One of the most common questions that I get from new estate planning clients is “Do I need a trust?” Not surprisingly, the answer is, it depends. In many circumstances, a last will and testament and powers of attorney will be sufficient.
A lot of people are of the mistaken belief that trusts are only for people with high levels of wealth and those concerned with reducing the amount of taxes paid to Uncle Sam upon death. In fact, there are many different types of trusts, only some of which are designed to limit one’s gross estate for estate tax purposes. Therefore, your net worth is not necessarily the driving factor. Given the existing federal estate tax exemption ($5,430,000 in 2015) and the ability to transfer one’s unused estate tax exemption to his or her surviving spouse, otherwise known as “portability,” these types of trusts are less prevalent than they were in the past.
For purposes of determining whether clients without estate tax concerns may be good candidates for a trust, I typically start by discussing what I see as the three primary benefits of a revocable living trust, which are: 1) probate avoidance; 2) greater control over distribution of assets after death; and 3) continuous administration of assets in the event of incapacity. When your assets are appropriately titled in the name of your revocable living trust, there is no need for your estate to be administered as part of a probate proceeding. What makes probate so bad? The biggest complaint is typically the amount of attorney’s fees necessary to complete the process. While attorney’s fees for probate administration are significantly less here in Arizona than some other states, it is still a significant expense that can be avoided. There are also certain court mandated filings that your personal representative must prepare as part of probate that, even with the assistance of an attorney, can be onerous and time consuming. You may not wish to put these kinds of demands on loved ones who are already grieving your loss. Trusts also give you a greater level of control over the distribution of your assets upon your death. For example, if you don’t want your or son or granddaughter to inherit your entire estate at age 18, you may wish to stagger distributions so that he or she receives say 25% at age 20, another 25% at age 25, and the remainder at age 30. Finally, trusts allow for the continuous administration of your assets in the event you should become incapacitated. If you can’t do it yourself, someone will need the authority to manage your finances and pay your bills. While a financial power of attorney may grant sufficient authority to your agent to handle these affairs, there are circumstances where banks and other financial institutions do not recognize that authority. If that is the case, and your assets are not titled in trust, it may become necessary for your agent or someone else to seek appointment as your conservator to gain the necessary authority. Like probate, conservatorship can be onerous and expensive. When your assets are held in trust, the successor trustee you name in your trust will have immediate authority to step in and begin administering your trust assets to provide for your care.
Trusts are not for everyone and they are not one size fits all. A discussion of the different types of trusts, and their potential advantages and disadvantages, is beyond the scope of this article. To determine if a trust is right for you, you should consult with a qualified estate planning attorney.