A few questions can help you decide if you need a trust as part of your estate plan.
Every piece of your estate plan, from a will to a power of attorney, can help you protect your loved ones and translate your wishes for your legacy into action. That includes a trust. But unlike other legal documents, whether you need a trust very much depends on your goals, beneficiaries, and estate.
These questions can help you decide. If you answer yes to one (or more), you may want to consider setting up a trust.
Q: Is your estate very complex?
- Yes. If you have quite a bit to plan for, such as children from a previous marriage or with special needs, second homes, very large assets, or complicated investment accounts, a trust gives you the ability to define plans and limitations for beneficiaries. You’re also able to specify exactly what you want to do with every asset, and when you want to pass it along.
- No. If you have traditional assets such as a car, home, and retirement accounts, you may find you can designate beneficiaries and execute your plans with a will. “If it’s a simple estate, you may not need a trust,” says Stanley Poorman, a financial professional with Principal®.
Q: Would you like to provide assets to beneficiaries while you’re alive?
- Yes. Consider a trust. Trusts can be set up to take effect before or after death, or if you’re incapacitated.
- No. If you intend your assets to pass to heirs only after you die, a will may suffice.
Q: Will your estate be subject to very high taxes?
- Yes. Some trusts may help you to minimize estate taxes and offer beneficiaries some protection, such as from claims of creditors. For example, assets placed into an irrevocable trust are generally removed from the estate, which helps to reduce its taxable value.
- No. You’re not alone: The estate tax exemption of $12.06 million doesn’t affect most people, Poorman says, so a will may be sufficient. One consideration for your estate plan is a transfer on death form, which can be used for assets such as a bank account that you’d like to transfer outside of a will. However, not every state allows these; if they do, each state has different requirements.
Q: Would you like to make plans for your assets, but still maintain control over them while you’re alive?
- Yes. For example, perhaps you would like to benefit a child through your estate but are worried about their ability to manage assets. A trust gives you more control, allowing you to set terms and conditions for how that money is managed and used. Or a revocable or living trust allows you full control of your assets so you can move them in and out of the trust and sell as you wish.
- No. A will may suffice.
Q: Would you like your plans to be private?
- Yes. You may need a trust. “Most people with a typical estate don’t need the complex planning and are not worried about who sees their will,” Poorman says. “The biggest advantages to a trust are control and privacy. Probate, which is the process for determining a will is valid, is public, but a trust is not.”
- No. Once your will is settled, it is a matter of public record.
Q: Are you worried about your ability to manage assets if you become ill or disabled?
- Yes. If you’re concerned about a medical condition such as dementia, a trust can help you establish goals and clear authority now in case you’re unable to do so yourself in the future.
- No. Other elements of an estate plan, such as a power of attorney, may allow your loved ones to help you make financial decisions.
Q: Are you willing to pay to set up and fund a trust?
- Yes. A trust isn’t a DIY document. The more complex the trust, the more it generally costs to set up. Depending on the type of trust, you might need to transfer assets to fund the trust, pay the trustee, and maybe even pay for investment management, which can total several percentage points of the trust’s value. (An estate-planning attorney and tax professional can help.)
- No. Even if you just need a will, a legal professional (which may cost much less than trust advice) can help.
Q: Would you like your estate to benefit a charity?
- Yes. A special-use trust can help you achieve gift-giving goals.
- No. A will may be sufficient, especially if you simply want to give small gifts to favorite charities.
Q: If you think you need a trust, do you have a trustee in mind?
- Yes. Name a trustee who both understands your wishes and has the insights to know who to consult to take care of your assets. It’s work. If you don’t think one person has the time or ability, you can name multiple people to serve as co-trustees.
- No. Explore your options. You can name a financially responsible family member or work with a trusted professional (or a combination of the two). The key is their ability to understand and execute your wishes.
If you decide you need a trust, sit down with your legal advisor to review next steps. This estate planning checklist can help you make sure you have considered the many pieces in your estate plan. If you participate in a retirement plan through Principal® or have one of our IRAs, you and your spouse can also access free online resources to prepare a will and other estate planning documents from ARAG®. To get started, create an account with ARAG.