"You need a trust!" may sound helpful, but it leaves out the important stuff: WHY you might need a trust. Never fear, I'm here to help.
For today, let’s focus on some of the top reasons that folks these days are using trusts. (Does saying "these days" make me sound old?) Whether you already have a trust agreement in place or have yet to execute one, it’s good to be reminded of why people opt to use a trust and in what situations a trust would be especially useful.
Luckily, there's no "one size fits all" here. Trusts serve different purposes, and here are five of them!
1. You have minor children.
Yep, this is a big one. One of the things parents like myself love about using a trust is it provides extra protection to children. I’m talking about financial management–something kids cannot, in their young age, take on.
With a trust, you’re able to limit your children’s access to their inheritance until they're mature enough to manage it themselves... or until it's time to fund their university studies, perhaps?
If it strikes your fancy, you can also choose to give them lifetime gifts! This does not only ensure that your kids regularly receive something (minimizes chances of mismanagement, too!), but it also helps reduce how much you will ordinarily pay for taxes. More for you to enjoy and give away–what a payoff!
2. You wish to cut down costs and avoid probate.
Trusts are an excellent way to set up your estate in a way that avoids probate. One of the downsides of executing a will (instead of a trust) is that your loved ones will have to go through the probate process. Avoiding probate (a costly and lengthy process!) through the use of a trust helps save your family big bucks and tons of time. For those with larger assets, a trust is also a great way to reduce or avoid estate taxes. (Yes, a trust can do this too!)
True, setting up a trust may involve higher upfront costs, but you are saving your family from many future expenses which can accompany other estate planning tools, such as a will. If you take these into account, getting a trust might just be is the more cost-efficient choice… especially with the help of a budget-friendly estate planning lawyer! ;)
3. You want to keep your estate private.
This reason is kind of a part 2 for the "avoiding probate" reason above. Why? Well.....
Those probate court proceedings are public in nature. During probate (and even after), supposedly personal information about your estate (what you own, how much your estate is, who you owed, whom you are going to donate to, etc.) will be accessible to anyone, everyone!
Not exactly ideal, huh?
With a trust (no probate needed!), personal details regarding your estate are kept private–as they should be.
Even if your personal circumstances don’t really call for the execution of a trust (we’ll discuss some of these specific circumstances later), the fact that you will be able to avoid the public nature of probate is more than a good enough reason to get one anyway.
4. You want to plan for incapacity.
Remember incapacity planning? Well, a trust is a game-changer (read: huge!) in taking precautionary measures in the event of temporary or permanent incapacity.
An example of a common incapacity planning tool (among many others–make sure to visit the linked blog above for a recap of these equally awesome planning instruments!) is the revocable living trust, which allows you to designate a trustee to manage your assets (savings, real estate investments, personal and other valued possessions) in the event that you are unable, or no longer able, to manage them yourself.
Fit and able? No problem–you don’t lose control over your properties even with a trust agreement in place.
Suddenly become incapacitated? No problem, too! Your designated trustee will take charge, but will act within the limits you provided in the agreement. Your hard-earned assets are dealt with in accordance with your wishes and preferences, as well as personal concerns and inhibitions.
5. You need protection against creditors.
In fact, one type of trust (because there are a number of different kinds–trusts serve different purposes, remember? ;) ) is referred to as an asset protection trust, precisely because it has the effect of protecting assets under it against debt satisfaction. (Quick disclaimer: I’m talking about an specific kind of trust in this section. Not all trusts function this way.)
Wondering how this happens exactly? Well, in essence, properties placed in a trust are technically not owned by the trustor anymore. The trust itself becomes the owner. In many trusts, you maintain control over the assets (such as in the revocable living trust we discussed above--this is the most common type of trust I draft). But in other kinds of trusts, specifically for certain asset protection arrangements, you are giving up control over trust assets. In this situation, the effect is creditors lose the right to go after these properties, too, as they’re only authorized to go after assets that the debtor himself/herself owns. (Asset protection extends to your beneficiary’s creditors, too, if any!)
Bonus Reason: Flexibility.
Yeah, I know I said 5. But I was feeling generous. Trusts are a legal document, and so they must be drafted and executed carefully to do what you need. But that doesn't mean they're not flexible--because this is actually one of their greatest strengths.
Trusts allow you to truly customize your estate plan. You can specify who, what, when, where, how, and why your assets are passed along to your beneficiaries. You specify who is in charge (and TONS of other options about how that person can act to manage your trust once you're gone). You can even name your trust whatever you want ("The Flying Purple People Eater Trust" is fair game). Fun times, huh? Some of the most common ways that individuals use this flexibility is for planning how to pass assets on to minor children. For example, some parents specify that a child receives a specific portion of their assets at certain ages (maybe 25, 30, and 35), but usually while still allowing that child to withdraw money for necessary school, mediical, or living expenses. Some parents may specify that their child is to receive an extra payout when they graduate college, get married, or buy a house. (Hmm, maybe I should do a fun blog post with some of the off-the-wall trust provisions I've seen or heard. Could be fun!).
The possibilities are so numerous I can't even get into them here. Like I said, flexible.
And there we have it–your top reasons to use a trust! Pretty amazing how this estate planning tool serves many different purposes, huh?
Ready to get one (or another one) yourself? This estate planning attorney’s ready to help!
Reach out or schedule a consultation. (Both free!) Can’t wait to chat and hear about you and any of your concerns about trusts and estate planning in general.
Until the next one,