Sorting out your possessions and ensuring that your loved ones will be taken care of are key parts of end-of-life planning, as if you do not handle these matters correctly then you risk burdening your heirs with long hours in court fighting over your estate.
Most people assume that having a will is the ideal way to avoid this scenario. However, any good estate planning attorney will tell you that a will is not the only means to ensure that your affairs are in order.
Trusts are another vital estate planning tool that can either complement your will or replace it entirely.
A trust is an estate planning device where you enter into a relationship with a third party (often called a trustee) who is legally mandated to manage and distribute your assets according to your instructions after you are gone.
Trust Definition
Types of Trusts
There are many distinct types of trusts (such as the legacy trust, marital disclaimer trust, spousal lifetime access trust [SLAT], A-B trust, and IRA trust) which each have their unique purpose. However, there are two larger families of trusts that the rest fall under, living trusts and testamentary trusts.
- A living trust (also known as a revocable trust) is any trust you create while you are alive. Under a living trust, you can either keep your property until your passing or transfer some of it to the trust before then, as the trust’s specific terms are up to you. A living trust is also known as a revocable trust because while you are alive you can alter the terms of the trust with ease.
- A testamentary trust is any trust you create using the provisions of your will. Testamentary trusts are less popular than living trusts because they lack some of the benefits bestowed by living trusts—for example, testamentary trusts cannot be altered as easily as living trusts.
Benefits of Using a Trust
There are many benefits to using a trust in lieu of, or in addition to, a will. These benefits are as follows:
- Living trusts allow your heirs to avoid going through probate. Probate is a long and often costly legal process which all property descended via will must go through. During probate people who think they have a claim to your assets can dispute your will and assert these claims before the court. It is not uncommon for probate to last as long as 18 months, during which time your heirs may have to scramble across the country to attend court hearings. Additionally, during probate a significant part of your estate’s wealth can be consumed by legal fees. By forgoing probate, living trusts:
- Allow your heirs to claim their inheritance sooner, as there is no lengthy court procedure for living trusts and third parties cannot dispute the terms of your living trust.
- Protect your estate from legal fees, as despite having higher setup and administration fees than wills, living trusts can often cost less overall given the high cost of probate.
- Keep the contents of your estate private. During the probate process property descended though will become part of the public record, which allows anyone to see the contents of your estate. Property descended through living trust remains confidential and stays off of the public record.
- Allow your heirs to claim their inheritance sooner, as there is no lengthy court procedure for living trusts and third parties cannot dispute the terms of your living trust.
- Living trusts also have tax perks compared to wills. To avoid gift and inheritance taxes you can transfer portions of your estate lower valued below than the annual gift tax cap into your trust every year, which allows your heirs to lose less of their inheritance to taxes.
However, please note that there are also a few things trusts cannot do despite their benefits, such as select guardians for minor children. Thus, a trust can often work best in concert with a will.
Why a Trust Might be Right for You
Trusts can greatly decrease the burden on your loved ones when they sort out your estate. Living trusts are particularly effective here, as by avoiding probate a living trust allows your heirs to collect their inheritance without wasting hours in the courtroom or wasting a fortune on attorney’s fees. A properly managed living trust can also reduce the amount of your estate that is lost to taxes and maximize the inheritance of your loved ones.