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3 reasons people may decide to add trusts to their estate plans

On Behalf of | Jun 3, 2024 | Trusts And Estate Planning

Most people might benefit from using a trust as part of their estate plan but many people might avoid creating one because they view trusts as complex or expensive. Testators unfamiliar with the advantages of trusts may forego their creation and rely on simpler estate planning documents that don’t fully meet their needs.

Trusts come in many different forms and can serve a variety of purposes. The three benefits below are some of the most common reasons that adults decide to add trusts to their estate plans.

Limiting taxes and collection activity

As of 2024, estates worth more than $13.61 million are at risk of estate taxes of up to 40%. Assets transferred to a trust are typically not part of someone’s estate and therefore do not contribute to the risk of estate taxes. Assets moved to a trust also have a degree of protection from creditor activity, which can be a serious concern for middle-class testators and their loved ones. Creditors ranging from hospitals to student loan companies could make a claim against someone’s estate for full repayments. Assets in a trust are less at risk due to collection activity or taxes after someone’s death.

Preparing for medical care later in life

Long-term care expenses can quickly become prohibitively costly. Quite a few older adults eventually need Medicaid coverage because they require nursing support in their homes or need to take a room in a nursing home. Applying for Medicaid can be a challenge the state has very strict rules about both property and income. Those who plan at the last minute may be subject to penalties that delay their eligibility for benefits. The creation of a trust five years or more before someone applies for Medicaid benefits can increase their chances of getting benefits quickly and decrease their risk of facing a penalty.

Providing an inheritance for struggling loved ones

There are many reasons why an individual might have an issue receiving a sizable inheritance directly. Some people have personal issues, such as challenges with substance abuse, that make a large inheritance a risk for them. For other people, it might be an unstable marriage and the possibility of a spouse claiming their inheritance during divorce that prompts a parent to create a trust. Trusts can be beneficial for those with special needs, as they can help augment someone’s standard of living without making them ineligible for crucial benefits. Trusts are even useful in far more simple situations, such as scenarios where parents want to leave resources for minor children or where testators want to ensure the protection of a beloved pet.

Adding a trust to an estate plan can be a smart move for people in a variety of different circumstances. Those who are honest with themselves about their estate planning wishes and family challenges can potentially establish appropriate estate plans that work for them and the people in their lives.