A couple of years ago, I was contacted by someone who was interested in getting their estate plan completed. We sat down and started talking about his family, assets, liabilities, etc. After getting a good feel for his situation I recommended a pretty simple plan involving a Will and the necessary non-probate planning. He seemed surprised and asked me, “So do you think I need a trust?” Apparently, he had visited with a couple of other attorneys who were pushing him into these complex (and quite a bit more expensive) trusts. These trusts would have worked, but they were completely excessive to his situation.
Every person needs to have an estate plan, no matter how simple their situation may be. It only takes one small mistake to significantly reduce the value of the property is inherited and the time it takes to actually inherit it. An instrument commonly used to help avoid that mistake is called a Trust, and a common question clients ask is whether they need one. To be able to assess whether or not you need a Trust there are several considerations to take into account.
Trusts come in many different forms and have many different purposes. They are extremely efficient instruments used to plan an individual’s estate. Trusts can be living or testamentary; revocable or irrevocable. Trusts help avoid probate and paying estate taxes. They also help protect the assets and the beneficiaries of the estate. When used properly they will save your family all of the money, headache, time and hassle that could be incurred in an improperly planned estate.
The main reason I wouldn’t recommend a trust to someone would be if it were not cost effective. One of the first things I ask my clients to do when beginning the estate planning process is to figure out their net worth (assets minus liabilities). This includes real property, bank accounts, life insurance, retirement accounts, debt, etc.; and it usually adds up to more than what most people realize. However, if I look at the estate and see that the amount of debt significantly reduces or eliminates the value of the assets then consideration needs to be given to a more cost-effective estate plan.
Another reason would be if you have a very simple distribution plan. Only having one or two heirs who don’t have their own children can leave things pretty simple, and we can use alternative vehicles to accomplish the plan you want to be laid out.
A third possible reason would be if your only asset is a retirement investment account. These accounts have some very stringent rules regarding on-death transfers and the tax benefits of listing a person versus a trust should be explored with a professional.
Essentially, whether you set up a Trust or not is ultimately your decision but it is your lawyer’s responsibility to provide you with other alternatives as well as the pros and cons of each plan. These alternative plans should all include a Will, but should definitely NOT be limited to just a Will. If an alternative plan to a Trust is used it is very important to remember the following: (1) it will take careful planning to make sure they are following the overall estate plan. Even the most well-crafted Will won’t undo a careless overall plan; (2) the initial efforts of proper titling of the assets are absolutely crucial to the execution of your plan; (3) it will require constant awareness, and maintenance/updating any time there is a change to your family, property or location; and (4) if the only thing in your estate plan is a Will you need to find out what is missing.