Commentary: When does it make sense to add a trust to your estate plan?
When thinking of the hierarchy of estate planning documents, the two that are likely to be on top are wills and trusts. A will is a more basic document that outlines who will receive your assets when you die and may name guardians if you have young children.
Trusts are more sophisticated legal documents that hold assets on behalf of a beneficiary or beneficiaries. How do you know when it makes sense to add a trust to your estate plan? The following four considerations will help you determine whether one is advantageous for you.
If you only have a will, a portion of your estate is likely to go through probate. Probate is the process of distributing your assets after you pass, and it can be both expensive and time-consuming. Additionally, probate is a public process, meaning that anyone can go to the courthouse and look at the assets that you had.
If you have a lot of assets that would be subject to probate (assets with payable on death/transfer on death designations, jointly owned assets and assets with beneficiary designations are usually exempt from probate), putting them inside of a trust can preserve your privacy.
Owning Property in Multiple States
Let's say you own a home here in Minnesota, have a cabin in Wisconsin and own hunting land in South Dakota. Situations like these can become complex when your estate is administered. Without a trust, you'll likely have to go through probate in each state where the real estate is held, which isn't ideal.
Implementing a trust can allow you to set rules regarding how and when your heirs receive their inheritance. These rules can take a couple of different forms. One option may be to designate specific purposes that trustees can use assets (e.g., for college or for a home). You can also make age-based rules (e.g., a trustee will receive 25 percent of their inheritance at age 30, 25 percent at age 40 and the remaining 50 percent at age 50). This helps you to better ensure that your legacy is utilized in a way that reflects your vision for it.
Many people would like to leave a portion of their estate to a charity or charities. Trusts can help you give to charity in a more efficient manner. One option, the charitable remainder trust (CRT), is funded while you are still alive. During your lifetime, the CRT provides you or a specified beneficiary with an annual income stream. After a fixed amount of time or once you pass, the remainder of the trust goes to a charity of your choice. This allows you to get an immediate tax deduction today, receive a stream of income from the trust during your lifetime and ensure you'll leave behind a philanthropic legacy.
Trusts are more expensive than wills to set up, and they can be an administrative hassle. But if you found yourself desiring any of the four considerations we laid out, then you'll probably find those costs to be a small price to pay for the ultimate value the trust will provide you and your loved ones.
Bruce Helmer and Peg Webb are financial advisers at Wealth Enhancement Group and co-hosts of "Your Money" on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at firstname.lastname@example.org. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.