We discussed the importance of establishing a will in a smart estate plan in our last blog. The second component of the smart estate plan is often a trust. A trust is nothing more than a means of transferring property to a third party. Specifically, a trust lets you transfer title of your assets to trustees for the benefit of the people you want to take care of—aka your selected beneficiaries. The trustee will carry out your wishes on behalf of your beneficiaries.
Wills and Trusts Compared
Broadly speaking, there are two types of trusts: living (established while you are alive) and testamentary (created by your will after you’ve passed). Living trusts are becoming more and more popular to avoid the cost of probate. In the probate process, your representatives “prove” the validity of your will. The probate process also gives any creditors the opportunity to collect their due before your estate is passed to your heirs. There may be a long delay in settling your estate as it goes through probate. To add salt to the wound, probate can be costly.
A living trust can avoid or mitigate the effects of probate. It is a revocable trust that you establish and of which you are also typically the sole trustee. The assets in your living trust avoid probate at death, and are instead distributed to your heirs according to your wishes.
Living trusts are sometimes said to be superior to a will, but that is certainly not the case for everyone. It’s important that you understand how they compare.
Is a trust for you?
- Are your beneficiaries unwilling or unable to handle the responsibilities of an outright gift (investing the assets, spending the gift wisely, etc.)?
- Do you want to keep the amount and the ways your assets are distributed to heirs a secret?
- Do you want to delay or restrict the ownership of the assets by the beneficiary?
- Do you need to provide protection from your and/or your beneficiary’s creditors and plaintiffs?
- Do you want to lower your estate taxes?
If you answered “yes” to any of the five questions, you may find it beneficial to set up a trust.
Comparing Wills and Living Trusts
Is a living trust for you? It depends on your particular situation. Soundmark would be happy to help you with your estate plan and determine the best route for you.