You should work with an attorney to develop your estate plan because as a layperson, you are not going to understand all your options. Many people are surprised when they find out about the targeted estate planning solutions that can be used, and we will look at three of them in this post.
Supplemental Needs Trust
People with disabilities often rely on Medicaid as a source of health insurance because they cannot work, so they do not get coverage through their employers. The Supplemental Security Income program is another benefit that they can receive.
These benefits are only available to people with very limited financial resources because there is a $1,600 asset limit here in Connecticut. Once benefit eligibility has been granted, it can be withdrawn if a recipient was to come into money for some reason.
This presents a challenge if you are going to be leaving an inheritance to a loved one with a disability. As a response, you can make the individual in question the beneficiary of a supplemental needs trust.
The trustee would be able to provide anything other than direct cash payments that are used to pay for food and shelter without risking eligibility. After the death of the initial beneficiary, a successor that you designate would assume ownership of the remainder that is left in the trust.
Incentive Trust
You do not have to leave inheritances with no strings attached if you would like to make sure that you guide a loved one toward a certain type of behavior. An incentive trust can be utilized to nudge the beneficiary onto a fruitful path.
For example, let’s say that you want to encourage your granddaughter to attend college and start a career. You can establish an incentive trust and leave instructions for the trustee with regard to the distributions.
As long as your granddaughter is in college, the trust will pay for all expenses, and a bonus will be provided upon graduation. There would be additional incentives to encourage graduate school attendance, and once again, there can be a lump sum waiting at the end of the rainbow.
After graduation, the trust would match money that your granddaughter earns on the job. This would instill a work ethic, and it would allow her to potentially choose a rewarding career that may not be especially lucrative.
This is one of countless possibilities, and this type of trust can also be used to guide someone away from negative behavior like substance abuse or compulsive gambling.
Generation-Skipping Trust
People who are exposed to the federal estate tax are faced with the prospect of a 40 percent reduction of the taxable portion of their legacies. It is only a factor for high-net-worth individuals because the first $13.61 million can be transferred tax-free.
This is the exclusion, and it is scheduled to go down to $5.49 million indexed for inflation in 2026, so the tax will apply to more people in just a couple of years.
There are trusts that can be used to gain estate tax efficiency, and one of them is the generation-skipping trust. The way that it works is you fund the trust, and you make your grandchildren the beneficiaries, skipping your children.
However, you are not leaving your children out in the cold. They could live in property that is owned by the trust, utilize trust owned vehicles, and receive distributions of the trust’s earnings.
There would be no imposition of the estate tax during the life of your children. After their death, your grandchildren would become the active beneficiaries. The estate tax would be a factor at that time, but one round of taxation would be avoided.
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