While marketing a product I created – the My Affairs In Order flash drive, a convenient way to organize and retain personal and financial information for your loved ones before death – I get asked a lot of questions. The questions that come up more than any others are: What is a trust? And, do I need a trust?

You don’t have to be Warren Buffet to need a trust. However, the cost to create a trust can be fairly expensive, so you may want to consider if your situation warrants it. In this article, I will explain what a trust is, how a trust can help you, discuss types of trusts and how to know if you can benefit from having one.

Before beginning, I want to add a caveat that I am not an attorney and my article is not meant to advise you on what you do or do not need. If, after reading information on trusts, you believe you would benefit from having one, contact your attorney and/or tax advisor.

 
 

What is a Trust?

A trust is both a legal entity and a fiduciary arrangement that allows you, the trustor, to specify how you want certain assets distributed upon your death. A third party, called a trustee, is in charge of the trust. The trustee holds legal title to property that is transferred to the trust and held for another person – the beneficiary.

How Will a Trust Help Me?

One of the benefits of a trust is for you to be able to stipulate how you want your assets distributed. I’m sure you are thinking that a will does the same thing – and you’re right. A trust does not replace a will. A trust covers only those assets that have been transferred into it. A will specifies how assets, not within a trust, will be distributed and can also name an executor, a guardian to care for your children or pets and outline funeral services, among other things.

A second benefit of having a trust is that it can help you avoid probate. Property that you transfer into a trust before your death will not have to go through the probate process. It is estimated that about 5% of property value goes to attorneys and court fees when your estate goes through probate, so having a trust in place means more money will go to your beneficiaries.

Another benefit the trust provides is that it can help to reduce estate taxes. The current exemption for owing taxes on an estate is $5.45 million. A very small percentage of the population will have to worry about owing estate taxes with that exemption limit.

And finally, assets held within a trust will be distributed more quickly and efficiently and at little to no cost, versus assets that are designated for heirs in a will that must go through the probate process. In addition, a will is a public document and can be viewed by anyone, whereas assets can be distributed from a trust without public notice.

Types of Trusts

There are numerous ways in which a trust can be arranged. Trusts are flexible, but can also be quite complex with each type having its own advantages and disadvantages. Your advisor will recommend a trust type depending on how you want to distribute your assets.

The two basic categories of trusts are the Living Trust and the Testamentary Trust. A Living Trust is set up while you (the trustor) are still alive, while the Testamentary Trust is outlined in a will and created after your death. Property that you transfer to a Living Trust before your death will, most likely, not have to go through probate, but funds transferred in a Testamentary Trust are subject to probate and transfer taxes.

Living Trusts are further classified as revocable or irrevocable trusts. A revocable trust allows you to retain control of the assets in the trust during your lifetime. You can change or alter the terms of the trust or totally dissolve it at any time. An irrevocable trust generally cannot be changed after it has been set up. Once your assets are transferred to the irrevocable trust, you no longer have control.

Within these basic categories of trusts are many different types that are designed to apply to specific situations. Some types are:

  • Marital or “A” Trust – designed to provide benefits to a spouse
  • Bypass or “B” Trust or Credit Shelter Trust – bypasses a spouse’s estate to take advantage of any federal estate tax exemption
  • Generation Skipping Trust – allows the trustor to transfer money tax-free to grandchildren or later generations
  • Charitable Remainder Trust – allows the trustor to receive income for a specified time period with the remainder going to a charity
  • Qualified Terminable Interest Property – first provides income to the surviving spouse, but then when the spouse dies, the remainder goes to named beneficiaries

From the list provided, you can see that there probably is a trust type that will serve your purpose.

Do I Need a Trust?

Generally speaking, if you have a net worth over $100,000, own real estate and have very specific ideas on how you want to have your assets distributed, you will probably benefit from having a trust.

If you want your assets to skip a generation and be distributed only to your grandchildren, or if you want your beneficiaries to meet certain conditions before they receive the inheritance, or you want all your assets to go to a charity, then a trust is the best vehicle to accomplish these goals.

What stops a lot of people from setting up a trust is the expense. One affordable option to obtaining a trust is to ask your attorney about an irrevocable trust called the Kiss Trust. It is a trust meant for lower net worth individuals. It can be set up at a fraction of the cost of creating other trusts.

Bottom line, only you (and your professionals) can decide if you need a trust. But if you think you would benefit from having a trust for the distribution of your assets, don’t worry about the amount of your assets and don’t let the cost of having one set-up deter you.

Have you thought about setting up a trust? What factors influenced your decision? What other information do you think is important to share for your financial affairs to be in place when you die? We welcome your comments in the section below.

Rita CallRita Call is a licensed CPA who performed audits of small businesses, employee benefit plans and non-profit organizations prior to retiring in 2015. After retirement, she started an internet business, My Affairs in Order, that sells flash drives with convenient and easy-to-use software for recording and storing personal and financial information.

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