Do I really need a Trust?
By: David E. Peterson, Esq.
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Do I really need a Trust?
Estate planning attorneys love trusts. Of course we do. They are the most flexible and powerful tool in our tool kit. Trusts can mean the difference between a squandered inheritance, and a multigenerational legacy. Trusts can save thousands, or even millions of dollars on taxes. But should everyone have trust? Of course not. It has to make sense for the client, and clients come from a wide variety of scenarios.
If you’re reading this blog, then you may have been asking yourself, “Do I really need a trust?”
The best way to decide whether you need a trust, is to understand the reasons that people choose to have them. There are three main reasons why people establish trusts in their estate planning.
The first reason that people establish trusts is to avoid probate. Without a trust, any property that you own individually, without a beneficiary designation, passes according to your will. If you don’t have a will, then it passes according to the default rules, called intestacy. Whether you have a will or are intestate, someone will need to petition the Probate Court for permission to access and dispose of your assets.
The process of petitioning the court for authority to administer your estate is called Probate. It generally takes anywhere from a few weeks to a few months, and of course there are legal, court, and administrative fees involved. Unlike some lawyers, I won’t try to scare you out of probate. It’s usually not that bad, unless your family is prone to conflict.. But probate is easily avoided by placing assets into your trust during your lifetime. Whatever is in your trust, pases according to the trust, rather than according to your will or intestacy.
The second reason that people establish trusts is to reduce or eliminate estate taxes. The estate tax is a tax based on the total value of your assets upon your death. There are federal and state estate taxes, and the Massachusetts estate tax typically applies to estates with a value of more than $1 million. With trusts, a married couple can pass up to $2 million before the estate tax kicks in. For a $1.1 million estate, this saves around $40,000. For a $2 million estate, this saves around $100,000 of estate taxes.
Take a moment to quickly tally up your home equity, investment accounts, money in the bank, life insurance benefits, and everything else. Is it more than $1 million? Is it likely to be when you die? If so, and if you’re married, then the trusts in your estate plan will easily pay for themselves several times over.
The third reason that people establish trusts is to protect their beneficiaries from financial liabilities. Do any of your children or grandchildren have issues with drugs, alcohol, or gambling? If you leave them an inheritance through your will, they get to decide how to use that money.
Even if they don’t have specific addictive tendencies, are your beneficiaries great at managing their finances? Do they have experience with significant sums of money? Do they have spouses who will pressure them to spend it on expensive trivialities, or acquaintances looking for someone to invest in the latest snake oil fad? What if your beneficiaries are children? Without a trust they have full control over their inheritance upon their eighteenth birthday. Were you financially responsible at eighteen?
When an inheritance is retained within a trust, you can select a trusted person to serve as trustee and oversee the inheritance. The trustee can make sure that the money is used for the right purpose, according to your wishes. And while the trust is in place, the inheritance is protected from your beneficiaries’ lawsuits, creditors, divorces, immaturity, or personal vices.
If any of these concerns resonate with you, you should seriously consider establishing a trust as part of your estate plan.