Trusts can solve a host of legal and financial problems no matter how much (or little) money you have.
Done right by a lawyer, your heirs can avoid the expense and time of probating your will and may save on estate taxes while easing administration of your affairs while alive and after you have gone.
These are solid reasons to consider a trust on top of a will in your estate plans. Yet people fear trusts because of the cost to establish them or the image of creating a “trust fund baby.”
There are two types of trusts – and three main reasons to consider one.
A revocable trust is flexible; it can be changed at any time by the grantor – you. These are the most common because it is as simple as if you owned the assets in your name.
Once a trust is established, you retitle homes, bank and investment accounts to the name of the trust, an essential step to creating the trust that sometimes falls through the cracks. After that, the only change is that when you sign official documents, you will sign as the trustee rather than yourself. Otherwise you can continue to sell or handle property in much the same way as before.
The trust also can be designed for special situations: a special needs trust, for example, to help a disabled person for life, or a charitable trust to leave money to a favorite charity while giving income to a family member during their lifetime or a real estate trust for your properties.
Other reasons to consider a trust include avoiding probate (which creates a public accounting of all your assets), Medicaid planning or timing the inheritance to your heirs.
An irrevocable trust is permanent and cannot be changed. A common reason for choosing this option is to save on estate taxes or to set up funds for grandchildren. These are less common and typically what most people think of when they hear the words trust.
A trust is not something everyone needs. If your estate is small and most of your assets are in retirement plans with beneficiaries in place, you don’t need one. However if you have relationships, properties or goals that are less than simple or traditional, consider discussing your trust options with a lawyer.
Here’s why a trust might be for you
1. You want to reduce estate taxes
The federal tax exemption is $11.18 million in 2020 and $11.58 million for 2021, but state estate tax exemptions can be far less generous. Massachusetts currently exempts $1 million of assets from estate taxes, and New York excludes almost $6 million. Florida has no estate tax.
If you have a property in a second state, your heirs may face a second round of probate and estate taxes. With a trust, all property falls under the trust, leaving less management and paperwork for your heirs and reducing costs of settling your estate.
Years ago, a client left his wife properties in two states. Though he had a will, he had not taken the time to establish a real estate or revocable trust because of the expense. Instead, she had to pay lawyers in two states (plus her accountant) to settle the estate and transfer the deeds into her name. Then she had to pay state estate taxes on the out-of-state property — an expense that could have been avoided with a real estate trust.
As soon as she settled his estate, she set up her own trust to avoid the expense, delay and added hassle for her children upon her death. Experience was a great teacher, and this time it was the old England adage of “penny wise and pound-foolish.”
2. A will isn’t enough for the way you want to distribute assets
Today’s families are complex and are formed in a myriad of ways. Beyond the traditional nuclear family, there are second and third marriages, children in and out of wedlock, and long-term relationships that mirror marriages. By taking each personal situation into account, a trust can be established to match the individual’s needs.
A trust can be set up so that after your death, young children can be receiving income until whatever age you set and then have access to the principal of the inheritance. Otherwise, with a will they receive the full inheritance at the age of majority set by a state for inheritances. (Each state sets its own rules, but it’s between 18 and 21.)
Partners can be provided a steady stream of income, with the principal still ending up in the hands of whoever the grantor selects as the beneficiaries.
One client chose the details of her trust to prevent her only child from spending down her inheritance or becoming financially lazy. Rather than leaving her the money outright, my client designed a trust which at her death would match the amount of money the daughter was earning. The more she earned on her own, the more she was rewarded from the trust. At age 50, the daughter could have the balance.
Creativity and legal details addressed the mother’s worst fear about how her daughter would handle that money accumulated from decades of saving and investing.
3. You want to protect your assets from unseen issues while taking care of yourself
As people age, they may want added help with their finances, or they may need it because of dementia or Alzheimer’s disease. By having a trust in place, they are prepared to have someone help them when and if necessary without any legal or financial changes.
A neighbor once drew me into a conversation with an elderly friend: “I told her the best thing to do was to make all of her bank accounts joint and then I could manage her money that way as she aged,” she said.
That would have been the worst thing! That approach may have worked in the old days when there were not a lot of options available for joint money management. But what if the jointly named person got a divorce? Or was sued? Then there was the sad reality of the son, a joint owner of his mother’s account who became addicted to drugs and emptied the account to feed his habit.
On a joint account, all the money is available to each owner to use as they please. In a trust, the money is clearly stated as being for the benefit of the grantor (you, if it’s your trust) or someone of their choosing. It shields your assets from divorce proceedings or a lawsuit involving the trustee. The trustee can be removed at any time. Money used erroneously would become a criminal act.
Some final points to consider
If you are considering a trust, the biggest mistake you can make is to buy a trust package online. Even though the prepackaged program may be for your state, the absence of a professional to know the nuances of your state and the latest state laws may leave loopholes causing more hassle and expense for your heirs.
Plus, without a lawyer who knows your wishes and has a copy of the document, your heirs will be starting from scratch after your death.
If you move to a different state, you will need your estate plan revisited because every state has their own legal nuances, especially around power of attorneys, health-care directives and wills. However, completely redoing your trust is typically not necessary. With a few addendums, your trust documents can continue to operate on your behalf.
CD Moriarty, CFP, is a columnist for MarketWatch and a personal-finance speaker, writer and coach. She blogs at MoneyPeace. You can ask questions that may be published by clicking here.
Also read: Avoid these 3 estate-planning mistakes and make probate cheaper and easier for your loved ones
Plus: Why you shouldn’t give your house to your adult children
And: Money mistakes to avoid if you remarry later in life
More: Should you create a Medicaid trust?
Barron’s: Five Killer Mistakes Trust Lawyers Make
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