A trust may be an effective tool for you to use in your estate plan to help maintain privacy, control your assets, and ensure your wishes.
Quick takeaways
- A trust helps you clearly define what happens to your assets, such as establishing beneficiaries or helping with decision making should you become incapacitated.
- A trust does not become part of the public record because it is not subject to probate, an advantage over a will.
- There are different types of trusts, including revocable and irrevocable living trusts, for different types of needs. Each has degrees of flexibility for when and how your assets are transferred to the trust.
When it comes to your estate plan, there are different tools you use to help you reach your goals. One of them is a trust. Whether you need or want a trust depends on your goals, beneficiaries, and the extent of your estate. How do you decide—and what’s next if you want a trust? These insights can help.
A personal trust allows you to define and govern what happens to your assets, either under certain circumstances or upon your death. But it’s also a formal, legal document. When you establish a trust, you become what’s known as a grantor, and you transfer ownership of your assets into the trust.
People set up a trust for different reasons. Some want to control exactly what happens to their assets, particularly if they were to become incapacitated. Others want to specify how inheritances are distributed (for instance, limiting a young person’s access or specifically paying for their education). Trusts can also be used to provide for minors, dependents, or those with special needs. And a special-use trust can benefit a charity to help you achieve gift-giving goals.
A will must be legally validated in court; therefore it becomes part of public record. For most people, that’s fine. But for those who need or want privacy for their estate plans, a trust—which does not go through probate—may be preferable. In some instances, a trust may help someone avoid or reduce estate taxes. And sometimes, very complex wills may take longer for a court to review.
A trust isn’t a DIY document. The more complex the trust, the more it generally costs to set up. While the terms of a trust apply across state lines, the requirements for establishing a trust are determined by each state.
When a grantor establishes a trust, they name a trustee or custodian to carry out the trust’s terms. They’ll also decide what type of trust to create (more on that below). 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.)
A trustee should be someone 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.
There are three common types of trusts. Here’s how each works:
- A testamentary trust is set up in a will. Upon your death, the trust receives assets from your will.
- A revocable living trust has the most flexibility. You can change what’s in it, who manages it, and who the beneficiaries are.
- An irrevocable living trust is usually used to reduce the amount of assets subject to estate tax. Once you’ve established and funded it, generally it can’t be changed.
There are also additional types of trusts, such as a special needs trust, which helps take care of the beneficiary without jeopardizing their access to government benefits, and an irrevocable life insurance trust, when the death benefit from your life insurance policy is passed through the trust to its beneficiaries.
No. Anyone can establish a trust. But for complicated estates, a trust may help. For example, 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. Know that for many with traditional assets such as a car, home, and retirement accounts, plans may be executed just fine with a will.
No. Trusts can be set up to take effect before or after death, or if you’re incapacitated. And trusts can be set up so that you can make a plan for your assets, but still maintain control in your lifetime.
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.
It might, and it also may 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. However, the estate tax affects only a very small number of people each year.
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.
Want to evaluate your estate plan to ensure you have all the documents you need? This estate planning checklist can help. 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, you must have both a Principal online account and create an account with ARAG.
