Do I Need a Trust?

Who needs a trust?  A trust is the gold standard in estate planning, and is what most practitioners prefer to work with, and what most clients prefer to get.  A trust is usually the simplest, easiest, most efficient, and most flexible estate planning tool for any given scenario.  The trade-off is that its is usually more expensive to set up initially.  So what sort of people can benefit the most from a trust?

Established couples.  Many middle-aged or more established families benefit from a trust over a will.  By the time that children start to move into adolescence, many families have enough assets that they want a trust to help manage them if something were to happen to the parents.  Even families who do not feel or appear very wealthy actually have significant assets that will need to be properly administered at their deaths.  When people take stock of their financial condition, they can be surprised how quickly everything adds up.  For example, Peter and Mary have three kids, 16, 12, and 10.  They bought a small starter home when they first married, but sold that and were able to put 20 percent down on a modest home in a nice neighborhood.  They purchased the home 15 years ago, and about 10 years ago the housing market started to take off, and now, between their down payment, their monthly mortgage payments, and the appreciation on the home, they have $300,000 in equity.  Mary worked for the first several years of their marriage, before staying home with the kids full time, and managed to save up $10,000 in her retirement account, which has grown to $20,000 since she quit to stay home.  Peter has saved aggressively and managed to put $150,000 in his 401k.  They also inherited $50,000 from Peter’s parents when they died, and each of them has a $250,000 life insurance policy.    All of the sudden, without quite realizing it, their net worth is over $1,000,000.  That’s enough that it pays to think about what would happen to it if you die, especially since their oldest child is almost out of the house.

If Peter and Mary die with only a will, leaving everything to their children but appointing a guardian (Peter’s brother) over the kids, then when they die, that guardian will be in charge of using all that money to raise the kids.  Not necessarily a bad thing.  But their oldest will turn 18 in only a few years, and will be entitled to his share of the inheritance.  This creates two possible concerns.  First, many parents feel that it’s not wise to hand an 18 year old a check for over $300,000.  Second, that cuts the remaining funds left to get the other two children to adulthood.

A trust can solve this problem by delaying distributions until a certain age, or until certain conditions have been met, or by authorizing expenditures on only certain things.  A common arrangement, for example, is to leave instructions that the entire value of the trust should be kept together until the youngest child turns 18, and then start distributing the principal of the trust to each child as they turn 25.  The trust could also authorize the trustee to pay college or educational expenses, or for a wedding, even before the funds are distributed.  This more closely tracks how most parents would actually use their assets, if they had not passed away.

Estates containing real estate.  In general, any estate that contains real estate (including a personal residence) is large enough, and creates enough complications in probate, to benefit from a trust.  Although probate is not especially difficult or expensive in Utah, using a trust rather than a will streamlines the process considerably.  This is, in fact, the most common type of estate plan: a modest estate containing the home as the primary asset, which is to pass in more or less equal shares to the children.  A typical example would be Bruce and Betty.  Their children are grown, they own their house outright, and are retired.  When they die, they want all their assets to go to their children in equal shares.  Their home is small, but with recent real estate trends it is now worth $300,000, much more than they paid for it 40 years ago.  They have $200,000 in their retirement accounts, plus social security and Bruce’s pension.  They appoint their oldest as the successor trustee on the trust, and then name the trust as the beneficiary on the retirement accounts.

When they die, their oldest son will automatically become trustee of the trust.  He can immediately withdraw the money from the 401k to pay for funeral and burial expense, plus any medical bills or other creditors.  He can then hire a real estate agent, sell the home, and distribute the money to his siblings, all without the expense or delay of needing to go to court to probate a will.  Bruce and Betty spent some time and money to get their trust properly set up, but they feel that it was money well spent, since it will mean one less thing for their children to worry about at their passing.

Clients who want to leave a legacy.  For anybody who wants to do more than simply pass their assets on to their children, a trust is essential.  For example, if you want to provide ongoing payments to your children, rather than a lump sum, you will want to use a trust.  Likewise if you want to protect your children’s inheritance from creditors, a trust is the best vehicle.  A special purpose fund, like a “grandchildren college fund” or the “family cabin fund” will need to be administered through a trust.   These matters are especially acute for people who have children with special needs, or who are bad with money, or where addiction is a concern.

A common arrangement is to direct the trustee to only pay income, not principal, from the trust fund to the beneficiaries.  Upon the death of the trustor (the person who created the trust), all the assets are liquidated and invested to create income.  This can be a combination of stocks and bonds, or real estate.  The amount paid out each year will fluctuate based on the market, but the original fund of the trust is preserved and continues to produce year after year.

Another common arrangement is to direct the trustee to pay for certain expenses, like monthly housing costs, whether a mortgage or rent, but authorize no other expenditures.  This allows the beneficiary some measure of security, while still making them responsible for their day to day finances.

These are only examples.  Trusts are flexible enough to accommodate an enormous variety of needs and plans.