Do I Need a Trust?

The Two Types of Trusts

There are two types of trusts:

• Living trusts (also called “inter vivos” or revocable trusts).
• Testamentary trusts.

A living trust is in existence from the moment you sign it, and has a lot of similarities to business entities like an LLC. Testamentary trusts are written into a Will, so they only come into existence if you die and certain conditions are met (like if both you and your spouse have died and your children are under a certain age).

The content of a testamentary trust and a living trust can be very similar, the main difference is how they are created, put into effect, and funded.

7 Benefits of a Trust

The reasons someone might benefit from a trust:

1. Avoids probate. This is the reason most people are familiar with. A funded trust can speed up the process of transferring assets after death by avoiding a court proceeding called a probate. A living trust can avoid probate, but a testamentary trust does not.
2. Privacy. Again, because there is no probate for living trusts.
3. Protects a beneficiary. A testamentary trust is very often used for minor children, who are too young to manage assets for themselves. Any other beneficiary with inability or disability may benefit from this type of planning (irresponsible adult children, adults with special needs, etc.) Trusts typically also protect a beneficiary from creditors (with a spendthrift provision). Some people see trusts as a way to manage their children’s behavior (for example, paying only for education), but be careful not to take this too far: the time to start parenting is not when you draft your estate plan. Becoming too restrictive can be problematic when the circumstances change in ways you don’t expect, such as a child becoming disabled.
4. Better contingency planning. It’s common for people to use beneficiary designations to transfer many substantial assets directly to their loved ones after death. Being able to name a trust as the beneficiary instead of individuals (when appropriate) can help avoid needing to change everything if a beneficiary dies, since we will have anticipated that in the planning process.
5. Provides for professional management. Some people don’t have a trusted family member or friend to manage assets for them in case of incapacity, or for children or other beneficiaries in case of death. There are professional trust companies and trust departments at banks that can handle this role (for a fee of course). This can be done in either living or testamentary trusts.
6. Keeps assets in the family. For example, a cabin trust. This makes it easier to hold onto an asset for other owners or beneficiaries through a death or incapacity. Such a trust can provide for long-term management and use of a property, and ideally will benefit the relationships between the beneficiaries.
7. Prevents difficulties among beneficiaries. A living trust makes it more difficult to contest your wishes because there is no probate and there are fewer rights for the beneficiaries to access information and know how the trust is being administered.

A Few Situations When You Might Not Want a Trust

I don’t recommend a Trust for anyone who doesn’t understand how it works. I also feel like they are usually unnecessary for younger people who will likely go through a lot of life changes before death—especially when married it’s likely that at least one spouse will live into the next life phase. For a trust to work as intended, it must be properly funded. So if you don’t understand how that works or if you are likely going to have a lot of changes with your assets, then I would hesitate before recommending one.

I also prefer to go to the least complex option that accomplishes your goals. For example, if you can transfer most of your assets with beneficiary designations to responsible adult children, then we can probably accomplish that without a trust unless you feel like you want the added structure of a trust for “just in case” planning (like if a child died before you and you wanted to keep money in trust for grandchildren). I can usually assess how interested a client is in doing the “just in case” planning from our discussion, and we can decide from there.

To contrast, even though I think most younger parents are well served by having a will with a testamentary trust (trust within a will) and many prefer the simplicity of that type of plan, some prefer the added security of having a living trust set up or feel it would serve them better as their children age.  In short, what type of plan to use depends greatly on your personal values, and that is part of the benefit of working with a trusted advisor.