Why you might need a trust in your estate plan
After going through a drawn-out legal battle with family members over her father’s estate, Emily Guy Birken wanted to make sure that there would be no such disputes over her assets if something happened to her.
Even more pressing, Birken, 40, wanted to set aside money to take care of her aunt, who has cerebral palsy. Birken and her sister decided that the best solution would be to set up and fund a special needs trust for their aunt, naming themselves as trustees.
One of the benefits of such a trust is that the money won’t affect her aunt’s ability to get government benefits such as Medicaid. There are other benefits to the trust as well, including possible protection in divorce, says Birken, author of End Financial Stress Now.
“Neither [my sister nor I] expects our marriages will fall apart, but you never know,” she says. “We don’t want this money to become a football in any potential divorce proceedings.”
Birken’s experience is just one example of how estate and trust planning ready the people you love for your own death, and plan for unexpected things that might happen in life. Having a trust can decrease the burden on your loved ones when you’re gone, and make it easier for them to carry out your wishes.
While a will is an important step in estate planning, putting a trust in place might also make sense. Here’s what you need to know as you weigh the decision.
Who needs a trust?
While you may be able to carry out many of your wishes using just a will, the process of probate (when your will is legally validated in court) can get complicated. Using a trust, in addition to a will, allows assets to avoid probate by transferring directly to a trust.
“It may be a hassle to do probate,” says Principal® counsel Jared Yepsen. “It’s a long process, and there are expenses involved. You have to appoint someone you know to execute the will, and it’s done in public, so people can see it all. Using a trust, you can avoid all of that.”
Trusts also allow you to have more control over exactly what happens to your assets and how they’re distributed. That can be useful in a variety of situations, including limiting a young person’s access to their total inheritance, providing for the care of an adult with special needs, protecting assets in a divorce, or avoiding estate taxes (now or in the future).
What are the different types of trusts?
An estate planning attorney can help you figure out exactly the right trust for your needs. Typically, you’ll either set up and fund a trust while you’re alive or create a trust that will act as a beneficiary to some (or all) of your assets.
Creating a trust while you’re alive can be either revocable, meaning you can put assets in as well as take them out, or irrevocable, meaning that any assets put into the trust are no longer your property (or part of your estate). Once set up, a trust is administered by trustees. Common examples of a trustee are family members or a third-party institution, such as a bank.
Here are some types of trusts to consider:
Trust for family or other beneficiaries
These may be the most common types of trusts. You can create one with stipulations on how and when your heirs would receive their inheritance. So, for example, the trust might pay for their education and then pay out one-third at 25, one-third at 30, and another at 35. “If you want to control your assets from the grave, a trust is the way to do that,” says Tyler De Haan, director of business development-retirement solutions for Principal. “You can write very specific language into the trust.”
Special needs trust
This type of trust is often set up for heirs to ensure assets take care of the beneficiary without jeopardizing their access to government benefits such as Social Security disability and Medicaid. While the trustee can’t pay funds directly to the beneficiary in this case, they can spend money on the beneficiary’s behalf.
Irrevocable life insurance trust (ILIT)
With an ILIT, the death benefit from your life insurance policy is passed through the trust to its beneficiaries (outside of the estate). This helps do a few things. First, it provides cash for your estate to pay any taxes. Placing your life insurance policy in the trust also protects it from creditors. The most popular reason to use an ILIT is to reduce estate taxes when you die—though the federal threshold for those taxes is pretty high, currently $11.58 million.
How do I get started with a trust?
While it’s possible to create a trust using online legal service providers, you may be better off working with a local estate attorney who’s familiar with local and state laws and any applicable tax rules. Ask friends and family for a referral or search for an attorney via this tool from the National Association of Estate Planners and Councils.
“If you have specific things that you want to happen with your money after you die, an estate planning attorney can help you figure out which type of trust will work best for your needs,” De Haan says.
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The subject matter in this communication is educational only and provided with the understanding that Principal® is not rendering legal, accounting, investment advice or tax advice. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, investment or accounting obligations and requirements.
The National Association of Estate Planners and Councils is not an affiliate of the Principal Financial Group®.