One of the most common questions we hear from clients is, “Do I need a Trust?”
While I like giving neat-and-tidy answers, this is not one of those questions where that can be done. Every person’s estate is a little bit different, and this requires individual analysis before determining if a trust is right for you. My goal in this article is to help you in this analysis, so that we can answer this question for you.
A good starting point is to understand what exactly a trust is and what it does. When you know the purpose of a trust, you are better able to evaluate if this is a legal document that would benefit you.
A trust (sometimes called a “revocable trust” or a “living trust” – but what I will simply call a “trust” in this article) is sometimes referred to as a “Will Substitute” because a trust mimics a Last Will and Testament: it provides us with instructions for what to do with the trust assets at the time of your death. The trust designates someone in charge of this whole process: we call this person the “trustee” (by way of reference, the person in charge of a Will is called an “executor”).
So why would someone desire to have this “Will Substitute”? Why not just have a Will? The primary reason is that Wills can be much more expensive and time-consuming to administer than a trust. In order for an executor to be able to carry out the terms of your Will when you die, they must be court-appointed by a probate judge. The executor lacks the legal authority to pay bills, sell assets, and make distributions without this court appointment. Not so with the trustee. A trustee can handle the administration of your affairs without needing a probate court appointment. Avoiding probate court is often desirable because court almost always means more money (legal fees), time, and publicity are spent administering your estate. While it is true that the creator of the trust does not realize these benefits, the people they love most will, and this is a significant incentive to implement a trust.
But now we could swing the other way – why would you NOT create a trust? Doesn’t it always make sense to avoid probate court and provide our loved ones with more money, time, and privacy?
There are two main reasons a trust is not right for everyone. The first is this: a trust is not the only way to avoid probate at the time of your death. For example, assets held in joint tenancy with someone else or assets with a beneficiary designated on them will avoid probate when you die. If the bulk of the assets you own are already jointly-held or have a beneficiary designated on them, then these assets are not subject to the distribution instructions of your Will and will not be subject to the probate process when you die. Having a trust in this situation could be superfluous – the document may not add value as a probate-avoidance tool. This being said, trusts are often the best probate-avoidance tool in a number of situations: (i) you own real estate in another state, (ii) you own a small business; (iii) you have a blended family; (iv) you have a special-needs beneficiary; or (v) your beneficiaries do not get along.
A second reason why not everyone may choose to have a trust is that the implementation of a trust is typically more work (and costs more money) than implementing a Will. This is because a trust needs to be funded. That is, the distribution instructions in the trust are only valid over assets that are titled in the name of the trust. Having the trust document prepared and signed is only a first step; you must then retitle assets into the trust for that document to be able to govern those assets. This retitling process takes additional work (both on your part and your attorney’s part), which is why trusts typically cost more to implement. And this retitling process is ongoing: as you acquire new assets, you must evaluate if it is appropriate to title this new asset into your trust.
Like most things in life, I wish there was an easier answer to the question of “Do I Need a Trust?” Each person’s situation in life is different and should be evaluated on a case-by-case basis. A prudent approach to the answer will mean care evaluation of your particular circumstances and estate planning goals.
The trust is a wonderful tool (and not just for probate avoidance), and many of our clients have them. But this does not mean you should bypass the work of evaluating if it is right for you. We would love to talk with you about this if you have additional questions and see if your situation is one that could benefit from implementing a trust.