Do You Need a Trust in Your Estate Plans?

Everyone should start estate planning in their early years because no one can count on being around tomorrow. Shutterstock

Two of the most common forms of protection for an estate are a will and a trust. Although everyone should have a will in their estate plans, not everyone will need a trust.

Everyone should start estate planning in their early years because no one can count on being around tomorrow. You may have people depending on you to provide for their daily needs. Creating a will and a trust will help take care of them, but make sure that they conform to the rules in your state, which will differ based on your location.

Having a trust offers several immediate benefits that you may not get with just a will. Among the benefits, you will be able to:

• Retain Control Over Assets

There are two basic types of trusts. A revocable trust enables you to retain control over assets in the trust, allowing you to add or remove them as needed and change beneficiaries. Once you put assets into an irrevocable trust, you can no longer control them.

• Avoid Probate Court

If your assets must go through probate court, they could get taxed at an interest rate as high as 40 percent. Taxes will reduce your assets considerably, giving your beneficiaries much less than you had hoped.

• Transfer Assets Faster

Most states require waiting about nine months or more before distributing any assets from a will. If the will is contested, it could be two or three years before your beneficiaries receive anything. Distribution of assets in a trust takes place much faster. Quite often, they may be able to escape taxes, too.

• Ensure Assets Go to the Right People

A trust can ensure that assets get distributed to the people you want to have them. With just a will, the court may decide for you, and your assets may be given to someone different. If you do not even have a will, the court may choose where some or all of it goes.

If you plan on disinheriting someone from your assets, a trust offers more protection than a will because they are much harder to contest. Trust documents are only effective if written carefully; an estate planning attorney should review them.

• Avoid Public Knowledge of the Distribution

When your will and assets go through probate court, all the proceeds and distributions are made public. In contrast, the details of what is distributed from a trust and to whom is kept secret. If it does not matter who sees the record, you do not need a trust for this purpose.

• Provide Specific Directions

Trust documents let you be very specific about how you want your assets distributed. You can put time frames, conditions, ages, and almost any instructions you wish to put into the documents.

• Protect Assets From Creditors

An irrevocable trust will protect your assets from creditors’ reach. Any assets in this type of trust are no longer under your control and are not part of your estate.

• Provide Directions If You Become Incapacitated

There is always the possibility that you could become incapacitated before you die. You can put specific instructions into your trust documents about how you want the money distributed for your care and your spouse and children. You can also add a provision for charitable contributions.

Besides the trust documents, you should create two more to ensure your wishes get fulfilled if you become incapacitated. They include a financial power of attorney and medical power of attorney. These documents appoint someone to handle your financial and medical decisions for you.

The authority given by these documents, SmartAsset says, ends when you become incapacitated. It means that the appointed individuals no longer have a say about what happens to your finances.

A durable power of attorney differs because it becomes effective after you become incapacitated. SeniorLiving says that without it, the court may appoint a conservator or guardian for you.

• Avoid Federal Estate Taxes

People who have a lot of money can reduce their federal estate taxes by putting money into a trust. This method is only valuable if you have more money than the Lifetime Gift Tax Exemption, which is $13.61 million for 2024.

Some Special Types of Trusts

• Grantor retained annuity trust (GRAT). A GRAT enables a grantor (the person creating the trust) to put assets into the trust, which puts a freeze on its value. The assets will not be appreciated while in the trust, which enables the beneficiaries to keep their taxes low.
• Intentionally defective grantor trust (IDGT). One trust that will reduce taxes for your beneficiaries is IDGT. WildomarProbateLaw says that this irrevocable trust enables the grantor to put funds into it without taxes, but they will pay taxes on all earnings of those assets. The beneficiaries do not pay any taxes when received because they grow tax-free.
• Spendthrift trust. The trustee has specific guidelines and some discretion as to how and when a beneficiary receives a distribution from assets.
• Charitable trust. It is an irrevocable trust that will donate to one or more trusts at specific times or under certain conditions.
• Qualified personal residence trust (QPRT). This irrevocable trust lets the grantor and spouse continue to live in a house given to their heirs.
• Qualified terminable interest property (QTIP) trust. Once created, the money in the trust will support the spouse. Any assets left in the trust will go to the beneficiaries of the first spouse.
• Special needs trust. This trust enables disabled or permanently dependent children to continue to be supported. Money from the trust will not prevent them from getting government help from Medicaid or Supplemental Security Income (SSI).

A trust can be conformed to meet nearly any specific need you have. Consult an estate planning attorney or one that specializes in wills and trusts to ensure it is set up correctly in your state.

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