Should I Have a Trust?

This has to be one of the most common questions posed to me. And the answer is not necessarily simple, but there are definitely some guidelines that I use to determine whether I should recommend trust-based planning. We’ll start with the revocable living trust, the most common type of trust – this is the trust that is basically used to avoid probate; the trustmakers can revoke or change its terms at any time, they generally remain the trustees and in full control of the trust assets for as long as they are alive and competent. My guess would be that 99% of the trusts in existence in the U. S. are (or were, before the trustmaker(s) died) this kind of trust.

First, a caveat. Although one of the main reasons that people create trusts is to avoid probate, in at least half of the cases that I have been called upon to help settle a trust after someone has died, a probate was necessary even though there was a trust! Why is this? Usually, because the deceased person had some substantial assets that they hadn’t put into their trust (this is called “funding” the trust). This can happen for many reasons. Sometimes people just forget, or don’t want to go to the trouble of transferring an asset. Sometimes people inherit assets and die before they can receive the asset and transfer it to their trust. Sometimes people are involved in litigation when they die, and don’t receive a settlement or award until after death.  Trusts can be useful even if not funded, but obviously if the purpose is to avoid probate, having substantial assets (including ANY real estate, even a timeshare) that is not in the trust will frustrate this purpose. I have put a purple “F” by each reason that requires that the trust be fully funded in order to meet the specified objective. If there is no “F”, the objective may be met by creating a trust that is funded only through a will, which would need to go through probate in order to get the assets into the trust.

So, when should you definitely consider creating, and funding, a revocable living trust?

– If you own real property located in more than one state (this includes real property interests of all kinds, including partial interests, timeshares, property that is mortgaged, etc.) (F – any real estate not in the trust will require a probate in the state where it is located, which can be expensive and time-consuming);

– If you live in, or own real property in, a state with laws that make probate extremely difficult, lengthy, or expensive (such as California) (Note: this is NOT the case in Hawaii, but explains why many folks who have moved from California, or have relatives there, may have heard that “everyone should have a trust,” or horror stories about probate) (F – if you live in such a state, all assets should be funded to the trust; if you do not live there, all real property located in such a state should be funded, to avoid probate in the “difficult” state);

– If you have minor children or dependents, or if you want to leave money or other assets to anyone who has special needs or is receiving (or may receive in the future) government benefits;

– If you wish to disinherit completely (leave nothing to) one or more of your natural heirs (those who would get your property if you died without a will, trust or other planning) (F – heirs will receive notice if a probate is required, but they may not learn of the existence of assets that have been funded to the trust, or the identity of trust beneficiaries. If trust is fully funded, notice to disinherited heirs may not be required.);

– If you have a very large estate, and need to plan to minimize estate and income taxes at your death;

– If you are married, and after you die, you want your spouse to be able to use the assets you have left behind, but not be able to leave those assets to whomever he or she pleases (e.g., a new spouse, children that are not yours) without restriction (that is, to be able to change the plan you have set up before your death);

– If you wish to specify the terms for distribution of assets to your beneficiaries (timing, conditions or incentives, etc.), rather than have them simply receive their inheritance all at once upon your death;

– If you wish to protect the assets that you leave to others from their creditors, future divorcing spouses, and others who might try to separate them from their money or property; or

– If you wish to keep the details of your estate (what property you have and who gets it) private after your death (F – assets that go through probate may have to be disclosed in a public court record; heirs will have to be notified even if they receive nothing. Names of trustee(s) will be public, but trust beneficiaries’ names may remain private.).

NOTE: There are some common misconceptions about this kind of trust (revocable living trust). It will NOT protect your assets from your creditors, including people who sue you! It will NOT protect your assets from having to be “spent down” so that you can qualify for Medicaid to pay for nursing home care, or protect your home from being liened by the state if you receive Medicaid for long-term care. Nor will it – in most cases – have any effect on your tax liability (either at death or during life), unless it is used in conjunction with additional planning strategies. (We have strategies and tools to help with all of these things, but just creating and funding a revocable living trust will NOT accomplish these goals.)

Other trusts can be used for other purposes. You might consider:

– A Special Needs Trust to protect assets for someone receiving need-based government benefits, such as Medicaid or SSI;

– A Retirement Plan Trust if you have a large amount in IRAs, 401(k)s, or other qualified retirement assets, and you would like those assets to continue to be protected from creditors after they are passed to your beneficiaries;

– An Irrevocable Asset-Protection Trust if you have a large amount of assets, NO current trouble with creditors or judgments, but substantial risk of being sued in the future (e.g., physicians and others in high-risk professions or occupations);

– A Medicaid Asset Protection Trust if you want to ‘give away’ your assets so that you can qualify for Medicaid to pay for long-term care in the future, but want to put some limits on how and when your beneficiaries can use those assets;

– Irrevocable Life Insurance Trusts, and other complex trusts if you have a large estate (over $5 million if unmarried, over $10 million if married) and want to reduce or eliminate estate taxes. (NOTE: If your estate, including life insurance proceeds, business value, retirement assets, etc. exceeds about $4.5 million, you should consult with an experienced estate planning attorney regularly!)

For a detailed review of YOUR SITUATION, to determine whether you should consider a trust-based estate plan, a will-based plan, or other options, call Kauai Estate Law today for a free consultation.