Most people choose to organize their estate plan around one of two central tools - a Last Will & Testament or a Living Trust. Why would you choose to create a trust rather than a will? This question is even harder to answer when you consider the amount of bad advice people give. To help you navigate this question, we're going to discuss two common but unhelpful considerations and then a few less common but more helpful considerations.
Common but Unhelpful Considerations
Many clients enter a conversation with us thinking that trusts are either about avoiding probate or avoiding estate taxes (sometimes called “death taxes”). While it’s true that trusts can be useful tools for these purposes, neither issue should be central in deciding whether or not most people should create a trust. Here’s why.
Do you want to avoid probate?
If avoiding probate is your only priority, you don't need a trust.
While it is true that a trust will avoid probate if properly funded, there are simpler ways to avoid probate if that's your only priority. Probate is necessary when the only owner of property is a deceased person. In other words, if property has a joint owner or a designated beneficiary who is still alive, then no probate is necessary. Similarly, a trust also avoids probate because the trust is still "alive" when you die and the trust, not you, is the owner of the property. So, yes, the trust avoids probate, but it requires more time and expense to create than just adding joint owners or beneficiaries to your assets.
There may be good reasons why you shouldn’t rely on joint ownership and designated beneficiaries, though. This can introduce some other problems discussed below, as well as tax problems for joint owners. But, again, if avoiding probate is legitimately your only priority, then a trust isn’t necessary.
Are you super rich?
If you would only use a trust to avoid paying estate taxes, you (probably) don’t need a trust.
Under current tax laws, only an incredibly small number of people will owe estate taxes to the federal government when they die. This is because, as of 2022, you need to be worth $12.06 million dollars as an individual or $24.12 million dollars as a married couple to have a large enough estate to be taxed. Add to that the fact that Oklahoma has no state estate tax, no matter the size of your estate, and the likelihood of owing estate taxes decreases even further.
This is where the idea that “you don’t have enough money for a trust” comes from. People who have this ultra-high net worth use specific types of trusts to reduce the size of their taxable estate. If you don’t have a taxable estate, then you don’t need a trust to solve an estate tax problem.
If you DO have a taxable estate, then you need a plan the involves a variety of tools working together. Let’s definitely schedule some time to talk.
Less Common but More Helpful Considerations
When we counsel clients, we want to focus on what a trust can do beyond just avoiding probate and how a trust can help the vast majority of people, not just the top 0.5%. The questions below apply to a lot of people and are not dependent on the size of their estates.
Do you want to simplify the administration of your estate?
If you rely on joint ownership or beneficiary designation to avoid probate, this introduces a few potential complications. It can be difficult, if not impossible, to consolidate resources right after death to pay for funeral expenses, final tax obligations, debts, or other administrative costs. The joint ownership and beneficiary strategy may avoid probate, but it doesn’t allow you to designate a primary point person or team to take care of administrative matters. This can create a great deal of conflict in families and can make it more difficult to honor your obligations.
Do you want to protect assets for a surviving spouse or partner?
Clients who are married or partnered often want to ensure that they protect their assets and priorities for their surviving partner. When one partner dies before another, the survivor’s life may change in some predictable ways. They may get remarried, which is wonderful but introduces some financial risks. They may experience a healthcare crisis. They may have a significant creditor liability. A trust, if properly drafted and administered, can provide a great deal of protection in these circumstances, where simply relying on joint ownership or beneficiary designations cannot.
We wrote about this topic in more detail in Estate Planning Strategies: Collective Wisdom, Proven Techniques of WealthCounsel Attorneys (Second Edition).
Do you want to provide guidance and protect assets for your beneficiaries?
Many clients want to ensure that the inheritance they leave is only available to their intended beneficiaries and not to third-parties like divorcing spouses, creditors, or other unintended recipients.
When beneficiaries are minors, a trust can help provide guidance about how the inheritance is to be used. Should it prioritize education, entrepreneurship, travel, or other forms of enrichment? How should money be used to help purchase a first home or pay for a wedding? At what age, or under what circumstances, should the beneficiary take over management of the money?
When beneficiaries have special needs, a trust can make sure that an inheritance doesn’t threaten important public benefits. It’s sadly common for people with special needs to lose crucial healthcare, income, and housing benefits when a loved one dies and leaves them some life insurance or an interest in a home or other financial assets. Leaving an inheritance was well meaning, but improper planning created more of a problem than it solved. A trust can solve this problem.
In many circumstances, beneficiaries are already adults and have no current special needs. They are in stable relationships, have decent jobs, and everything seems to be fine. But a well-drafted trust can even benefit these beneficiaries, providing them with control and flexibility while still protecting their inheritance from unexpected financial misfortunes.
Do you have pets or livestock and want to provide for their ongoing care?
If you have a beloved cat or dog, horses, cattle, backyard chickens, or other animals dependent on you for care, you probably feel responsible to ensure they will be properly cared for if you’re incapacitated or when you die. But you can’t exactly designate your doodle or your cows as the beneficiary of your life insurance policy. A trust can nominate an appropriate caretaker, set aside funds for ongoing care of your animals or for the safe sale or transfer of their ownership to another person, and then clarify what is to be done with any undistributed funds for the animals.
Do you have assets that will be complicated to divide fairly?
Many clients own or have interest in a business, farm, or ranch. These can be complicated to fairly distribute, especially when certain children have participated in management while other children have not. A trust, in conjunction with other management documents, can help clarify your intentions, provide for equitable distribution, ensure ongoing proper management, and reduce potential conflicts about how these types of assets are to be distributed and administered.
Do you want to protect assets from long-term care costs?
Most of us will not move directly from health to death but will experience a period of incapacity. For many, this period will require some form of long-term care. Everyone is vaguely aware that long-term care is expensive, and most clients would prefer to protect their retirement savings or family property from the expense. Under certain circumstances, we can use specific and carefully drafted trusts to preserve assets, allowing the client to qualify for Medicaid and other benefits.
Note: A revocable living trust cannot protect assets from the costs of long-term care. Only certain kinds of trusts, each of which is irrevocable, can accomplish this. You can read more about this here.
Do you want to provide for ongoing charitable giving?
Clients will sometimes have pledges to a church, charity, or cause they want to honor even after they’ve died, or they many want to begin a charitable giving program upon their deaths. Either way, a trust can help facilitate giving, provide for the most tax efficient method of giving, and can ensure for both the charity’s sake and the sake of other beneficiaries that intentions for the giving plan are clear.
The trust can help answer questions like: How should the funds be used? When does the giving begin and end? What assets are available to fulfil the obligation? What types of oversight and accountability are in place? What happens if the charitable beneficiary no longer exists or changes its purpose?
Do you want to reduce the likelihood of conflict?
No one wants to set their children up for a fight, let alone a public one. When you think there will be tensions among family members – like when a child is estranged, or when there is a blended family, or when in-laws have negatively affect family dynamics, or when adult children have radically different value system or worldviews – a trust can provide the kind of privacy and clarity that reduces potential conflicts by addressing these issues directly.
Hopefully, these questions have helped you determine if a trust is a good fit for you. If you’d like more information or want to discuss your particular situation, let’s schedule time together.
Here's the stuff we always put at the end: If you want to know more, we would love to talk with you. Best part, the conversation about how it could benefit you doesn't cost anything. Call us at (918) 770-8940, send an email to email@example.com.
Disclaimer: Reading this blog post does not create an attorney-client relationship, and it is not formal legal advice. This is for information purposes only. It is always best to speak with an attorney about your questions, assets, concerns, and needs.