When many people think about estate planning, their first thought is having a will. A will is a basic and essential estate planning document.
Wills direct how your client's property will be distributed and can also direct who will act as the guardian for minor children if both parents are deceased. Wills can be subject to probate, which can delay the distribution of assets and can become contentious and expensive for heirs in some cases.
Beneficiary designations direct how the assets in retirement plans and annuities are distributed upon the account holder's death. They also determine who receives the death benefit for a life insurance policy.
Some of your clients will have estate planning needs that are more complex and may need something beyond a will and proper beneficiary designations. A trust might be the answer in many of these situations.
What Is a Trust?
A trust is a fiduciary arrangement that allows the trustee, generally a third party, to hold the assets in the trust on behalf of the trust's beneficiaries. There are many types of trust arrangements that specify how and when the trust assets pass to the trust beneficiaries.
Unlike a will, trusts generally do not have to go through probate after the trust grantor dies if structured correctly. This saves time and expenses such as attorney fees and court costs that can be incurred during the probate process.
Trusts can offer a level of flexibility that a will cannot. For example, a will goes into effect only when your client dies. Depending upon how the trust is structured, it can encompass a situation where your client becomes incapacitated during their lifetime.
Why Would a Client Consider a Trust?
Perhaps the biggest reason for a client to consider using a trust in addition to a will and other estate planning strategies is specificity. A trust can be structured to be very specific regarding to whom and when the assets in the trust are distributed. A will does not allow this degree of specificity.
While there are many types of trusts your client can consider, all trusts fall under two main types.
Revocable trusts allow the grantor to retain control over the assets in the trust. They can revoke the trust or change it at any time. One downside is that any income is taxable to the grantor of the trust due to the level of control they have over the trust's assets.
With an irrevocable trust, the grantor gives up control of the trust's assets once the trust agreement is finalized. Irrevocable trusts will generally have their own tax ID, and the grantor is not responsible for taxes on the income of the trust.
There are a number of reasons that your client might benefit from using a trust for some or all of the assets covered by their estate plan. Here are some examples of situations and types of trusts that might be appropriate for your client.
Maintaining Privacy
The probate process is a matter of public record. For any number of reasons your client may want to keep the details of their estate private. Perhaps they are a prominent local businessperson or professional. There could be issues surrounding certain family members or relatives.
Only the trustee and the beneficiaries are involved in the process, so privacy can be maintained.
Beneficiary Protection
An irrevocable trust can provide the beneficiaries with protection from creditors, lawsuits and in the case of a divorce.
Additionally, a trust can be structured in a way that protects the interests of a minor child beneficiary by setting limits and guidelines as to when distributions are made. This can help protect these beneficiaries from their own overspending and from others who might try to take advantage of them financially.
Special Needs Trusts
A trust can be structured to help provide for a a minor child or an adult with special needs. If properly structured, this type of trust can help ensure that the beneficiary maintains their eligibility for Medicare and Social Security benefits.
