Do I need a trust? This is a question which surfaces frequently in my discussions, and the answer is a big, solid, definite “maybe”.
As with most financial considerations, the necessity of a trust depends upon you. There are plenty of cases where a trust makes sense, but in my experience, most trusts are sold by salespeople disguised as lawyers. As with any other major purchase, a little homework in advance can help you avoid buying something you don’t need.
What you most certainly need is an estate plan, which is simply a plan for how to handle your affairs in certain situations. Typically an estate plan covers the delegation of decision-making powers in a variety of situations. A good estate plan not only deals with the decisions that must be made when you die, but also in instances where you are alive and cannot make decisions for yourself, like incapacitation or dementia. That plan is executed through a variety of legal documents, to include wills, trusts, advance directives and powers of attorney.
The preparation, construction, and revision of these documents can be costly, so it is vital to build your estate plan alongside both personal and professional people you trust before drawing up any paperwork. This can help you avoid racking up needless costs.
First, let’s understand the difference between wills and trusts. Wills are instructions on how to distribute your stuff, including your minor children, after your death. In my professional opinion, every legal adult should have a will. It should not come as a surprise that, at some point in time, you will die.
Trusts are legal entities which can own your stuff (but not your children) before or after your death. For some people, trusts are smart pieces to an estate plan, but for others, they are simply a waste of money.
There are many reasons cited to establish a trust, but I believe only two are relevant. You should consider a trust if you wish to make the process of distributing your assets easier on your heirs, or if you need controls in place to protect your heirs who may be irresponsible or incapable.
Of course, it’s easy to acknowledge that almost everybody wants the process to be easier on their heirs. However, functionally this comes down to a break-even cost analysis. Will the money you spend on a trust outweigh the benefit it will provide upon your death? Chances are that if your estate is small, the answer is yes.
Consider the case of a widow in the state of Texas who has one living child, a paid-for home, and $100,000 in assets. She could spend an extra $2500 for a living trust and countless hours reassigning all of her assets to the trust. Upon her death, with no challenges to her will, her heir could likely navigate the probate process without professional help for less than $500.
Conversely, imagine a married couple living in Maryland (a financially unfavorable place to die) with kids they both brought to the marriage and an estate hefty enough to be subject to inheritance tax. Spending $2500 on a trust in this case is a no-brainer.
This is why the answer to the question is clearly “maybe”. It is very dependent on your situation. Have a special-needs child? If so, then establishing a trust is almost a foregone conclusion. If you are fortunate enough to have competent professionals in your circle that do not bill by the hour, seek counsel. And if not, just spending an hour on the web researching should help you be able to determine if you truly need a trust.