To Trust or Not To Trust
August 23, 2019 - A frequent question we hear from new clients is, “Should I have a trust?” The answer is, “It depends.” Let’s cover some of the reasons you may want to include a trust in your estate planning.
First, there are different types of trusts: mostly, revocable (living or inter vivos), vs. irrevocable trusts. This article will cover revocable trusts.
Revocable trusts let you add and remove trust assets any time. That is, you can freely revoke the decision you made to put assets in the trust. Think of a checking account titled to your revocable trust. Every time you write a check, you are revoking your decision to put those funds in the trust.
Revocable trusts are non-events for income tax purposes. To the IRS, you are your trust, and your trust is you. For estate planning, revocable trusts offer several benefits:
Control: With a will, your executor must distribute your estate to your beneficiaries within a reasonable period after you pass – usually within a couple years. With a trust, you can better manage the distributions. Say your child is 21, but not so wise with their financial affairs. You may want a trustee to manage the inheritance until your child reaches age 35.
Simplicity: Your trust outlives you, to dictate the ongoing terms of your estate settlement. This means your executor can avoid “probate,” which is when a local court (or courts, if assets are in multiple states) administers and oversees the process of gathering and distributing your assets to creditors and heirs.
Costs: Avoiding probate means avoiding probate costs.
Privacy: A trust is private, while a will becomes a public record during the probate process. Without a trust, for example, a disgruntled heir can see who got what.
Trusts aren’t for everyone. Their main disadvantage is the cost and effort involved in establishing and funding them. So, if you are going to set up a trust, please hire a reputable estate-planning attorney to assist. A cheaply done, poorly structured trust can be far worse than none at all. Also, don’t forget to retitle assets into your trust as appropriate. Generally speaking, if an asset isn’t in the trust, it doesn’t receive any of the benefits described above.
Written by John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™