Is a will sufficient for your estate, or should you consider a trust? Before addressing this question, let's review trusts and what they do.
A trust transfers legal title to property to a trustee, who manages the assets of that trust during your lifetime (if it is a living trust) and distributes or manages the assets for your beneficiaries after your death, according to your wishes. Trustees may be people or companies.
Revocable trusts allow you to change your mind and revoke the trust at anytime while you are still competent. The majority of trusts are living revocable trusts, with the creator as trustee to retain control of assets. Revocable trusts are primarily created to avoid probate.
Irrevocable trusts make permanent changes in asset ownership, and are used to shield assets from estate taxes. Revocable trusts are still subject to estate taxes, since the change in asset ownership is not permanent. Read our guide to Revocable vs. Irrevocable Trusts for a more in-depth look at the differences.
For many people, the cost of setting up and administrating a trust is not worth the benefits, compared to a will. Others will decide that a trust is worth the cost (typically several thousand dollars to set up, plus ongoing administrative costs). Some primary decision factors are:
- Age/Health – For most married, middle-aged people, a will is generally sufficient. However, as you get older, you may be more concerned about potential incapacitation from accidents, Alzheimer's or other cognitive problems. Setting up a trust can ensure your affairs are managed properly if you are no longer capable.
- Wealth – Generally speaking, the more total wealth you have, the more a trust makes sense, especially if you are in the multi-million dollar ranges where estate taxes apply and irrevocable trusts are useful. Below that range, your decision may depend on where you live.
Most jointly owned assets can pass to spouses with minimal probate concerns, especially if your estate is relatively small – and the definition of small varies by state. Sometimes property and other valuable assets are excluded, allowing estates approaching $500,000 to be considered small.
- Assets – Do you have large assets that you want to protect, such as significant real estate holdings, a small business, or property in another state? A trust can ensure a smooth transfer and/or continued management of these assets.
- Privacy – Probate processes are public record, thus going through probate allows anyone to know what assets you hold. If want to keep your assets private, a trust is the way to go.
- Complicated Family Situations – Multiple marriages, stepchildren, and other extended family issues can make the probate process difficult. You can clarify this through trusts that designate different beneficiaries than your own direct descendants.
However, if you are setting up the trust for these reasons, it is not wise to make family members sole trustees – that is just asking for trouble. Find an objective professional to be your primary trustee, and add a family member as co-trustee if you choose.
- Specific Directives – There are trusts for specific reasons, such as a generation-skipping trust for grandchildren, trusts to pay for college educations, to manage your retirement accounts after death, and many other reasons.
In general, the question is: do you have assets or situations that make transfer of your assets upon your death difficult or costly? If so, you should at least consider a trust.
These are only suggestions; it is wise to do your own research and see if a trust is right for you. Do not hesitate to contact a financial planner for detailed advice regarding your situation.