Do I need a trust?
Whether you’re in or nearing retirement, or you just want to make sure your family is well taken care of in the event of an emergency – you might be wondering whether or not you need a trust. The truth is, 60% of Americans don’t have their necessary estate planning documents put together. A trust is, all too often, viewed as something “extra” to have – which means even fewer people have one set up to protect their assets and pass on their wealth.
As you get started creating your estate plan, you may be wondering whether or not a trust is right for you. Let’s talk about what a trust is, exactly, and whether or not it might be a good fit for your family’s estate planning needs.
What is a Trust?
A trust is, at its core, an arrangement that lets a third-party hold your assets for you – and distribute them to beneficiaries. Many people wonder whether or not they actually need a trust, because a will is a much more common form of estate planning. However, trusts have several unique benefits that protect your assets and your heirs:
You can pass on assets quickly with a trust, as they often are able to avoid probate
Assets in a trust can usually be passed on more privately than a will, which can be subject to public questioning
There are a wide variety of trusts, which means you can tailor them to your needs depending on the one you select
Your trust assets can be professionally managed
You may have an opportunity to reduce tax liabilities and costs when your assets are in a trust
What’s the Difference Between a Trust and a Will?
Now, you may be asking:
This all sounds great – but isn’t that what a will is for?
The biggest difference between a trust and a will is that a will only becomes valid after you die. Your will directs your assets after you pass away to your various heirs. A trust, on the other hand, can start distributing your assets before you pass away, in the event of an emergency where you may pass away as a result, or after the fact.
A will is a legal document that sets out “rules” for how you want your assets divided, and it also assigns legal counsel to direct the distribution of those assets. Trusts act a little bit differently. When you title your assets in a trust, your “trustee” (one or more individuals or an institution of your choosing) holds your assets legally until they’re ready to be distributed to your various beneficiaries.
It’s also important to note that a will can pass through probate. A trust, on the other hand, doesn’t pass through probate. All of the assets held in your trust circumnavigates probate, meaning that the distribution of your assets doesn’t need to go through the court. This sometimes means that your relatives receive your assets more quickly. And more privately.
Different Types of Trusts
There are several different types of trusts, and each serves a different purpose. For the most part, they can be divided into a few different
Revocable trust (living trust).
A revocable trust, sometimes called a living trust, gives you the flexibility of passing on assets during your lifetime. You can also alter or dissolve a revocable trust. Usually, revocable trusts stay out of probate, but don’t avoid taxation.
An irrevocable trust can’t be altered or dissolved. Once it’s set up, it’s set in stone. People who set up irrevocable trusts are usually after their tax benefits – they can help protect your assets against estate taxes, as well as avoid probate.
Do You Need a Trust?
Trusts can be a useful estate planning tool, but they’re not right for everyone. A trust may be a fit for you if you have a significant amount of assets to pass on, or you want to start passing assets on while you’re still alive (while avoiding certain taxes). However, it ultimately depends on your unique situation and what you’re trying to accomplish.
Sometimes, a trust makes sense if you have specific assets that you want to avoid probate. Other times, a trust is a logical next step if you have adult children who live at home, or are a caretaker for a child, relative, or parent who has disabilities – and would need continued financial assistance ASAP in the event of an emergency, or your death.
Scott Fields from Fields Law, PC, says:
Property in a trust is not available to most creditors (Medicare/Medicaid is a big exception), either during your lifetime or after you die. Therefore, it is a good way to preserve assets of an estate for the heirs/beneficiaries. It’s also a good way to preserve significant assets to someone who may be sued a lot, such as doctors and lawyers.
A revocable trust can allow the current owner of the property to maintain full control of the assets once they’re in the trust. This includes living in and selling property, changing investments, cashing out CDs, etc.
Also, it’s still a good idea to have a will, in order to properly deal with assets that aren’t put into the trust. This includes money in personal bank accounts, furniture, etc.
Finally, people should make sure to actually transfer the assets into the trust after signing the document. I’ve dealt with several estates that paid a lot for a living trust and then never deeded the house into the trust. So the trust was essentially worthless.
If you need help determining whether or not a trust is the right fit for you, speaking with a fee-only financial planner, or an estate planning attorney, can help. Schedule a call with me today to learn more.