In Part II, we discussed Wills and the advantages and disadvantages of having a Will. This issue will focus on the second of four estate planning tools – a Trust, and the advantages and disadvantages of having a Trust as part of your estate plan.
What is a Trust?
A Trust, generally, is a legal entity that can hold title to property. There are three parties to a Trust agreement: the Trustmaker who creates the Trust, the Beneficiary who receives the benefit of the property held in the Trust, and the Trustee who manages the Trust. The property that is transferred to and held by the Trust becomes the Trust principal. If you create a Trust within your Will, it is called a Testamentary Trust. If you create a Trust while you are alive, it is called an inter vivos or Living Trust.
While you are alive, you usually will receive all the income of the Trust and as much of the principal as you request. Upon your death, the Trust assets are distributed to your Beneficiaries in accordance with your directions contained in the Trust agreement, or it can continue for specified purposes for a period of time.
The Advantages and Disadvantages of a Trust
The main advantages of a Living Trust:
- If you want or need to have someone else manage your property and pay your bills in case of illness or disability, the Living Trust is an ideal estate planning tool for you.
- Avoiding probate which can save time and money, especially if you own real estate in different states.
- Because a Living Trust is not filed in Court, its provisions are private. This differs from a Will, which must be filed with the Probate Court and becomes public.
- Reduction of delays in distribution of your property after you pass away.
- Continuity of management of your property after your death or incapacity/disability.
The main disadvantages of a Living Trust:
- There are usually more initial costs in setting up a Living Trust as compared to a Will because a Living Trusts generally requires more extensive, technical and complex drafting.
- “Funding”, which is the process of re-titling your assets in the name of your Living Trust, takes time.
- Administering the Trust can be expense depending on who is acting as Trustee.
Trust vs Will: Which is Right for You?
How do you know if you need a Trust instead of a simple Will? Many people assume that Revocable Living Trusts are only for the wealthy, but Revocable Living Trusts have benefits even for the average person. If your life or financial situation fits into one or more of these categories, then you should consider a Revocable Living Trust.
Planning for Disability
Regardless of your net worth, and particularly if any of your assets are titled solely in your name, then you should consider a Revocable Living Trust for disability planning to avoid court-supervised guardianship or conservatorship.
Estate Planning for Minor Beneficiaries
Parents with minor children and who have life insurance policies or retirement plans with high values should consider a Revocable Living Trust. In the event both parents die while the children are still minors, the insurance or retirement funds will be placed in the Trust for the benefit of the children instead of in a court-supervised guardianship or conservatorship.
Estate Planning for Singles
Anyone who is single and has assets titled solely in their name should consider a Revocable Living Trust to avoid court-supervised guardianship and the costs and hassles of probate.
Tax Planning for Married Couples
If you are married and the combined estates of you and your spouse exceed the Federal exemption of $3,500,000 or your state’s exemption ($1,000,000 for Maryland the Washington, DC), then you should consider establishing a Revocable Living Trusts to eliminate or avoid estate taxes.
If You Own Real Estate in More Than One State
If you own real estate in more than one state or outside of your home state, then you should consider a Revocable Living Trust to avoid multi-state probate.
I hope this information helped you better understand Trusts and how they fit into the estate planning process. Next, we’ll discuss another estate planning tool, Powers of Attorney and Advance Medical Directives. As always, if you have any questions about any aspect of estate planning, I invite you to contact me by phone (888-495-7289) or email.