We often have to clear up misconceptions that people harbor about estate planning. One common notion is the idea that there is just one type of will, and one type of trust. In reality, this is not the case. In this post, we will provide an explanation of some of the different wills and trusts that can be used when you are planning your estate.
The last will is the most commonly utilized estate planning document, and everyone has heard of it. You can use a last will to state your final wishes regarding the way that you want your assets transferred to your loved ones. This can seem like the simplest way to go, but this is not entirely true. A will must be admitted to probate, and this process is costly and time-consuming.
A living will is a legal document that has nothing to do with financial asset transfers. This is an advance directive for health care. In a living will, you state your wishes regarding the utilization of life-sustaining measures like artificial respiration, nutrition, and hydration. When you execute a living will, you take a potentially excruciating decision out of the hands of your loved ones.
An ethical will is a very unique document. It is not legally binding in any way, but it can be an important addition to your estate plan. Since biblical times, ethical wills have been used to pass along spiritual and moral values to loved ones that will be left behind.
Revocable Living Trust
The revocable living trust is a useful estate planning tool that is the ideal alternative to a last will. There are many benefits to be realized if you establish this type of trust. You don’t have to worry about losing control of assets in the trust, because after all, it is revocable. Plus, you can act as the trustee and the beneficiary while you are living. It is possible to add or remove property from the trust at any time.
In the trust declaration, you name a trustee to administer the trust after your passing. You can choose to utilize someone that you know personally, but many people make arrangements with a professional fiduciary like a bank or a trust company. Successor beneficiaries are also named, and after you are gone, the trustee would distribute assets to them according to the terms that you record in the trust document. If you want the trustee to distribute assets on a limited basis over an extended period of time, you can leave these instructions.
All the assets that comprise your estate would be consolidated, and this is makes the process of estate administration much more streamlined and efficient. Plus, best of all, assets in a revocable living trust can be distributed to the beneficiaries outside of probate, so you avoid the drawbacks.
Pour Over Will
When you create a revocable living trust, you may not transfer everything that you own into the trust for one reason or another. To account for this, you can include a pour over will in your estate plan. This would allow the trust to absorb assets that were in your name at the time of your death.
There are also irrevocable trusts that are used in the field of estate planning under certain circumstances. One type of irrevocable trust that is commonly used is the income only Medicaid trust. This government health insurance program becomes relevant for many senior citizens, because Medicare will not pay for long-term care.
Most people are aware of the fact that Medicaid is intended for people with limited resources, so there is a $2000 asset limit that governs eligibility. To get assets out of your own name to qualify for Medicaid coverage to pay for a stay in a nursing home, you could convey them into an irrevocable Medicaid trust. You would not be up to touch the principal, but you could receive income from the earnings of the trust until you enter a long-term care facility.
The federal estate tax is a factor for high net worth individuals with resources that exceed the amount of the exclusion, which is $11.2 million at the time of this writing. Assets that are conveyed into an irrevocable trust would no longer be part of your estate for tax for purposes. Grantor retained annuity trusts, generation-skipping trusts, qualified personal residence trusts, and charitable lead trusts are some of the different types of irrevocable trusts that provide estate tax efficiency.
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