We've all heard about trusts, yet they remain the black box of the financial planning world. Ask any financial planner, "Do I need a trust?" and you will never, ever, ever get a short answer....ever.
Trusts are simply financial agreements people make to allow another person to hold assets for the benefit of the beneficiary. Broadly defined, they are a legal tool to be custom made for your unique situation. Just like a skilled mechanic will have a workshop full of many different types of tools, your attorney can help you create many types of trusts to solve your estate planning needs.
Here are 4 reasons why you may need a trust.
1. You Have Minor Children: If you have minor children still living at home, you need a trust. Most people have written in their will if something happens to them, their children will equally receive all their wealth. If you have minor children, that can't happen because they are not adults. You should establish a trust to receive all the wealth in your estate. You also name a trustee to manage the trust wealth for the benefit of your children. The trustee's responsibility is to pay for the needs of the children out of the trust assets until the children reach an age where they can manage their share of the wealth themselves. You can decide the age(s) when the trust pays out to the children. Depending on the potential size of the trust and number of children, you may want to write into the trust language to delay the distribution of the trust assets until the children are mature and can handle the responsibility of their share of the trust wealth. It may be prudent to delay distribution until the children reach the age of 30 or older. I like the idea of delaying distribution to the children to receive 1/3 at age 25, 1/3 at age 30, and the final amount at age 35. I like this because at age 25 your children will probably be in the process of establishing a home and could use some of the money as a down payment on a first home. Then waiting until age 30 and 35 for the rest of the distribution gives them some time to continue to mature and make better decisions when they receive their share.
2. You Prefer Privacy: Financial advisors will typically mention how using a trust avoids probate. Probate is the legal process through which a person's estate is settled via their will. It is a public process through the courts. Anyone can visit the local courthouse and look up the court records regarding the probate courts and see exactly what wealth transferred via your will. If the idea of someone looking up the court records on how much was in your estate and who received the inheritance causes concern, then you should consider establishing a trust. Wealth owned by a trust transfers to the trust beneficiaries outside the probate process. Using a trust is private, only the trustee knows how much is in the trust and who the beneficiaries are that receive wealth from the trust. There is a cost to this privacy. Trusts cost more for a lawyer to create, and there is more complexity because you need to title your assets to be owned by the trust. A financial advisor can help guide you through this process. It is not difficult once you know what you need to do. If privacy is a concern, trusts can be very useful.
3. You Own Property in Another State: If you own real estate in more than one state, you should investigate having a trust. As previously mentioned, without a trust your will must go through a process called probate. The probate process must be completed for assets owned in each state. Therefore, if you own real estate in a state other than the state where you live, your personal representative would need to open a probate proceeding in that state also. This is called ancillary probate. Having multiple probate proceeding going on in separate states is time consuming and expensive for your estate. Having a trust own your property located in another state allows your personal representative to avoid the need to go through probate in another state.
4. You Have a Special Family Situation: Families in which the children face unique issues should consider a trust. Examples include children with special needs, physical limitations, mental, and emotional concerns. Also, if children struggle with addictions a trust could be the answer to protect them and their future security. If you have a child with special needs, a special needs trust can help provide for the child's needs in the future. It is best to choose an attorney who specializes in creating special needs trusts as they will have the breadth of experience needed to best handle your situation. If your concern is your child struggles with emotional challenges or addictions, then setting up a trust in which you choose a trustee to make decisions on their behalf is a good idea. In addition, delaying the distribution to children struggling with emotional problems or addictions gives them time to seek treatment or mature to better handle the responsibility of receiving wealth.
These 4 reasons are usually the most common when people decide to use a trust. However, this only scratches the surface of the many ways in which trusts can be used as a tool to accomplish your goals in transferring your wealth to your heirs. If you are thinking you may need a trust, call your financial advisor or attorney to explore your potential need for a trust. If you do not have an attorney, the Planned Giving office of One Mission Society is here to help. If you have any questions, please feel free to call us anytime. No strings, no cost. We're here to serve.
* Please note that Jay Dunnuck is not an attorney and any recommendations written in this post are for example use only. Please consult with an estate planning attorney for questions about your unique situation.