Is a trust worth your time or your investment?
As of 2021, the estate tax threshold is $11.7 million for a single person, and potentially $23.4 million for a married couple. Traditionally, trusts were used to split up the assets of an estate to make sure that the estate did not exceed the estate tax thresholds, and therefore gave the estate tax advantages. So the question then, and this is a question I get all the time from my clients, is why would I want a trust if my wife and I do not have $23.4 million in assets?
The quick answer is that for most people that create an estate plan, if you do not have these substantial assets, you do not need a trust. Missouri has many non-probate transfer laws, which allow you to transfer your property to your heirs without utilizing the probate courts. Transfer on Death (ToD) or beneficiary designations can transfer your car, your bank accounts and even your investment accounts to your heirs. These transfers happen outside of probate and therefore they simply transfer to your heirs without any interference from the court. Properly setting up your assets with beneficiary designations will keep your estate out of probate and will be sufficient for most people.
That being said, why would someone choose to have a trust over just a will? The short answer is a trust provides a sort of insurance policy to insure that assets do not end up in probate, and can protect your heirs in certain circumstances. Once a trust is established, all you have to do is point your current assets, and your future assets to be owned by the trust. Instead of setting up beneficiaries for each of your assets, changing these beneficiaries should it be necessary on every one of your assets, and then adding these same beneficiaries to each new asset, you simply name the trust as the beneficiary or owner of the asset. The trust becomes the simple point of change to control where everything goes. Once all of your assets are in the name of the trust, the trust controls the distribution of these assets and should anything need to be changed, you change it in the trust, and not on each and every asset's beneficiary that you own.
The big thing is that a trust can prepare for contingencies for your beneficiaries. Life happens, and lets say you have three children that you want to receive an equal share of your assets. You could designate on all of your accounts that each child be able to receive an equal share. But what happens if life happens? What happens if one of your children were to go on disability and couldn't inherit your assets, or worse, if they were to pass? What happens if this happens and you cannot change the way your assets are distributed? The worst case scenarios are that the probate court will be involved, or someone receives a gift that then kicks them off of their benefits and the state takes their share of your estate. Again, a trust is a form of insurance policy that can prevent this from happening.
The last thought is when you probably should have a trust even if you have less than a certain amount of assets. If you are disinheriting a child, if you have a child with special needs or if you have a child with a disability, a trust is probably something you want to consider. If you want to disinherit a child, a will can accomplish this goal, but because assets go through probate, the child can challenge the will and therefore cause years of litigation, even if your will is properly created. You can also use non-probate transfers, but if something ends up in probate, that child can challenge the value of the asset, and again, you end up in a situation where this child can tie up your estate in the probate court.
When an heir is disabled, whether it be through a physical disability or a mental one (i.e. an addiction), the trust can act as a way to protect your estate assets and your heir. First, the assets will remain in your trust, if properly set up, and can be used in accordance with your wishes. Second, the assets in the trust can be slowly given out to your heir, but can still remain in trust and be protected for other heirs while you care for your primary heir. What this means, is that you have an heir that is on disability, they can only receive so much money before they lose their support. The trust can provide this amount of money to them, without giving them their entire share. The trust can also provide for them, can buy them a car, a house, or other provide other support. Since these are trust assets and not gifts, it does not impact their status as a disabled person.
A trust is a valuable tool that is more expensive to establish initially, but can provide simplicity and flexibility to give you piece of mind to know that everything you wanted to be taken care of is actually taken care of.
As always, we offer a free, no obligation consultation for all of our clients and would like to hear from you.