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Trusts are often spoken of as a way to eliminate or reduce the tax burden on an estate. Now that there is a Republican president in office and Republicans control congress, many people hope that the estate tax will be repealed. If that happens, are there still benefits of trusts as part of an estate plan?
The answer is an emphatic “yes.” This is so for several reasons. First off, most of us are not subject to federal estate tax, which only applies to estates over $5.49 million as of 2017 (double that for married couples). If you’re in the one percent of Americans in this category, congratulations—and chances are you are already working with an estate planning attorney to manage estate tax issues.
Although certain types of trusts can reduce taxes, that is not the sole, or even the primary, purpose of most trusts. Living trusts are the most common type of trust used in estate planning, and they have no impact on estate tax. However, trusts do have a variety of important benefits that won’t be affected by any changes in estate tax law.
Benefits of Trusts
Probate Avoidance
Most people who create a trust as part of their estate plan do so for one primary reason: to avoid probate. Probate is the court-supervised process of administering a deceased person’s estate. Most states have made the process simpler than it used to be, but it still has the potential to be drawn-out and costly—not what the surviving family needs while they’re trying to grieve and move forward. To begin the probate process, the will must be filed with the court and an executor appointed, and heirs, including spouse and children, may not be able to access estate funds until that happens.
If the deceased had property in multiple states, a trust makes even more sense. Real estate owned in the deceased’s sole name must be probated in the jurisdiction in which is located. This means the estate of someone who owned a modest home in Michigan, a vacation cottage in Indiana, and a timeshare in Florida could have to go through three separate probate proceedings.
The assets in the trust completely bypass the probate process.
By contrast, with a trust, the beneficiaries the deceased named when creating the trust document can receive funds from the trust immediately. The assets in the trust completely bypass the probate process. Depending on the terms of the trust, the successor trustee may manage assets in the trust for a period of time for the benefit of the beneficiaries, or may simply distribute them.
Avoiding probate also protects privacy. Many people don’t realize that probate files are a matter of public record. Trust documents, on the other hand, are not filed with the court, and thus remain private.
Maintaining Control Over Assets
If you fear that your heirs or beneficiaries might not know how to manage the assets you leave them, a trust may be a much better option than leaving them the assets outright. So long as your heirs are legal adults, they have complete dominion over their inheritance. A trust, however, allows you to specify how and when those assets are used and distributed.
Even if you are not concerned that your heirs will squander their inheritance, a trust allows you to reward or incentivize certain behavior. For instance, you can provide for distributions to heirs at milestones such as finishing college or getting married.
Avoiding Conservatorship
In the event you become unable to manage your own financial affairs, who will take care of them for you? People frequently become incapacitated by a sudden illness or accident, or by dementia. If that happens and you do not have a trust or power of attorney in place, your loved ones will need to go to court to gain a conservatorship (similar to a guardianship, but refers to your financial matters). This can be a cumbersome and time consuming process.
If you do have a trust that provides for a successor trustee in the event of your incapacity, that trustee can step seamlessly into your shoes and take care of your financial business. You should obviously choose someone you trust completely for this role, due to the control they will have over your assets.
Protecting Your Children’s Inheritance from Creditors or Divorce
Adult children often don’t like to burden their parents with their struggles, whether with debt or marital problems, so you may not know everything that is going on with them. If your children wind up owing money to a judgment creditor, or to an ex-spouse in a divorce, the money you leave to them could be taken by someone you never intended to have it.
If you have a properly structured trust, you can place the assets outside the reach of your children’s creditors or ex-spouses.
However, if you have a properly structured trust, you can place the assets outside the reach of creditors or ex-spouses. The words “properly structured” are key here; make sure your attorney knows that you want the trust for protection from creditors.
Protecting a Loved One with Special Needs
If you have a child with special needs who will need financial support after your passing, you will want to create a specific type of trust called a special needs trust or supplemental needs trust for their benefit. A properly structured special needs trust will allow your loved one to have financial support without jeopardizing eligibility benefits, such as Medicaid or housing assistance, that they may need from the government.
In sum, no matter what happens to the estate tax, the utility of trusts is not going to change. Depending on your needs, various types of trusts may prove to be essential components of your estate plan.
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