Four Reasons to Consider a Trust No Matter Your Net Worth

In the context of estate planning (Will, Power of Attorney, etc.) what do you think of when you hear the word “trust”?

For many, the word conjures thoughts of the super rich, “trust fund babies,” complex legal structures, maybe even tax avoidance. That’s exactly how I thought of trusts before becoming a financial advisor. They are widely misunderstood and, I would argue, just as widely underused. Many dismiss them without fully understanding their usefulness.

Without further ado, here are four reasons to consider a trust no matter your net worth.

You avoid probate

It’s important to understand the difference between your estate and your probate estate. The former is your entire net worth when you pass away—brokerage accounts, IRAs and 401(k)s, real estate, life insurance policies, automobiles, checking accounts, etc. Anything you own, either in part or in whole, will be part of your estate.

Your probate estate refers to your assets that will pass through the probate court. An asset that has a named beneficiary, think IRA or life insurance, will avoid probate. So might a jointly owned asset, like a home you own with your spouse. The beneficiary designation and the joint ownership allow the assets to pass easily and relatively quickly to the heir or co-owner. Anything lacking joint ownership or a beneficiary may pass through the probate courts where it can be tied up for anywhere from 6 months to a year; longer if the estate is contested. In addition to this inconvenience, the probate process can be costly, with thousands of dollars being paid to the Court instead of your loved ones.

Ideally, you want as few of your assets as possible to be a part of your probate estate to avoid delays and cost. This is especially true when it comes to a solely-owned business. (More on that below.) Incorporating a trust as part of your estate plan can help you divert your assets away from the probate courts and to your family members.

You maintain privacy

Another benefit of a trust is privacy. It’s not widely understood that your probate estate is public record. That’s right: the value of your home, brokerage accounts, checking accounts, who inherits your wealth, the name of your executors, the value of your business, all will become public record if allowed to pass through the probate courts. In the age of identity theft, this is something to avoid.

Depending on your views on privacy, this can be a minor or major inconvenience. But as a business owner the lack of privacy creates competing interests. Here’s how.

For the purposes of your estate, it benefits you to value your business as low as possible to avoid any potential estate taxes and probate fees. Yet, if your heir or surviving spouse plans to sell the business, it’s in their best interest to receive top-dollar. A savvy buyer will think to look through probate records in the hope the business passed through probate and was given a low valuation. If that’s the case, now your spouse or your heirs are arguing against a valuation that they, or someone close to them, put before the courts.

Another potential issue is that business valuations are expensive, easily in the $10,000-15,000 range.

To the extent that your assets are owned by a trust, they will not be reported to the Court nor become public record. No one will know who your beneficiaries are, what they stand to receive from your estate or when and under what conditions they will receive their inheritance. In other words, a trust allows your personal affairs to remain private.

You have minor children

One of the worst estate planning moves you can make is to pass wealth directly to a minor child. If that occurs, the court will hold the funds in a “guardianship account” and the guardian must periodically report to the court how the funds are being utilized. There are also fees involved.

A better approach is to have your assets held in trust for the benefit of your child or children. You will name a trustee who is responsible for ensuring your wishes, as laid out in the terms of the trust, are followed and that the funds are used wisely. Typically, trusts of this nature allow money to be used to support the child in their “normal” lifestyle, pay for college, purchase their first car, maybe even make a down-payment on a house, etc.

Depending on the size of your estate, you may not want your heirs to have full access as soon as they reach legal adulthood, either. Most trusts I see will slowly turn control of the assets over to the child at certain ages, say 25% at age 25, 33% at 30, 50% at 35, and 100% at 40. This can ensure that if your child is foolish with the first distribution, they can learn from the mistake without having spent their entire inheritance.

Relatedly, if you don’t have children, consider establishing a trust to hold funds for your parents in the event you predecease them. Elder financial abuse is becoming more common so having a trustee in place to help your parents make wise decisions, particularly if their mental capacity is diminished, can be in their best interests.

Protection from…

The final reason to consider a trust is that it offers three important kinds of protection.

First, it can protect the wealth you pass to your child from being divided in a divorce. Because a properly structured trust is its own separate entity, the assets held within it will not be included in a divorce.

Second, it offers protection from creditors. If your child is in an accident where they are at fault, or their business fails, creditors cannot access funds within the trust.

Third, it protects children who may not be financially savvy from squandering what you spent a lifetime accruing. A trustee of your choosing can help ensure funds are used wisely and for legitimate purposes.

In closing

First, understand that estate laws vary by state so what works here in North Carolina may not work in Massachusetts, for example. Be sure you work with a local estate attorney who knows the laws of your home state.

Second, be sure to go the extra mile and update beneficiary designations and account ownership under the direction of your estate attorney and financial advisor. Too often we see elaborate estate plans that lack coordination with account titling or beneficiary designations.

Third, understand the difference between a testamentary trust, which is created by your will and only at your passing, and a revocable living trust, which is created during your lifetime. The former offers many of the same benefits as the latter but does not offer privacy or probate avoidance.

No one likes to think about their estate plan; it’s often the hardest item to get our clients to take action on. The importance of it, however, cannot be overstated.

A key component of your estate plan is a trust. Utilized properly, it can help you avoid the probate courts, maintain privacy, provide for your minor children (or aging parents!), and protect your wealth from being divided, seized, or taken for granted.

Please get in touch with us if you want to discuss this in more detail or need a referral to one of our trusted estate attorneys.

 

Ryan Smith
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Born and raised on the North Shore of Massachusetts, I moved to Raleigh in 2011 to marry my wife, Emily. We have two kids, Jack and Gwen, and are members of Church of the Apostles in North Raleigh. I have been a Wealth Advisor since 2005 and earned a Master’s of Science in Financial Planning from Bentley University. Soon thereafter I became a CFP® professional and received my Retirement Income Certified Professional® designation in 2015.