A common question when individuals come in for an estate plan is whether they need a trust. Typically, they read an article or heard from someone that trusts avoid probate, reduce taxes, protect assets, and do all these wonderful things, so they should have one too. Trusts have many benefits, but they are not right in every situation, especially since there may be simpler or less costly ways to achieve your goals. You must consider your total circumstances and objectives to determine whether you need a trust. Here are a few questions to get you started:
Should You Have a Revocable or Irrevocable Trust?
In any trust, property in the trust is held and managed by a trustee for the benefit of a beneficiary. However, with an irrevocable trust, generally, the person setting up the trust (the grantor) cannot terminate the trust once created as they could with a revocable trust. Usually, the purpose of an irrevocable trust is to minimize estate taxes or protect the assets for some purpose, such as Medicaid planning or other reasons. Assets in the irrevocable trust no longer belong to the grantor and would not be in the grantor’s estate at death. They are also insulated from creditors and considered separate property in divorce so they are excluded from equitable distribution and alimony calculations.
How Much Money Do You Have to Put into a Trust?
Once you transfer assets into an irrevocable trust, you don’t own them, so it is important to determine how much you can afford to put in the trust. Many people underestimate how much they will need as they age. Once you retire, you will have less income and possibly higher expenses for health care and other items. You also have to consider your intended lifestyle. Maybe your plan is to travel or move to an expensive gated community or buy a second home. Also, you should think about how long you may live. Are you in good health? What is your family’s health history and lifespan?
The point is to ensure you leave yourself a comfortable cushion and not transfer too much into a trust. Remember that while it may make you feel good to set aside money for your children and grandchildren, it’s also important to not end up relying on them for your care because you ran out of money.
Do You Have Enough Money to Justify Creating a Trust?
Generally, a trust is more economical if you have trust assets of $500,000+ per beneficiary, but there are exceptions. The reason for saying it is best to have over that amount is that there are costs associated with creating and managing a trust, including legal, trustee, and financial management fees; income taxes; and other expenses. If there aren’t significant assets in the trust, it may not be worth paying the extra money to support a trust, although there are some ways to save money. For example, if you are appointing a family member as trustee, he or she may be willing to waive compensation.
There is also the option to create a short-term trust, such as one that would last until the beneficiary reaches a certain age. In this way, the extra cost of maintaining a trust would only be for a limited time.
How Do You Decide Whether to Create a Trust?
Trusts are not one size fits all solutions. You should consult an experienced attorney who can help you develop a comprehensive estate plan that could include a trust in the appropriate circumstances. We work closely with clients to determine what options are best for them to achieve their goals and meet their needs. Contact us for a consultation.