Basic estate planning typically begins with a will, which outlines important decisions like who will inherit your property and care for minor dependents after you pass away. However, wills are not always the most efficient option to organize your estate, considering the legal proceedings that must happen before any assets are distributed. In some cases, it may be best to create a trust.
A trust is a fiduciary arrangement that clarifies how your assets will be distributed without the involvement of a probate court. It can be structured to take effect upon incapacitation, before death, or after death. In contrast, wills only take effect upon death and typically require authentication by a probate court, which often takes time and involves additional costs.
Why You Might Consider a Trust
A trust allows you to be specific about how, when, and to whom your assets will be distributed. There are dozens of special-use trusts that can be established to meet different estate planning goals, like charitable giving and tax reduction.
A trust not only identifies your beneficiaries but also specifies how and when your assets are distributed, including in cases of incapacity. If you are unable to make decisions due to a health condition like Alzheimer’s or a stroke, a trust can ensure your resources are managed in line with your wishes while you’re under the care of a loved one or healthcare professional.
Additionally, trusts are extremely flexible and may be deployed in various ways. For instance, you can appoint a trustee to assist beneficiaries who may have trouble managing their bequest. You can even structure trusts to protect beneficiaries from creditors, handle their state income taxes, and preserve the generation-skipping tax exemption.
Potential Benefits of Creating a Trust
The key benefits of considering a trust include:
- Control. A trust controls who will receive distributions, when those will happen, and on what terms. This can be especially important for surviving families and spouses with kids from multiple marriages.
- Improved protection. A well-constructed trust can protect your legacy from the heirs’ creditors or the irresponsible behaviors of the beneficiaries.
- Privacy and probate savings. The process where the state settles your affairs (probate) can sometimes be expensive and time-consuming. With a revocable living trust, you can generally avoid probate.
Additionally, trusts can help you outline plans for charitable giving, life insurance ownership, caring for family members with special needs, and even large retirement account balances.
Picking the Correct Trust for You
Overall, a trust can help you navigate various tax concerns and creditor protection to ensure your wealth helps your family and that you leave a legacy for a cause you truly believe in. You may choose to form a revocable trust, which may be altered during your lifetime, or an irrevocable trust, which generally may not be changed once created. When choosing to create a trust, it’s always wise to work with skilled estate planning professionals to ensure you get things right the first time. It’s also important to review your estate plan every three to five years or whenever major life events take place, such as the birth of a new child, marriage, divorce, or a significant change in your assets.