Has the current estate tax climate ended the need for trusts? Let's hope not, because there are still valid reasons advisors should have this structure in their arsenal.
In the early part of the last decade, the most common reason for families to replace their wills with a Revocable Living Trust was to reduce exposure to estate taxes (aka death taxes or inheritance tax). With the advent of a $5 million per person exclusionary amount in the 2010 legislation,1 and with the addition of portability provisions, many might think trusts are no longer necessary. But there are many reasons trusts should still be on the financial planner's recommendation list.
First, there are a plethora of advantages that a trust has over a will beyond just the estate tax issue. When I inquire from clients that have taken an estate through the probate process, most would suggest they would like to have their loved ones avoid that necessity if they could, mostly because the process is arduous, time consuming and costly. In our great nation, the laws say you can't own anything when you are no longer living, and therefore the probate process is the court-supervised method we utilize to transfer assets to the proper beneficiaries.
I explain to my clients that when they establish and properly fund a trust, they no longer own any assets under the jurisdiction of the probate courts. I suggest that a trust is akin to establishing a "special corporation," and that we move everything we own into it. We are the sole owner of this special corporation; therefore, we have complete control over everything inside it, including the right to distribute out anything we want for our use. When we pass, we have no assets owned directly in our name that would be subject to probate. The exception is this "special corporation," which is exempt from the probate process.
When we pass, we assign new managers to run the corporation (trustees), and new shareholders to receive distributions (beneficiaries). We leave instructions for the new managers on how to run things, including how and when to make distributions to the new shareholders. For tax purposes, this new "Special Corporation" uses our Social Security number, so it is transparent to the IRS and administratively it is easy to manage.
First, there are a plethora of advantages that a trust has over a will beyond just the estate tax issue.
Less expensive than probate
The cost to establish this special corporation is typically under $3,000. In contrast, the average for attorney's fees and court costs to probate an estate is between 4 percent and 10 percent of the assets.2 For someone with a $500,000 estate, that could easily amount to $25,000 at 5 percent.
Eliminating probate also saves the executor or personal administrator from much work. With the trust, the new managers simply step in and seamlessly continue to manage affairs according to your wishes. When removing the jurisdiction of the court, this also makes access to assets rather immediate. For some, this could be an important issue.
For others, privacy is a prime concern. The probate process is extremely public, with the executor needing to file financial records. The names and addresses of beneficiaries also becomes public knowledge. I can only imagine how con artists might attempt to use that information. With a trust, the affairs of the "special corporation" are kept confidential.
Two of the most important reasons to consider a trust have to do with what I refer to as "inheritance protection" and "spendthrift control." If I am a beneficiary and elect (or am required to by the terms of the trust) to leave assets inside this special corporation, those assets are safe against most creditor actions, including divorce.3 Most of us would desire our kids benefit from the assets we leave behind, rather than their ex-spouse to be. If we simply have a will and leave $300,000 to our child who then deposits those funds into the joint savings or investment account, and then files for divorce one year later, chances are we've just left $150,000 to our child and $150,000 to the ex.
