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Should You Have A Trust?

This article is more than 9 years old.

Many estate planning lawyers act as if everyone should have a trust yet most Americans don't even have a simple will. Given that trusts can easily cost thousands of dollars in legal fees, it's a big purchase that shouldn't be taken lightly. Here are some factors to consider:

How much of your estate can you shield from probate?

One of the main advantages of having a living trust is being able to bypass the time and cost of probate, which is a process of administering an estate that can easily cost thousands of dollars and take several months or even a year or more to resolve. Fortunately, not all of your assets are subject to probate. Some exemptions are jointly owned assets with rights of survivorship and assets with designated beneficiaries like life insurance policies, annuities, and retirement accounts.

In many states, you can also add beneficiaries to avoid probate to bank accounts with a POD or "payable on death" form and to investment accounts with a TOD or "transfer on death" form. Your beneficiaries will just need to show up with a death certificate and a valid form of ID to get immediate access to the account. Some states will even let you add beneficiaries to vehicles with a transfer on death registration and to real estate with a beneficiary deed. (You can see what your state allows here. My home state of California lets you add beneficiaries to everything but real estate.) With these methods, you can bypass probate on a lot of your estate, especially if you don't own a home or live in a state that lets you add a beneficiary to the deed. In that case, a trust might not be worth it.

Will you qualify for simplified probate?

If your probate estate is going to a surviving spouse or domestic partner, or if it is small enough, you may also be able to qualify for a simplified probate process in your state. For example, in California, probate estates less than $150k can qualify.  In that case, it may not be worth paying the cost of a trust.

How expensive is probate in your state?

If much of your estate is subject to the regular probate process, you'll want to get a sense of what that could cost in your state since that can vary considerably. California has some of the highest attorney fees, which start at 4% of the first $100k of the gross probate estate and can easily add up to tens of thousands of dollars. In this situation, a trust can be a lot cheaper in the long run than going through probate.

Do you own real estate out of state?

This might be another reason to have a trust. That's because unless you have a beneficiary deed in that state, the property will have to go through that state's probate process with all the costs that entails. Owning property in another country can add another whole layer of complexity.

How comfortable are you with the estate being public?

In addition to the time and cost of probate, another downside is that it's a public process. If you don't want all those intimate details of your financial life and last wishes to be made public, a trust can protect your privacy. For example, you may not want your heirs to know the division of your assets since they may perceive it to be unfair, which can cause conflict or even legal challenges.

Do you have a child with special needs?

Of course, trusts aren't just about avoiding probate. Another common reason to have a trust is to provide ongoing financial support for a child or other loved one who may never be able to manage the assets themselves. Providing the inheritance to them directly can also disqualify them from receiving some forms of government support.

Would you like to do something out of the ordinary?

Trusts are notorious for being used to add "strings from the grave." An example would be providing additional payments to heirs for taking specific actions like going to college or earning a certain amount of income on their own. Just be aware that the more complex you make the trust, the more it will likely cost.

Do you have a taxable estate?

If you're fortunate enough to have a taxable estate over $5,340,000, you might want to speak with an estate planning attorney about how various trust strategies can be used to minimize taxes or provide the funds to prevent a business or real estate property from having to be sold to pay the estate taxes. Keep in mind that some states impose their own estate tax on taxable estates as low as $675k in New Jersey. You can get information on the state estate taxes here.

Final thoughts

If you decide to draft a trust, be sure to work with a qualified estate planning lawyer. You can ask for referrals from people you know or from the local bar association's lawyer referral service, or you can search estate planning organizations like the American Academy of Estate Planning Attorneys, the National Network of Estate Planning Attorneys, WealthCounsel, or the National Association of Estate Planners & Councils. Interview at least three attorneys and use this guide to pick the one that's best for you.

If you decide not to draft a trust, you still might have some work to do. Make sure you've taken as many steps as possible to avoid probate in your state like making sure beneficiary designations are up to date and adding as many designations as your state allows. You'll also at least need a will to designate who will inherit your assets and a durable financial power of attorney to empower someone to manage your finances if you're incapacitated. You can get these from an attorney or do them yourself online.

Regardless of what estate planning strategy you choose, you'll need to revisit your plan as your needs and the laws change over time. Finally, as easy as it is to put off thinking about things like death and incapacitation, resist the urge to procrastinate. After all, you never know when you'll need your estate plan and by then, it will be too late.

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