Estate planning: When a will might not be enough

Photo of a couple that has decided they need a personal trust as part of their estate plan.

You won’t always be there to take care of the ones you love. It’s tough to think about that, but you can prepare for it by estate planning. Everyone knows what a will is, but estate planning is more than just a will. Wills only go into effect when you die. And wills can get complicated when you have large or unique family structures. A personal trust may help where a will can’t.

Trusts are often misunderstood—they’re not as common as wills. These 6 questions help you figure out if you need one in your estate plan.

What is a personal trust?

A personal trust is not just a document. It’s a legal structure where you can place your stuff while you’re alive. But while a will becomes effective when you die, a trust takes effect the minute you sign it—this means you can use it to specify what happens if you become incapacitated.

If you have something you treasure, or if you don’t think your wishes will be carried out as you want them to be after you die, you might need to establish a personal trust.

“People often think that trusts only apply if you have a lot of money,” says Heather Winston, assistant director of financial advice and planning at Principal®. “If you have assets—anything from money and investments to a prized record collection or a classic car—a trust is a way to protect what happens to them.”

Why would I use a trust if I already have a will?

A will is the base of a good estate plan. But if you get sick or are unable to take care of yourself, a will can’t specify how you want your financial affairs handled. A trust, on the other hand, is immediately active and could specify, for example, that you want to sell that classic car to help pay for long-term care if you need it.

“Because you transfer the ownership of your assets under the trust,” Winston says, “you have the benefit of being able to enjoy them while you’re alive. In the event you’re not able to care for yourself—or when you pass—the trust will very specifically define what happens next.”

Additionally, trusts can help reduce some of the relationship complexities of estate planning that a will alone may not.

It can be tricky, for example, to pass along parts of your estate to anyone but a spouse. A trust can make it easier to pass along assets to children from a previous marriage, a partner in a non-traditional relationship, close friends, or a charitable organization. That’s because when you transfer assets—even with a will—to anyone other than a spouse, the legal system can get involved through a process called probate (the details of which can be released publicly). If probate is required, it can be expensive and there’s an increased chance that your wishes might not be followed to the letter. But a trust is a private arrangement, so your personal affairs won’t become part of the public record if you don’t want them to.

“There can be a lot of powerful emotions when a family member dies or isn’t able to take care of their own affairs,” Winston says. “You can be very specific when setting up a trust, and, in turn, you can help your loved ones by taking the emotion out of the financial aspect of what to do and when.”

How does a trust work?

You can set up a trust by sitting down with an attorney—preferably one with expertise in estate law. They’ll ask you specific questions about how you want to handle your affairs then help you draft the trust document. You can work with other key people—like a financial advisor—to move assets to the trust.

If you don’t have detailed plans or a lot of stipulations, there are online resources that’ll help you set up a trust by yourself.

As you’re setting up the trust, you’ll choose a trustee to manage and distribute the trust’s assets.

There are companies that provide professional trustee services for a fee. Consider selecting a corporate trustee if you need an unbiased, experienced approach that your loved ones may not have. Corporate trustees can also act as a neutral party for any disagreements that pop up.

A trustee can also be a person—maybe even you. This is a cheaper option and setting yourself as trustee gives you maximum control while you’re alive.

What types of trusts are there?

Building a personal trust is a flexible process.

Some options you might see:

Traditional trust

A traditional trust names a trustee, or co-trustees, to control all aspects of a trust. This often restricts your beneficiaries to using the same trustee for administration, asset selection, and investment allocation.

Directed trust

Want your beneficiaries to have a little more control? The directed trust has a trustee who handles administration and distribution duties, but beneficiaries can work with a financial advisor of their choice, instead of the trustee or the trustee’s portfolio manager.

And these trusts can come in 2 types: irrevocable and revocable.

Revocable trust

This is a trust that allows you to change your mind while you’re alive. If situations change, you could amend the trust and pull assets out. When you die or become unable to care for yourself, the trust can’t be changed.

Irrevocable trust

With an irrevocable trust, you can’t change your mind. You establish the trust and set the terms. Any assets put in the trust can’t be pulled back out while you’re alive. One of the main benefits of an irrevocable trust is the tax benefit of moving assets into the trust.

You should contact a tax or financial professional to discuss which trust options your situation requires.

So, is a trust right for me?

Winston says it’s never too early to start planning for your family’s future. And trusts are a great option, no matter what your financial situation.

Trusts offer benefits for all types of people:

  • Parents. Create a multi-generational plan for distributing wealth. Determine when your heirs will receive their inheritance, and add provisions for receiving it, like getting a college degree.
  • Spouses and significant others. Take the burden of investment decisions off your family. Distribute your retirement benefits or donate to a charity that’s important to you.
  • Business owners. Protect your assets from creditors and establish a plan for funding your business after you retire. You can also determine how to equally distribute assets among family members who aren’t involved in the business.

What if I need help?

While you can save money with online trust resources, DIY estate planning may not be your best bet. Specificity is the biggest benefit of personal trusts and pre-built forms don’t always address your personal situation. Plus, an off-the-shelf form could open the possibility of mistakes or omissions. Add differing state rules on top of that, and things can get complicated quickly.

A financial professional can help you navigate all of this, so your personal trust reflects your hopes and wishes. They can also provide names of estate attorneys in your area to help draft the documents.

While you can’t control what the future holds, you can get peace of mind with a personal trust.

What to do next.

  • A financial professional can help you figure out how a trust could fit into your estate planning. Want to talk to one in person? We’ll help you find one.
  • Want to set up a trust? We can provide trustee, custodial, and administrative service. Give us a call at 800-332-4015.

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.

Principal Trust CompanySM is a trade name of Delaware Charter Guarantee & Trust Company, a member company of the Principal Financial Group®.

Insurance products from the Principal Financial Group® are issued by Principal National Life Insurance Company (except in New York), Principal Life Insurance Company and the companies available through the Preferred Product Network Inc. Securities and advisory products offered through Principal Securities, Inc., 800-247-1737, member SIPC. Principal National, Principal Life, Preferred Product Network and Principal Securities are members of the Principal Financial Group®, Des Moines, IA 50392.