When I meet with clients, I get asked this question all the time. In general, there are lots of great reasons for having a living trust, but trusts are not for everyone, and you will need to examine your personal situation to make sure that a trust makes sense for you and your family.
Is the Overall Size of My Estate a Factor?
Yes. The overall size of your estate is certainly a factor, as is the asset mix of the assets in your estate. However, there is no bright line threshold for determining when you need a trust. Although generally speaking, clients with larger estates are more inclined to consider trusts, trusts have benefits for modest estates too. As a result, the size of the estate is not the determinative fact. The best way to think about it is to weigh the pros and cons, or the benefits and costs, for your family.
Here Are Seven Benefits of a Trust
Below are seven benefits to having a revocable living trust. Not all of these benefits apply to everyone, but several of them may apply to you:
- A Trust May Reduce Estate Taxes. For larger estates, one of the benefits of a trust is to reduce estate taxes for your estate. Please note that this benefit does not impact as many people as it used to a few years ago to for two reasons. First, the estate tax applicable exclusion amount (i.e, exemption amount) is now $5.45 million, and many of my clients do not have estates that large. Second, with portability now being a permanent part of the estate tax landscape, married couples can now protect themselves up to $10.9 million before estate taxes are ever an issue.
- A Trust Avoids Probate. A properly funded revocable living trust can avoid a probate when the first spouse passes away and when the second spouse passes away. As compared to a probate, the administration of a trust is private and generally does not require court filings or court hearings. In addition, the administration of a trust is generally quicker and less costly in terms of legal fees and costs.
- A Trust Avoids the Need for a Conservatorship. A properly funded revocable living trust can also help you to avoid a conservatorship, or a “living” probate. When someone becomes incapacitated and they have no estate planning documents in place, a conservatorship proceeding is needed to appoint someone called a conservator to pay their bills and manage their assets. This requires going to court and can be a time-consuming and expensive proposition. A properly funded trust, on the other hand, allows someone to act on your behalf immediately in the event of an incapacity without the need to go to court.
- A Trust Works Better Than a Durable General Power of Attorney. Similarly, some people with durable general powers of attorney have found that a durable general power of attorney does not work as well as a living trust in the event of an incapacity. I have often had difficulty getting some banks or financial institutions to accept a perfectly valid Arizona durable general power of attorney. However, I have never had a difficulty getting a bank or financial institution to accept the validity of a trust.
- A Trust Provides More Flexible Distribution Provisions. As compared to a Will, a revocable living trust provides much more flexibility in drafting distribution provisions. Typically, a Will has a distribution plan that states that all bills are paid first and then distributions are made to the beneficiaries outright. In a trust, after the payment of all bills, the amounts to be distributed may be held in trust, distributed over time, or paid out in lump sums at certain times. Families can give the trustee as much discretion in making the distributions as they would like. Although wills may be drafted in such a way to include a testamentary trust to allow for such flexibility, the downside with a testamentary trust as compared to a revocable living trust is that the testamentary trust will often require a probate to establish the trust, something most families like to avoid.
- Trusts Can Provide Creditor Protection for Beneficiaries. As long as the trust has a certain provision in it referred to as a “spendthrift provision” and the trust has no mandatory distribution provisions requiring the trustee to make certain distributions to beneficiaries at certain times, then any assets held in trust for the benefit of a beneficiary will be protected from such beneficiary’s creditors. Of course, if the trust provides for any mandatory distributions, then any distributions out of the trust into the hands of the beneficiaries would be subject to creditor’s claims. Especially, when there are known issues with some of the beneficiaries (i.e., drug or alcohol addictions, bi-polar issues, or poor money management issues), a properly-drafted trust with a spendthrift provision can help to protect these beneficiaries from themselves and from their creditors.
- A Trust Deals Better with Special Needs Circumstances. Finally, in addition to the circumstances mentioned in Section 6 above, a trust also is the only vehicle that will work for an incapacitated person who is on governmental benefits. With properly drafted “special needs” language in a trust, parents of a special needs child can provide for the child after they are gone without causing the child to lose his or her governmental benefits in the process.
Are There Any Downsides to a Trust?
There are three downsides to a trust. First, a trust is generally more expensive than a will. Second, a trust is more complicated than a will. Finally, a trust requires some re-titling of assets into the trust after it is created, and a will does not. With that said, when most clients weigh the benefits vs. the downsides of a trust, they often come to the conclusion that the benefits outweigh the downsides.
Trusts are not for everyone, but for many families a trust provides several benefits for them in their estate planning documents. Every situation is unique though, so it is important to work through this decision about whether your family needs a trust with a qualified estate planning professional.
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Our firm has helped hundreds of families just like yours handle a wide variety of estate planning, business planning, probate, and elder law issues. When families or business owners are not getting along, we can also handle any disputes and litigation related to their businesses, wills, trusts, guardianships, or conservatorships. Please give me a call, so that I can help you work through these difficult issues with confidence.