Last week, one of the questions we discussed that I and my partner Buzz Suuppi get all the time is: How much assets do I need for a trust? What we are really being asked is: Should my estate plan be will-based or trust-based?
At a minimum, all estate plans should include at least a financial power of attorney, a health care power of attorney and a will. In most instances, your financial power of attorney will avoid the necessity of a court appointed conservator during your lifetime in the event of your mental disability. Similarly, your health care power of attorney will usually avoid the necessity of a court appointed conservator during your lifetime in the event of your mental disability.
With a will-based estate plan, your will is the primary operative document for the transfer of your assets to loved ones after your death through the probate court process. With a trust-based estate plan, your trust is the primary operative document for the management of your assets during your lifetime and the transfer of your assets to loved ones after your death, usually without any court involvement. The will in a trust-based estate plan is a pour-over will, which is used as a back-up to pour-over any assets into your trust that were not funded into your trust during your lifetime.
As we discussed last week, there is no minimum dollar amount of assets necessary for you to own before a trust is used. You do not need $1 million in assets, or a taxable estate ($5.49 million in 2017) before a trust makes sense for you. We’ve had clients with a net-worth below $100,000 for whom we have prepared trust-based estate plans, as well as clients with a net worth over $1 million for whom we have prepared will-based estate plans.
What determines whether you have a trust or not, are the instructions you want for you and your loved ones and the goals and objectives you want to accomplish. Who do you want to benefit? What protections do you want for you and your beneficiaries? What are the nature and extent of your assets? Run away from any planner who recommends a will-based or trust-based plan before discussing these matters with you.
Here are the three most common reasons our clients choose a will based estate plan instead of a trust-based estate plan:
A will is simpler during lifetime.
Will-based plans are simpler than trust-based plans to set up and maintain during your lifetime. They do not require as many updates. The complications typically arise after your death during the probate court process, which you never see.
A will is more economical to set up.
Because they are simpler, will-based plans are more economical to set up initially than trust-based plans. The big costs come after your death during the probate court process, which you never see. According to a survey of probate attorneys, your loved ones can expect probate death administration costs to be 5%-10% of the gross value of your assets going through probate.
Try to avoid probate with joint ownership and beneficiary designations.
You may be tempted to use joint ownership and beneficiary designations to avoid probate. As we discussed last week, we regularly see situations in which joint ownership and beneficiary designations backfire on the family and do not work as intended because the joint owner or beneficiary got mad, got greedy, got sick, got sued, got divorced, was a minor or died in the wrong order.
Here are the most common reasons that many of our clients choose a trust-based estate plan:
Keeping matters private
With a trust, there is no public court filing that can be reviewed by anybody. The only persons that need to be notified of the trust are the current and contingent beneficiaries of the trust.
Avoid probate.
In most instances, with a fully-funded trust-based plan, your loved ones avoid probate after your death. Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust during your lifetime.
Keep matters simpler after death.
A trust-based plan death administration is simpler for your loved ones to manage than the probate court administration.
Keep overall costs down.
It has been our experience in our office, that for our fully-funded trust-based estate plan clients in our annual updating program, overall costs of their plan, including, initial trust set up and funding, annual updates, trust disability administration and trust death administration, all together, are typically less than the 5% that is the low end for just probate death administration of a will-based plan.
Protect young adult beneficiaries from making unwise spending decisions.
By delaying the age at which young adult beneficiaries get control of their trust inheritance to a more responsible age of say 25 or 30, increases the likelihood that they will make wise spending choices.
Protect inheritance from beneficiaries’ creditors.
By using lifetime trusts, you can provide for your beneficiaries needs, and protect their inheritances from claims by their creditors.
Protect inheritance from beneficiaries’ divorces and remarriages.
By using lifetime trusts, you can provide for your beneficiaries needs, and protect their inheritances from claims by their spouses and ex-spouses.
Protect inheritance from alcoholic or drug/gambling addicted beneficiaries.
By using lifetime trusts and third party trustees, you can prevent alcoholic or drug/gambling addicted beneficiaries from getting control of their inheritance and protect those trust assets for their benefit.
Protect family cottage, farm or waterfront property.
By putting family real estate in a protective trust along with some money to pay taxes, insurance, maintenance and utilities, you can provide the use of the real estate for your loved ones for generations to come.
Pay for beneficiaries’ college or other studies.
By setting aside a bucket-o-money in trust, you can help pay for your loved one’s higher education costs.
Provide for special needs beneficiaries.
If you have a special needs beneficiary, you can set up a special needs trust that can provide an inheritance for their benefit, without disqualifying them from their governmental benefits, such as SSI or Medicaid.
Protect inheritance from beneficiaries with poor money management skills.
By using lifetime trusts and third party trustees, you can provide for your beneficiaries needs, and protect their inheritances from them making unwise spending decisions.
Provide for pets.
If you have a pet, you can leave funds after your death in trust to take care of them for the rest of their lives.
Provide an incentive for lazy beneficiaries.
You can put a provision in a lifetime trust with a third party trustee that says a beneficiary gets nothing unless they work, and if they do, the trustee can make a distribution equal to their income. If they work, they can double their income. If they don’t work, they get nothing.
By Matthew M. Wallace, CPA, JD
Published edited June 11, 2017 in The Times Herald newspaper Port Huron, Michigan as: Which is best for you: Will or trust?