Most people think of a will when they think of estate planning, and for some it is enough. If your financial and family situation is more complicated, a trust is a helpful additional tool that can protect you and your assets in life and death, potentially saving your family a drawn-out, expensive probate challenge over inheritances. Here's what you need to start thinking about, and the sooner the better.
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A living trust is a legal lifetime and death document — it helps you alive or dead. A trust allows you to say what you want done with your assets and to name a trustee, the person you want to manage assets if you can't, and who gets those assets when you die. There are several types of trusts, but the main two are revocable and irrevocable.
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A revocable trust can be amended or revoked at any time. "You can put assets in and take them out, you can amend or restate the trust, and you can revoke it. While you are alive, you have complete control over the assets," says Sherri M. Stinson, a lawyer in Palm Harbor, Florida. "Revocable trusts are best for people looking to retain control."
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An irrevocable trust is centered around asset protection and — as it sounds — can't be amended or changed once set by the creator, known as the grantor. "The main reason that people use these are for tax planning, creditor protection, and Medicaid planning. A grantor gives up a lot of control when he creates this sort of trust because he can no longer control the assets held by the trust," Stinson says.
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A trust is a powerful estate planning tool that should not be overlooked. There are many advantages to having one, but they aren't for everyone. If you aren't sure if you should have one, discuss your situation with an estate planning attorney. "Typically, living trusts are right for you if you own a lot of assets, have assets in more than one state, have minor children, or a complicated family situation," Stinson says.
The biggest advantage to having a trust is avoiding the legal process known as probate, which beneficiaries otherwise must go through to get assets you want them to have from your estate. "A properly funded trust generally doesn't require any interaction with the court," Stinson says. This allows a speedier process for beneficiaries after you die. It's also much less expensive, as heirs avoid court and lawyer fees associated with the probate process. "Your trustee can deal with your assets as directed by the terms of the trust without judicial intervention," Stinson says.
Another big reason to set up a trust: A trust keeps information out of public records by avoiding probate, reducing such risks as exposing your family to fraud and creditors.
Since information remains private when a trust is involved, it is much more likely that your wishes for assets will be carried out. A private trust won't invite upset heirs to contest your wishes in court, since probate and public records are avoided.
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You can be very specific in a trust about what you want done with your assets and when, including delaying their distribution. For example, if you have children or grandchildren, you can stipulate in a trust that they must be a certain age or reach a certain level of education before they get their inheritance. You can also protect your heirs from losing their inheritance to an ex-spouse or creditors.
Trusts are more expensive than wills, because much more goes into setting one up. For some people, a trust just doesn't make sense if you have a straightforward family situation, limited assets, and no children. "They can be expensive to set up relative to the value of the assets that you own," Stinson says.
Trusts take considerably more paperwork and record maintenance than a will, since all assets must be accounted for — and whatever's missed must go through probate. "A trust is intended to avoid probate. However, to do so, the trust must be properly funded. Funding means changing the ownership from you individually (or jointly, if it is a joint asset) to the name of the trust itself. The trust only controls trust assets," Stinson says.
The short answer: yes. Often assets are picked up that don't make it into a trust; a will helps define what happens to them. It is important to have a "pour-over will" so assets can be transferred into the name of the trust and its trustee can distribute them. "You should always have a will with a trust," Stinson says.
