Many Americans understand the importance of estate planning, yet an alarming percentage of adults do not have arrangements in place. According to a 2019 survey, 51% of people believe having an estate plan is necessary, but only 40% have implemented one. If you’re one of the people who has put off this important task, it might be time to start weighing your options.
Here are some helpful insights about trusts, who they benefit, and why you may want to make them an integral part of your estate plan.
What Are Trusts?
Trusts are legal documents you set in place to protect and control all of your assets. While some people may associate trusts with ultra-wealthy families, this stereotype is often untrue. Trusts are for people interested in an efficient way to control their assets after death or in case of incapacitation. They can also help individuals caring for those depending on you, such as minors, children with special needs, or even family pets.
Types of Trusts
If you decide to incorporate a trust into your estate plan, the next decision to make is the kind of trust(s) you wish to use. There are four main types of trusts, although these can be broken down further into smaller, more detailed categories.
The primary types of trusts include:
- Revocable trusts
- Irrevocable trusts
- Living trusts
- Will trusts
Just as they sound, revocable trusts can be altered and amended after creation, while irrevocable trusts cannot. And while a living trust is established while the individual is still living, a will trust is created at or after death, based on the individual’s will.
Top Three Benefits of Establishing a Trust
#1: Tax Efficiency
For some couples, establishing a revocable trust may help in minimizing estate tax burdens. With the recent 2018 Tax Cuts and Job Acts, federal estate taxes will only be triggered if an individual’s accumulated assets equal $11.2 million or more, or a combined total of $22.4 million for couples. Couples with a high accumulation of wealth and assets may want to work with their legal and financial professionals to create trusts that help shelter the remaining spouse from estate tax burdens after the passing of their loved one.
In December 2019, the government passed the SECURE Act, which affected certain aspects of retirement savings, distributions, withdrawals, and estate planning. Previously, non-spousal beneficiaries of the deceased’s IRA could stretch distributions out over the rest of their estimated lifespan. But with recent changes enacted, the account must be distributed over ten years. Exceptions include those who are disabled or chronically ill, less than ten years younger than the deceased, or under the age of 18.
As far as tax efficiency, this shorter distribution period can mean a more significant tax burden to your beneficiaries, with higher yearly withdrawals required to meet the 10-year requirement. If you previously made a trust the beneficiary of your IRA, you may want to revisit the terms of the trust with your financial advisor to make sure it’s still relevant with these recent changes. With certain types of trusts, this setup could potentially help non-spousal beneficiaries (such as children or grandchildren) bypass the 10-year rule, thus creating more tax-beneficial distributions.
#2: Avoid Probate
If your loved ones are left with only a will after your passing, the will must be sent through the state’s probate process. This means the contents of the will become public record, and your heirs may be delayed in receiving their inheritance. Additionally, probate can be an expensive and burdensome process to put on your beneficiaries. In establishing a trust, you can help your loved ones avoid the probate process. This can mean more privacy and less delay in fulfilling your final wishes.
#3: Protect Your Estate
Simply put, trusts can help you protect your estate. When done right, a trust can determine who gets what and how things are cared for once you’re gone. Neglecting to provide instructions like these mean your biggest assets could end up in the wrong hands. Instead, creating a trust allows you to pass along what you have to whomever you want, including your children, grandchildren, charitable organizations, even your pets.
Disadvantages of Establishing Trusts
While there’s potential to benefit significantly from having trusts as a part of your estate plan, there are a few considerations to make before establishing a trust. Most of the advantages listed above are only effective if a trust has been established correctly. And these are often complex documents, especially when compared to the simplicity of a will.
Any number of small errors could negate the benefits your beneficiaries were intended to receive. Because of this, it is recommended that you seek legal help if you decide to establish a trust. A professional can help you understand your options and work to maximize the benefits. However, this means that creating a trust can come with an upfront cost, as well as ongoing costs for maintenance, revisions, and retitling of assets.
Whether estate planning is a priority or it’s been at the bottom of your to-do list, you may want to consider if establishing a trust could benefit you, your estate, and your loved ones.
Erickson Braund is the Founder and Chief Financial Officer at Black Walnut Wealth Management. He is a Certified Financial Planner®️ professional and a Chartered Retirement Planning Counselor®️. Eric brings over 20 years of experience working with high net-worth individuals and families, helping them achieve their goals of protecting and growing their wealth for retirement and for generations to come. Because Eric is a CFP®️ professional, he adheres to high ethical standards and engages in at least 30 hours of approved continuing education in the financial industry each year.
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