From time to time, we get calls from clients asking about trusts and if they should be incorporated into a financial plan. While these vehicles can be a sophisticated tool for transferring assets, they can come with high costs and added complexity. To help determine if a trust would be a worthwhile strategy, below are three industry guidelines to use as a starting point for determining if a trust strategy might have a place in your financial repertoire.
First, what is a trust?
A trust is a fiduciary arrangement specifying how one’s assets will be distributed. While this sounds like a personal last will and testament, trusts are more conditional. They allow you to specify how, when and to whom your assets will be distributed. There are numerous trust types that can be used for different purposes, such as charitable giving, tax reduction, and creditor protection, to name a few.
To determine if a trust is for you, below are three common guidelines that can provide a starting point.
- Reduce/Avoid Estate Taxes
Trusts can be useful for reducing estate taxes. However, this only applies if you are subject to estate tax. In 2023, the federal estate tax exemption is $12.92 million per person or $25.84 million per married couple.[1] For those that have assets over these exemption amounts, their estate might be exposed to federal estate tax, which is currently 40%.[2]
- Avoid the Probate Process
Trusts can also be useful for avoiding the probate process at death. When one passes, some of their assets go through a process called probate, which is a court-supervised proceeding to authenticate the transfer of one’s assets based on their last will and testament. Reasons to avoid the probate process include costs, length of the process and privacy. While costs are typically a top reason for avoiding the probate process, it is important to look at the probate costs on a state-by-state basis. Some states, such as California and New York, are known for having high probate costs compared to others.
- Control How Assets are Distributed
Lastly, trusts can be beneficial if you would like to specify how your assets are distributed and used by heirs after your passing. A common saying is that trusts provide “control beyond the grave”, which can be useful for incentivizing good behavior by heirs or protecting heirs with special needs. While trusts can be a great way to preserve one’s wishes after passing, it is also important to communicate expectations with heirs proactively to prevent family drama and complications.
Trusts can be a very valuable tool for numerous reasons. However, it is important to assess your financial situation to determine if they fit in your financial plan. We highly recommend consulting with a board-certified, estate attorney to determine if trusts are appropriate for you. If you do not know of any board-certified, estate attorneys, we are happy to provide you with references.
Lastly, if you have any additional questions on trusts, feel free to give us a call.
[1] Estate Tax, Internal Revenue Service, October 26, 2022, https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
[2] What's New - Estate and Gift Tax, Internal Revenue Service, December 20, 2022, https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax.