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Should You Have a Trust for Your Estate Plan?


Trusts are a crucial part of estate planning, especially for people with substantial assets.

Trusts represent a valuable estate planning tool for just about anyone who wants to pass assets along to their heirs.

A trust is a legal structure for assets that encompasses instructions on exactly how and when to pass the assets to beneficiaries of the trust. It includes a grantor, a trustee and one or more beneficiaries. Trusts are a crucial part of estate planning, especially for people with substantial assets.

Why Would I Want a Trust?

Among the biggest benefits of a trust is that it allows you to transfer wealth smoothly, efficiently and privately to your heirs.

When you transfer assets to your beneficiaries via a will, rather than a trust, your estate is settled through probate, a process executed in state courts. Probate is a public, legal process that can throw a wrench into the settling of your estate. The disadvantages include:

  • Long Waits. Probate proceedings can last more than a year.
  • Expenses. Probate fees can add up quickly, even for the simplest case with no disputes between beneficiaries. Estimates put the sum of probate attorney fees and court fees at more than 4% of an estate's value.
  • Unwanted attention. Probate proceedings don’t take place in private. Your will turns into public record once it is in probate. Anyone who wishes to look at it can do so. That can mean an unwanted examination of your private affairs.

Having a trust eliminates those disadvantages. Once the grantor dies, it functions as a substitute for a will, enabling the estate to be closed quickly and smoothly without going through probate.

Revocable vs. Irrevocable Trusts

If you opt for a trust, the biggest question is whether to go for a revocable or an irrevocable trust.

With a revocable trust, you can eliminate or rewrite terms of the trust whenever you are so inclined. You can change the assets held in the trust, and you can change the beneficiaries. You can revoke the entire trust if you’d like.

An irrevocable trust, by contrast, can’t be changed. You can’t take property back that you’ve placed into it. You can't be the trustee and manage the trust's assets. You create the trust and then remove yourself forever.

Before you implement an irrevocable trust, you want to be sure you’re committed to the assets that are in the trust, the beneficiaries of the trust and the trustee.

Benefits of Revocable Trusts

The flexibility of revocable trusts makes them particularly attractive for people with fewer assets who don’t have to worry about estate taxes. Estates under $5.6 million for a single person and $11.2 million for a married couple are exempt from federal taxes.

Revocable trusts also provide protection should you become mentally or physically incapacitated. At that point, the assets in the trust can be managed by the trustee.

This means heirs don’t have to worry about getting court approval for conservatorship or guardianship over their loved one.

Benefits of Irrevocable Trusts

An irrevocable trust carries several legal and tax advantages. When you transfer assets into an irrevocable trust, you no longer own the assets. That means the assets are no longer part of your estate and aren’t subject to the estate tax. The fact that you no longer own the assets also protects them from creditors and lawsuits.

Your assets can be moved into an irrevocable trust in such a way that you won’t generate capital gains taxes, which isn’t the case with a revocable trust.

Irrevocable trusts also carry tax advantages for charitable donations. If the grantor puts assets into an irrevocable charitable trust while they are still alive, the grantor can take a charitable income tax deduction for those assets. If the assets aren’t transferred into the trust until after the grantor’s death, the estate will receive a charitable estate tax deduction.

Given the complexity of trusts, you should speak with a professional to discuss what kind of trust, if any, is appropriate for you and how you might go about establishing one. If you do establish one, you may also want the services of an estate attorney.

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