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When using alternatives to traditional last will-based inheritance planning to avoid probate and maintain privacy, avoiding errors is critical, since certain mistakes cannot be fixed. This approach requires careful planning. Even when most or all assets are moved out of the estate, there may still be some estate administration involved.
Here are some simple alternatives to traditional inheritance planning:
Transfer on Death Account Ownership
When assets are owned jointly and titled as “Transfer on Death” or TOD ownership, either party may access all or a portion of the assets without permission or knowledge of the other owner. If either party is vulnerable to creditors, the TOD account could be at risk. If one of the owners needs to apply for Medicaid, the account will be considered a countable asset. The assets only “transfer on death” upon the death of the last surviving joint owner.
Using Trusts to Avoid Probate
Trusts are used to solve multiple potential inheritance problems. A “testamentary” trust is created through instructions in the last will and comes into existence when the owner dies, the will has been probated and the executor settles the estate. Consequently, a testamentary trust requires probate, it does not avoid it.
A revocable trust is created while the owner (known as the trustmaker, grantor, settlor, or trustor) is living, and the owner may make changes or terminate the trust at any time. Upon the death of the owner, the trust converts to an irrevocable trust and only then does the trust provide creditor protection.
Credit shelter trusts are commonly used by married couples. The trust is created and funded while both spouses are living. On the death of the first spouse, the surviving spouse may use the trust assets. When the second spouse passes, the beneficiary is typically the couple’s children. Because the surviving spouse never actually owns the assets in the credit shelter trust, the surviving spouse’s estate does not include the assets of the trust, helping to minimize tax liability.
Beneficiary Designations
Retirement accounts, pensions, insurance policy proceeds, investment accounts and any financial assets with a beneficiary designation do not pass through probate and are not governed by a last will. Beneficiary designations should be checked regularly, and the estate should never be named as a beneficiary.
Make Gifts While Living
Gifting while living is a simple way to move assets out of an estate, but it might not be appropriate for everyone. For example, an adult child who is careless with money will benefit from a trust that controls when and how much money may be given. Have a family member headed off to college? Consider opening a 529 account in a child’s name and funding it annually to help finance their education. What about a loved one with “special needs”? No one with special needs who is receiving (or perhaps may become eligible for) means-tested public assistance benefits, should be gifted assets directly. This could compromise public benefit eligibility. Consider creating a “supplemental needs trust” to own the gifted asset for the benefit of the beneficiary with special needs. Alternatively, consider opening an ABLE account, which functions much like a Section 529 account, but for those with special needs.
Another gifting option is to pay certain bills for loved ones in a way that does not impact gift tax exclusions. A second option is to pay tuition bills at every level of education, from elementary school to post-graduate programs. The condition is that payments must be made directly to the educational institution for authorized expenses (i.e., books and tuition).
The same option exists to pay for medical bills, but payment must be made directly to the health care facility or provider directly.
Final Thoughts
As we conclude this edition of our newsletter, we hope the insights into alternative approaches to inheritance planning have been enlightening. At Vick Law, P.C., we're committed to helping you explore innovative strategies that align with your unique goals. Don't hesitate to reach out to us for personalized guidance or visit our blog for more in-depth discussions on estate planning. We look forward to assisting you in securing your legacy and ensuring your loved ones are well-provided for. Stay tuned for our next newsletter, where we'll continue to provide valuable insights into estate planning and elder law.
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