Making smart decisions to protect your loved ones is a big part of what we try to do with financial planning. As part of that process, estate planning brings up a number of questions, including - ‘Do I need a trust?’
Of course, estate planning begins with establishing a will that will handle your property, and addressing decisions such as establishing guardianship for any underage kids (this can’t be done with a trust). There are also important documents such as advanced health directives and powers of attorney to create. So, what is a trust and what role can one play in your plan?
There are many different types of trusts suited for different purposes. We are going to focus on a basic revocable living trust.
A living trust is a legal document that creates a clear set of rules for your property upon your death. Because it’s revocable, it can be changed or even terminated at any time while you are alive. Essentially you create the trust and name yourself as trustee (or co-trustee with spouse) during your lifetime, and you also name a successor trustee who will act upon your death to transfer assets according to your plans to your named beneficiaries. You can put investments, bank accounts, real estate and other valuable property in the name of the trust.
Do I Need a Trust?
Some benefits of establishing a living trust include:
A trust can be used to hold and manage assets for minor children until they are old enough to manage the money by themselves. No question, naming a guardian is important, but in the instance you don’t have one, a trust avoids the fiasco of having a court appointed guardian in charge of your assets. Many people choose to grant children access to assets over a staggered time period, i.e. age 25, 30, 35. A trust also provides a clearer set of rules than guardianship.
A trust can also be used to protect adult children from themselves. If you have concerns about a child’s ability to make good decisions, the assets can be held in trust and distributed as needed. It can also be used to keep assets away from a child’s spouse that you don’t care for in the event of divorce.
Probate is the legal process that the court uses after someone passes away. It’s intended to ensure that your property and possessions are given to the right people and settle any unpaid debts. It can also be expensive. The overall costs can vary pretty widely but generally range from 3-7% of the assets included in your estate. In addition to the high level of fees, it can also take a significant amount of time to complete the probate process.
It’s important to note that there are other ways to avoid probate. Certain assets such as retirement accounts or insurance policies with named beneficiaries and transfer on death accounts will also avoid probate.
A trust is considered to be a private document between the parties involved and therefore not part of the public record. This gives your affairs a level of privacy that can’t be searched in the public records.
It Protects You
It provides you with a plan in the event you become incapacitated. The trustee will be able to access and use your assets for your benefit if you are unable to do so on your own. This can be especially important for single people and adults without children.
Trusts can be expensive. It’s a good idea to use a qualified estate planning attorney to establish your trust document and fees tend to match the level of complexity required in drafting the document. Generally speaking, you can plan on a minimum of $1,000 and expect costs to go up if your situation is more complex.
One pitfall we’ve seen – people go through the process and expense of setting up their living trust but fail to fund it properly. A trust without anything in its name is just an empty file – you have to re-title the right assets and beneficiary designations in the name of trust for the strategy to work properly.
Many people can benefit from the uses of a trust but it’s important to look at your situation individually.
*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This material was created for educational and informational purposes only.
LPL Financial representatives offer access to trust services through The Private Trust Company N.A., an affiliate of LPL Financial.