When you research or talk with others about estate planning, wills, end of life to-do lists, etc., terms can start to get a little confusing. Trusts are often talked about alongside Last Will and Testaments, and when the two are grouped together it’s hard to know the difference between them. All the legal talk can leave you with a lot of questions – “Do I need a trust? A Last Will and Testament? Both?”
Different estate planning options work for different people. We know that every family is different, and that’s one reason relational estate planning is such a big deal. Just because your neighbor has a simple will, doesn’t mean that’s all you need.
We advise you to educate yourself on your options, then choose the avenues that will most likely be best for your estate and family.
(Related: Want to learn more about choosing a relational estate planning philosophy vs. a traditional estate planning philosophy? Click here.)
So if you’re specifically wondering, “Do I need a trust?” the answer right now is “Maybe”. Let us give you some insight into trusts, and then you’ll be able to decide for yourself.
What Is A Trust?
Think of a trust as a legal but fake person. It’s an account that can have a social security number, own property, buy things, and essentially act like any normal estate owner. Of course, there are rules about how the trust can operate, which are normally set out in a trust agreement at the trust’s inception, but here are a few general facts about how a trust typically operates:
- Every trust is managed by a trustee: If you set it up, you get to choose who that trustee is – whether yourself or someone else that you want to oversee it.
- When you transfer your assets to a trust, the trust actually owns them: Instead of your accounts, house, car, etc. being in your name, they’ll be in the name of your trust.
- A trust is designed to have one or more beneficiaries that benefit from it, either before or after your passing (depending on the type of trust you set up): These beneficiaries aren’t limited – they can be individuals, organizations, or charities.
- All trusts have to abide by a legal trust agreement, which is set up at their creation: Even if you, as the trust’s owner, should pass away, the trust must follow it’s prearranged rules.
Do I Need A Trust?
There are a lot of pros to setting up a trust, but the two main ones are:
(1) to avoid the probate process
(2) to control your assets both now and after you die.
A trust can be a really good idea for you if you’d like to have all the benefits of your assets without the risks that come along with owning them at the end of your life.
Beyond these two reasons, some people find themselves in life situations where creating different types of trusts would give them a great advantage.
Common Trust Scenarios:
- Do you have minor children to protect?
This is probably the number one reason people set up a trust. You can use it to protect your children under a certain age from getting their inheritance too early. Most people don’t want their children to receive an inheritance at 18, because, if we’re being honest, what 18 – year -old is truly ready to handle large amounts of money?
This situation calls for a minor’s trust, which allows you to designate an age (most people choose age 25) for your child to receive the money. Until they reach that age, your trustee will allocate funds to them as needed for things like health care, education, travel, etc.
- Is your family a blended family?
Distributing your assets within a non-traditional or blended family can sometimes have more complex dynamics than your average family.
For example, if your spouse is not the parent of your children, you may want to designate some money to care for them while they are still alive, but not just give it all to them, which would leave nothing for your children. Or you may want to care for your spouse as long as they are living, and then have any leftover money go to grandchildren, close friends, or a charity.
Obviously there are endless possibilities for different family situations, and a trust can sometimes make more emotionally complicated circumstances easier to sort through fairly.
- Do you need to provide for a child with significant personal issues?
Sadly, we have plenty of clients who want to do everything they can to care for their children but are hindered by their children’s personal issues. A trust can control the funds you leave to your children so that they can’t be used toward debt, substance abuse, or other destructive patterns. By choosing a wise trustee to oversee it, your money can’t be controlled by your children, but it can be used for their benefit, as in the case of minor children.
- Do you need a trust to benefit a disabled family member?
A trust set up for a disabled family member is called a special needs trust, and it can be a really cool thing.
Many times benefiting from a special needs trust is much better for a disabled child or sibling than just receiving a lump sum inheritance. This is because if they are already receiving some type of government subsidy through social security or Medicaid there are often financial qualifications that make them lose their benefits if they receive too much money from another source. A trust can be used for them but not be owned by them so that they won’t lose the government assistance they might truly need.
There are lots of different reasons why you may need a trust alongside a will. If you decide you need one, first determine its purpose and who it will be meant to benefit. Then, choose a trusted estate planning attorney who can help you with the ins and outs of setting it up.
(Related: Want to determine how to choose an attorney who will be the right fit for you? Click here.)