutic treatment. The trustee would have the ability to use assets in the trust to satisfy the supplemental needs.

Ongoing eligibility would not be impacted as long as the trustee acts within the guidelines. Another benefit is the fact that the assets that remain in the trust after the death of the beneficiary. They would then pass to a successor beneficiary.

This is key, because Medicaid is required to seek reimbursement from the estates of beneficiaries after they pass away. Assets in a third-party supplemental needs trust would be out of their reach.

Medicaid Planning

You might think that Medicare would cover a stay in a nursing home since it is a health insurance program for seniors, and many elders require this type of care. The reality is that Medicare does not cover the custodial care that nursing homes provide.

Here in Oklahoma City, the median charge for a private room in a nursing home was $88,695 last year. A married couple could expect that number to be double.

Medicaid does pay for long-term care. To qualify however, you would need to convey assets into a Medicaid trust. This would be an irrevocable trust, and you would not be able to act as a trustee or access the principal.

On the positive side, you could receive distributions of income that is generated by the assets of the trust. As long as you fund the trust at least five years before you apply for Medicaid, the resources would not count.

Estate Tax Efficiency

There is a federal estate tax that carries a 40 percent maximum rate, so it can do some damage. The exclusion is the amount you can transfer before the estate tax would be applicable on the remainder. For the rest of 2022, it stands at $12.06 million.

We do not have a state level estate tax in Oklahoma, but there are 12 states that have this type of tax. As a result, if you own property in one of the states, it will apply to your estate if its value exceeds the exclusion.

If your estate is going to be exposed to one or both of these taxes, you have to take steps to gain tax efficiency. There are trusts that can be part of the plan. These would include generation-skipping trusts, qualified personal residence trusts, grantor retained annuity trusts, and charitable lead trusts.

Attend an Educational Event!

We conduct educational events on an ongoing basis to share important information about estate planning and nursing home asset protection. You should definitely join us for one of these sessions. There is no charge, so this is a great opportunity to invest a little bit of spare time wisely.

To see the dates, visit our Oklahoma City estate planning events page and follow the simple instructions to register.

After helping his own family deal with a lengthy probate and the IRS following his father’s untimely death in a farm accident, Larry Parman made a decision to help families create effective estate plans designed to reduce taxes, minimize legal interference with the transfer of assets to one’s heirs, and protect his clients’ assets from predators and creditors.

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