Non-tax Reasons to Use a Trust Today
In late 2010 the U.S. government adopted estate tax law changes that included an increase in the estate tax exemption amount. Currently (2015) the exemption is $5.43 million which will be indexed for later years. Prior to the increase alot of attention was given to reducing estate taxes. I believe the use of a trust still has many benefits as part of an overall estate plan. Here is a brief list of some of the more interesting benefits:
- Probate Avoidance. Probate is the formal court-supervised process of attending to the final affairs of a deceased individual. Transferring title of your assets to a trust prior to your passing will remove those assets from the probate process. The benefits of avoiding probate include eliminating the time and cost invested in the process. Perhaps more important, avoiding probate keeps your financial affairs private since the process, including the financial accounting, are a matter of public record. Furthermore, using a trust to own out-of-state real estate may also be helpful in avoiding an ancillary probate proceeding in a non-resident state where you own property.
- Peace of Mind in Providing for Your Heirs. Careful selection of a trustee and consideration of the terms of your trust can effectively manage the payment of trust income and principal to trust beneficiaries. A well-drafted trust can preserve capital and manage cash flow. This can be particularly important when you feel that your loved ones’ good intentions may require some oversight when it comes to making wise financial decisions.
- Young Beneficiaries. After a beneficiary reaches the age of majority (18 in many states), he or she would typically have unfettered access to an outright inheritance in the absence of a trust that provides otherwise. Many parents and grandparents feel that their beneficiaries may not have the experience or maturity to manage large sums of money at such a young age. Thus, these parents and grandparents often structure a beneficiary’s inheritance through a trust that specifies the age(s) of distribution they determine appropriate. Years ago I read a psychology study that indicated that many young people who know that they have approximately $120,000 of inheritance at 18 don’t think they need college.
- Beneficiaries with Special Needs. A beneficiary with special needs may never be in a position to effectively manage his or her property. Thus, trusts are often created to manage assets for the benefit of a person with special needs for the duration of the beneficiary’s life. Additionally, a gift or inheritance received outright by a beneficiary with special needs may disqualify the beneficiary from receiving certain need-based public benefits. A properly-drafted trust may allow a beneficiary with special needs to continue to receive such public assistance.
- Blended Families. Trusts are commonly used in blended families. With a trust, a spouse is able to provide for his or her surviving spouse, while specifying that any remaining amounts held in the trust at the death of the surviving spouse pass for the benefit of the children of the spouse who created the trust. If a spouse were to leave his or her estate outright to the surviving spouse, then the surviving spouse would be free to divert all of those assets away from the children of the first spouse to die.
- Professional Asset Management. An institutional trustee will likely provide portfolio management as part of their service offering. Alternatively, an individual trustee should have the ability to select and hire professional asset managers to the extent he or she does not possess the requisite skills, and where beneficiaries are not equipped to make such decisions on their own.
- Creditor Protection. Properly-drafted trusts can protect a beneficiary’s interest from the claims of creditors. If a beneficiary has known creditor issues or if a beneficiary may have creditor issues in the future for reasons such as the beneficiary being in a high-risk occupation (e.g., a doctor), then arranging the beneficiary’s inheritance through a properly-drafted trust reduces the chances of a beneficiary’s creditors reaching the inherited assets.
- Property Settlement in a Divorce. Trusts may be helpful in segregating family wealth so that it is protected from a beneficiary’s ex-spouse in the event of a divorce. Assets received by gift or inheritance are typically not considered “marital property.” However, if assets received outright through gift or inheritance are commingled with marital property, it is often more difficult for the person who received the gift or inheritance to prove that such assets should be treated as separate property. Such a lack of proof may increase the risk of a court equitably dividing assets that are inherited outright among both spouses in a divorce proceeding.
- Control of Special Assets. Trusts are useful in facilitating ownership and control of special assets. Such assets include closely-held business interests and vacation homes. For example, a trust may provide an orderly structure for the use and enjoyment of vacation homes by multiple beneficiaries.