When we help a client review their complete financial picture, one of the areas we always discuss is their estate plan. As part of that discussion, we often get the question “Should I/we have a trust?” Clients may ask because they have read an article that suggests they should have one, or they may have talked with a friend who has a trust as part of their plan. But like a lot of financial questions, there is no one-size-fits-all answer. A trust can be part of a well-designed estate plan, but not everyone needs one.
Let’s start by discussing what makes up a well-designed estate plan. A typical estate plan consists of a will, a living will, and a durable power of attorney. Your will is used to name the executor of your estate and to provide the details for how you want your assets distributed after death. The living will details your desires regarding medical treatment when you are not able to express your consent. The durable power of attorney gives someone you choose the power to act in your place if you become incapacitated. That person typically has the power to act on your behalf for financial, legal and medical responsibilities.
Types of Trusts
And sometimes you need a trust. There are several types of trusts, the most common of which is the living trust. The living trust, sometimes called a revocable trust, is a document that provides for your assets being placed in “trust” for your use during your lifetime and then transferred to your designated beneficiaries at your death. Trusts can be a powerful estate planning tool, but they also lead to increased attorney’s fees, so they are oversold at times.
So when should you have a trust? If your financial situation is straightforward, with minimum complexity, chances are you do not need one. The rest of this post will highlight a few situations where they can help. (For related reading, see: How a Revocable Living Trust Makes Your Executor's Job Easier.)
When You Need a Trust
Probably the most common use for living trusts is to avoid probate after your death. Assets that you place in the name of the trust will pass directly to your designated heirs. A will serves a similar purpose, but the assets that are distributed via a will must go through probate. Probate is the court-supervised process of distributing your assets to your heirs. Depending upon the assets you own, probate can be a costly and time-consuming process.
Another problem some people have with a will is they become part of the public record. Trusts remain private. We often hear stories about celebrities who have passed away and how their assets are distributed. Just recently there were news stories about the distribution of Michael Jackson’s and Prince’s estates. Michael Jackson died over 10 years ago! While you may not be a celebrity, the privacy argument can be a good reason to have a trust. (For related reading, see: One Year Later: How Much Is Prince Worth After His Death?)
Trusts and Second Marriages
There are more second marriages and blended families than ever before. If one or both spouses of a second marriage have children from their previous marriage, it can create some estate planning issues. For instance, the surviving spouse may have the ability to disinherit the children of the deceased spouse. A living trust can solve that problem. It can allow for lifetime benefits for the surviving spouse and make provisions for the children to ultimately receive the assets.
There are other more technical and complicated situations where a trust can be helpful. No matter the complexity of your financial situation, we always recommend that you meet with a qualified and experienced estate planning attorney to make sure you have the documents you need to handle your affairs in the way you want them to be handled. While nobody likes to talk about death and incapacity, it’s much better for you to do some estate planning and make the decisions while you can. If you don’t, the state you live in will have statutes in place to handle things for you. And you might not like their plan.
(For more from this author, see: Medicare Enrollment Part 1: When to Enroll.)