Why Do I Need a Trust?

A simple will works for some people, but it’s not for everyone. For those is in a second marriage, have minor children, or are concerned about fraud, a trust may serve you much better. 

There are some simple estate planning techniques that you can use to avoid probate and simplify things for your heirs when you die, for example: adding beneficiaries to your retirement accounts or adding transfer on death (TOD) designations to your regular checking and savings accounts is a simple planning technique anyone can use. When you pass away these assets will avoid probate and can be transferred directly to the listed beneficiary. Once the beneficiary receives the proceeds, they can do whatever they like with the funds.

But, if having assets distributed outright to a beneficiary could cause potential problems, this is when to consider a trust.

Here are a few of the reasons you may want to use a trust for estate planning:

Conditions on Distributions

If you want to create specific conditions on the funds, you should have a trust in place. Many trusts require that distributions can only take place at future ages – for example one-third of the inheritance received  at age 30, one-third at age 35 and the rest at age 40. Some clauses require that the beneficiary pass a drug test, attend and graduate college, or have stable employment before the trust will pay out.

Trusts can be especially important with second marriages where one spouse wants to leave his or her assets to their own kids and not their stepchildren. For example, a client with a large IRA may want to pass the account to his wife for use during her lifetime, but through a trust, which ensures that the remainder of the assets go to his kids or whichever beneficiaries he has chosen prior to his passing. If he leaves the account outright to his wife, she has the ability to add whomever she chooses as beneficiary and ultimately bypass his wishes.

Creditor Protection

If your profession has a high probability for liability, having assets passed down in trust (once the trust becomes irrevocable) may shelter funds from being attached in a lawsuit. This can be very specific with respect to state law and the type of lawsuit, so understanding the ins and outs of this technique before making any decisions is important.

Passing Funds Outside the Estate

For large estates that are expected to grow even larger, creating trusts during your lifetime and gifting assets can remove the growth from your estate and lower future estate taxes. If your estate is likely going to be higher than the exemption (currently at $12.06 million per person for federal estate taxes) and you have more funds than you need to live on, funding an irrevocable trust now may be beneficial.

Also remember, revocable (or living) trusts become irrevocable on your passing, so anything in the revocable trust will be out of the beneficiary’s estate.

Complex Beneficiaries

If you have many beneficiaries in different proportions and want to specify who gets what – for example if you have four children and you want to leave 25% to one child but 75% to another and 0% to the remaining two – you may need to use a trust to avoid challenges or other issues.

Minor Children

Trusts are important when minor children are involved because you are also going to require a legal guardian for the child, who may also be in charge of the funds. Since minors cannot own assets outright you would want to make sure the funds are protected. The trust should specify your intentions for the funds and the conditions so the child (or the guardian) cannot be frivolous with the funds or to be sure the funds are used according to your wishes such as school or other expenses. If you leave the funds outright to the minor, the guardian can easily spend those funds or list their own beneficiaries.

Providing for Grandchildren

If your intention is to provide for grandchildren on your passing, or you don’t trust the parents to set inheritance funds aside for their kids, creating a trust for the grandkids (or future grandkids) is an option. If you leave assets outright to their parents there is no guarantee that the funds will not be spent by the parents and never go to the grandchildren.

Protect Against Fraud or Beneficiary Changes

There have been multiple stories of elder abuse and fraud. Older people can be coerced or tricked into updating their beneficiaries when they are in the hospital or under hospice care. If the elderly individual is able to sign a form and their signature matches what is on file at the custodian and they have no immediate family to catch the update, this can be problem and it happens a lot!

Updating a beneficiary is much easier paperwork than updating an entire trust, which requires the help of an attorney. If the elderly person is not of sound mind an attorney during the signing would likely be able to notice something is wrong and at the very least submit the signer to questioning.

Special Needs Beneficiaries

If you have beneficiaries who are incapacitated or require special care due to mental or physical disability, setting up a special needs trust may be required. It is very important to not put the beneficiary in a situation where he or she either becomes disqualified for benefits he or she may already be receiving or disqualifying the person from future potential benefits. A special needs trust, when set up correctly, should not interfere with government benefits or disability payments.

Getting the advice of an estate planning attorney about your individual situation and your intentions is important before you make any decisions so you can be guided on how to protect your assets and your wishes.

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Todd Murphy

Todd Murphy is an estate planning lawyer in Morristown New Jersey where he helps modern families of all ages plan for the future.

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