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Why people fund trusts when creating estate plans

On Behalf of | Jan 24, 2025 | Estate planning

In many estate plans, the testamentary instrument is the most important document. For many people, the document they rely on to structure their legacy is a will. Wills allow people to choose beneficiaries, name specific people to serve as their personal representatives and nominate guardians for their children.

However, there are limits to what a will can do. It only takes effect after an individual dies, and the testator does not have control over how beneficiaries use their inheritances. Some people choose to replace or supplement wills with trusts.

There are multiple different types of trusts, but a trust’s basic purpose is to hold and manage the distribution of various assets. What are some of the reasons that testators may choose to integrate trusts into their estate plans?

The need for financial protection

Concerns about financial vulnerability later in life can be a strong incentive to create a trust. Trusts can help protect assets from collection efforts.

They can also protect assets after the testator dies. By changing the legal owner of the assets to the trust, people can limit creditor lawsuits when they live on a fixed income later in life and can protect their estates from credit or between as well.

Concerns about long-term care

One reason that those preparing for retirement often establish trusts is to improve their chances of qualifying for Medicaid and other state benefits later in life. Long-term care costs can easily exceed the value of assets an individual has saved for their retirement.

However, the value of their assets could prevent them from qualifying for Medicaid if they need types of support that Medicare doesn’t cover. Trusts can play an important role in helping people qualify for Medicaid benefits later in life.

Desire to control the use of an inheritance

Maybe the testator wants their loved ones to benefit from the business that they started without selling the company to outside parties. Perhaps they worry about loved ones misusing an inheritance to feed a substance abuse disorder.

Trusts allow testators to provide clear instructions regarding the use and distribution of trust assets. They can limit potential abuse by leaving clear instructions for the trustee regarding asset distribution.

There are many other benefits to establishing a trust, including enhanced privacy and lower probate costs. Considering different estate planning tools may help individuals achieve their personal goals. Trusts are valuable for individuals in a variety of different personal circumstances, and testators may need to explore whether a trust could be useful for their situation.