Why a trust is a great estate-planning tool — even if you're not rich

  • By Sarah Max,
  • Barron's
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It’s never fun to think about how your worldly possessions will be distributed when you go to the great beyond, but consider the alternative: family feuding, unnecessary taxes, and probate. These problems and others can be avoided by setting up a trust.

“The perception is that trusts are for the very wealthy and that they cost a ton of money to set up,” says Daniel Routh, a certified financial planner with Exencial Wealth Advisors in Oklahoma City. “The reality is a trust can be a fantastic tool for the average person or couple because it simplifies things in the event of your death.”

Although there are dozens of types of trusts, the most common trust used for these purposes is a revocable living trust. Such a trust allows you — the grantor — to specify exactly how your estate will be distributed to your beneficiaries when you die, and in the process can avoid probate and heartache.

Probate — a legal process in which a will is deemed valid — can tie up property for months, and rack up attorney’s fees and court fees. Depending on your state and the complexity of your situation, probate can easily add up to 5% of the value of your estate.

There are some simple ways to avoid probate, including through joint property ownership, or payable-on-death transfers or accounts. “In most of the cases I’ve seen, however, a trust pays for itself multiple times over,” says Stash Graham is managing director of the Graham Capital Wealth Management in Washington, D.C.

The cost of setting up a trust will vary depending on where you live and the complexity of your situation, but “normally we see fees ranging from $1,500 to $3,000, and that is going to include the trust, a new will, medical derivatives, a power of attorney and the processing,” says Routh.

You’ll want to assign all of your probatable assets to the trust — everything from brokerage accounts and real estate, to jewelry, artwork and other valuables — and add a pour-over will to include any additional assets in the trust. Retirement accounts and insurance policies generally aren’t subject to probate because a beneficiary is named.

While you’re still alive, you have control over the trust, can make changes to it if you so choose, or even revoke it entirely. A revocable trust doesn’t require an additional tax return or other maintenance, aside from updating it for a major life event or change in your circumstances.

The trade-off is that because the trust is considered part of your estate it doesn’t offer much in the way of tax benefits or asset protection. (For that, you’ll need an irrevocable trust; once you set up such a trust it can be difficult to change or cancel.)

Managing assets in the afterlife

Other key benefits of a revocable trust are clarity and control. Spelling out exactly how your assets should be distributed can help protect the long-term financial interests of your beneficiaries and avoid unnecessary family conflict.

In the case of younger children, for instance, a trust can outline the ages and conditions under which they receive all or part of their inheritance.

If you have children or other dependents with disabilities, a special needs trust is a form of revocable trust designed for these circumstances. They are permitted under Social Security rules and allow for disbursements to cover costs related to maintaining a beneficiary’s health or comfort, without disqualifying them from Social Security, Medicare, or other benefits.

For second marriages and blended families, a trust removes some of the guesswork about which assets should go to a surviving spouse versus, say, children or grandchildren from a previous marriage. “If you get to a probate process, things can get ugly if your family dynamics are more complicated,” Graham says. Privacy, he adds, is another reason to consider a trust, since probate files are public record.

Because trusts can have lasting legal, tax, and financial implications, it’s a good idea to make sure you get guidance from advisors in all three areas, says Routh. That said, don’t make the trust overly complex.

“I see this time and again, where people come to us with a trust that was designed for someone with significant wealth but for a situation that is simple,” he says. “Don’t get talked into something that is more complicated than it needs to be.”

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