Should You Use a Trust for Estate Management?

A trust is an arrangement that allows a third party to control certain assets on behalf of a beneficiary. Trusts are usually set up for estate management purposes, as a way to pass money from one person to another without paying estate taxes.

Trusts also usually avoid probate — the process of verifying the will, accounting for the deceased’s assets, settling debts, and distributing funds — which means that the beneficiary has a much better chance to receive the money in the estate trust much more quickly than through a will.

Irrevocable vs. Revocable Trusts

The first distinction to make is between irrevocable and revocable trusts. The trustor can change a revocable trust at any time during their lifetime. The trustor can add or remove funds, change the beneficiary, modify the terms, or revoke the trust entirely.

One potential downside to a revocable trust is that the funds within it are still available to the trustor’s creditors as long as the trustor is alive. If you intend to use a trust to pass money down to your children and your financial situation changes drastically, you might lose control of that money.

An irrevocable trust, by contrast, cannot be changed after its creation. Once you’ve transferred assets to the trust, no one can take them out — including you. Irrevocable trusts are often used in life insurance policies to control the size of your estate and the beneficiaries of your insurance policy after your death.

Fixed vs. Discretionary Trusts

The second distinction to consider is whether the trust will be fixed or discretionary. A fixed trust has rules built into it that dictate how the assets can be distributed. For example, if you left $100,000 to your children in a fixed trust, you could dictate that the funds be paid out at a rate of $10,000 per year, starting when they turn 18. If you left them a house or other piece of property, you could set rules about whether and how it could be sold.

A discretionary trust acts more like a simple inheritance. Once the trustee takes ownership of the trust, it is up to their sole discretion what to do with the assets. You can leave documentation in the trust agreement about your wishes for the contents of the trust, but the trustee isn’t bound to follow them.

Pros and Cons of an Estate Trust

A trust can be a useful tool in estate management, but it can complicate matters. If you’re trying to decide whether to set up a trust for your estate or want to learn how to set up an estate trust, there are a few factors to consider.

Pro: Avoiding Guardianship or Conservatorship Hearing

If you become mentally incapacitated during your life, a court procedure will establish who should be in control of your assets. This process can be costly, contentious, and time-consuming. By creating a revocable living trust, you can assign a successor that will automatically take over without any intervention from the courts.

Pro: Avoiding Probate

As we mentioned above, probate is the process by which a deceased person’s estate is divided and distributed to heirs. It involves appointing someone (an executor) to administer the estate and review estate management, establishing the validity of the will, inventorying the deceased’s estate, appraising all their property, paying off outstanding debts, and then distributing what remains.

Probate court can be an arduous process. Inventory and valuation of a house full of belongings can take weeks or months, and none of the deceased’s assets can be sold or distributed until the probate process has ended. If the deceased owned properties in multiple states, the process must be completed individually for each state.

Most importantly, the process is public. Anyone, including a stranger, can look up your will, see what you left in it, and find out how the probate court distributed your assets. A trust document is private, shown only to the people named in the trust agreement, so you can keep your assets from being shown to the world.

Con: Setting Up an Estate Trust is More Complicated

Writing a will is a relatively quick process — you’ll have to meet with a lawyer to make sure all the language is binding, but in most cases, a will can be set up in a day or two. The cost of setting up a will is correspondingly low. Many attorneys offer will “packages,” which include their services, a meeting or two, and the relevant filing fees for a few hundred dollars. Our advice? Find an attorney who’s experienced and well-versed in tax law and do what they say.

A trust can take much longer and cost a lot more to set up, depending on the complexity of your estate. You’ll need to contact your bank, investment accounts, and insurance companies. Transferring stock ownership and updating beneficiaries can take time. Stock certificates have to be reissued. The titles for cars, boats, and houses have to be transferred.

Con: You’ll Still Need a Will

It’s unlikely that you’ll be able to move every single one of your assets into the trust before your death. The car you drive, the house you live in, the furniture and artwork you own, and other daily items will still be in your name and will be covered by your will.

You can set up what’s called a “pour-over will” that will transfer what’s left of your assets into the trust when you die. That will is subject to probate, but it’s a good backup for the assets that you don’t manage to transfer in time.

Certain assets can’t or shouldn’t be transferred to a trust:

• Qualified retirement accounts like a 401(k), 403(b), IRA, and some annuities. A trust doesn’t have a life expectancy, so it can’t own a retirement account. The transfer is considered a total withdrawal from the account and is subject to the same taxes and penalties you’d pay in your lifetime.
• Health savings accounts (HSAs) and medical savings accounts (MSAs) can’t be transferred to a trust, but you can name the trust as the beneficiary of those accounts.
• Motor vehicles like cars, boats, and even planes can be transferred to a trust, but many states will consider the transfer as a sale and charge transfer tax accordingly. Instead, you can purchase vehicles in the name of the trust so that no transfer has to take place. Additionally, some states allow vehicle owners to set a beneficiary after death without going through probate, so the trust isn’t necessary.

Talk to the Professionals

When we talk to our clients about whether a trust (or a variety of trusts) is right for them, we compare it to buying a car. Sure, you can buy the same brand new car from any number of dealers across the country and you’ll end up with the exact same car.

But some dealers will sit down with you and go over your needs — the conditions you drive in, your finances, and what you want this car to help you accomplish. Those are the dealers that people go back to when they want their next car, even if they’re not the closest option.

At First Western Trust Bank, we think of ourselves as the second kind of dealer. Anyone can set up a trust for you, but we’ll examine every aspect of your wealth, your priorities, and your goals through our proprietary ConnectView system to determine exactly what’s right for you.

We have nearly 20 years of experience in creating personalized, tailored financial plans for our clients. Set up an appointment to meet with us, and we’ll go over every aspect of your financial situation to help you decide whether a trust is the right solution for you.