I retired a few years ago and have a will and power of attorney, a reasonably good-sized net worth, mutual funds, annuities, cash, a home with no mortgage and a long-term health policy. I’ve read about trusts, but I’m still not clear on the pluses and minuses of setting one up. Why is that better than just the will and power of attorney?
– Michael
I think many people ignore trusts because they seem elite. But you don’t have to be a multi-millionaire to set one up. Reader, it sounds like you’ve already created a solid estate plan with a will and a power of attorney. But these tools on their own, and without a larger plan, have limitations. Here’s why it might still make sense to get a trust.
A financial advisor can help you create a financial plan that leaves a legacy to your heirs. Find a financial advisor today.
Why a Will Might Not Be Enough
A will is like a basic instruction manual. It outlines how the assets that don’t get transferred via a designated beneficiary should be distributed upon your death.
However, a will has to be verified by your state’s court system in a process called probate, which can be long and costly for your heirs. This is doubly true if you own property in multiple states. Additionally, probate also means your estate becomes public record.
A power of attorney gives a trusted advisor or relative the legal authority to make decisions about your property, finances or healthcare, but only while you’re still alive. That last part is crucial: Upon your death, the agreement dissolves entirely. So, if you want your assets to pass to your heirs swiftly, specifically and privately, then a trust is worth considering.
The Benefits of Using a Trust
There are several situations in which a trust is better than just a will and power of attorney.
You have multiple heirs. If you plan to pass wealth to more than one person, such as your spouse, adult children or grandchildren, a trust can streamline the transfer of assets and establish if/then rules. This can be difficult to clearly and legally explain in a will. There are also specific trusts you can set up to pass all of your assets to your spouse at your death and allow you to decide who will get what’s remaining at your spouse’s death. You can’t guarantee this type of specificity with a will.
You’re passing assets to your grandchildren only. A generation-skipping trust sets aside wealth for your grandkids – or anyone at least 37.5 years younger than you – while bypassing the estate tax at your death. Your children, referred to as the skip generation, can still access any income-producing assets in the trust. Note that there may still be a generation-skipping transfer tax if your estate is large enough.
You want to add conditions to an inheritance. A trust allows you to be more specific about who will get an inheritance and when. They allow you to ensure your grandchildren don’t get their cut until they graduate from college or get married, for example, or that your spouse collects an annual income from the trust, but doesn’t have unbridled access to the principal.
You want part of your wealth to go to charity. Charitable trusts allow you to split current or future gifts between your beneficiaries, yourself and a tax-exempt charity. There are various tax incentives to donating part of your wealth to charity through a trust.
You have an estate worth more than $12.06 million. This is rare, but still worth mentioning. The federal estate tax applies to amounts over the $12.06 million exemption in 2022, which is doubled for married couples. Various types of irrevocable trusts can help you shelter your assets from the estate tax upon your death.
The Downsides of Using a Trust
Complexity: Trusts can be layered and complex. If you only have one or two heirs, and your main assets are the type where you can name a beneficiary – life insurance policies, real estate, retirement accounts or bank accounts – then a trust probably isn’t necessary.
Upfront costs: Setting up a trust often requires hiring an attorney. It can cost $1,000 or more to draft trust documents, plus additional fees if you’re seeking legal advice.
Ongoing costs: Even if you’re the one controlling the trust assets now, you’ll need to name a trustee who will take over when you become incapacitated or pass away. You can save money and put a family member in charge. But hiring a professional can help eliminate conflict of interest and lessen the administrative load on your family. The trustee’s fee will usually be charged as a percentage of the trust assets.
What to Do Next
It won’t hurt to do more research. If you think a trust might be right for you, you can save some money by really thinking about what your goals are before consulting an estate planning attorney. Knowing what you want to accomplish by setting up a trust will help the attorney quickly narrow down the best options for you.
Keep in mind that if you decide to set up a trust, you’ll need to revisit your will and power of attorney documents. It’s likely you’ll have to utilize all three to set up an airtight estate plan.
Tanza Loudenback, CFP® is SmartAsset’s financial planning columnist, and answers reader questions on personal finance topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.
Please note that Tanza is not a participant in the SmartAdvisor Match platform.
Tips for Managing Your Estate Plan
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Building an estate plan that both protects your assets and gets them in the hands of your loved ones after you’re gone can be difficult. However, a financial advisor can help with this. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Estate planning on your own is possible, if difficult. Before you start planning on your own, consider some of the dangers of DIY estate planning.
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