Often in my practice I am asked by clients about trusts. Many people presume that trusts are the best approach to estate planning. You may be surprised to learn that a trust really isn’t for everyone. When I meet with a client, I start off by asking about their assets and their goals and what is most important to them. I get a wide variety of answers that can indicate whether we might want to draft a trust. When people initially have a trust in mind, their main concern is usually maintaining privacy, avoiding probate and/or avoiding estate taxes.
Let’s tackle estate taxes first. In years past, when the estate tax exemption amount was much lower and many more estates were subjected to paying estate taxes, lawyers preferred trusts for almost all estate plans. Do you or your spouse individually own more than $10 million in assets? Do you expect to own close to that number at the time of your death?
If you answered, “No,” then you probably don’t need a trust. For 2018, the estate and gift tax exemption is $10 million per individual. That means that an individual can leave $10 million to heirs and pay no federal estate or gift tax. Most people’s estates are well under the current estate tax exemption amount, so their estates aren’t subject to federal estate taxes at all. That means that you don’t need to worry about estate taxes anyway.
If you answered, “Yes,” then you do need a trust. This is because you expect to pass away owning more than the amount of the estate tax exemption. If estate tax planning is your primary concern, you will need a more complicated trust than this article will address. We’ll work with your accountant and financial advisor to make a strategic plan involving a couple of trusts and appropriate tax elections. But keep in mind that this complex set of trusts can be created to minimize these taxes, but it is unlikely that estate taxes can be totally avoided.
Next let’s consider probate. Probate is the legal process wherein the estate of a deceased person is administered. When a person dies, his or her estate must go through probate, which is a process where the deceased person’s property and assets are accounted for and distributed by the personal representative (or “executor”) and the process is overseen by the county probate court.
In many other states probate is a time consuming, lengthy, costly, and burdensome process, requiring many trips to the probate judge to get court permission to deal with property. It was drilled into my head in law school that estate planning attorneys needed to create trusts for folks in just about every case in order to avoid the much dreaded probate.
Here’s the twist. In New Mexico and Texas, the probate process is not cumbersome and is surprisingly simple. The New Mexico probate forms are available for free on the New Mexico Supreme Court website and you don’t need an attorney to probate a Will, although you may want one for peace of mind. You may be surprised to learn that the legal fees for a typical probate cost less than the price of creating a typical trust.
Living trusts are much more expensive to draft and are also more work to maintain than a Will. The cost of a living trust is more than the cost of two Wills because it is more work for the lawyer. Additionally, the trust must be funded to be effective, and that requires additional time to complete. Any property not transferred into the trust will be subject to probate. Furthermore, couples with trusts need two simple Wills in addition to the trust.
Privacy is a factor that might determine whether a trust is a good choice for you and your family. Trusts allow for management and control over property for many years after death, and trusts also allow for more privacy and less public disclosure of family assets. Because a trust can keep your property out of probate, it can also keep asset values private.
Finally, the following are some key advantages to living trusts that we have not yet discussed. A living trust may be appropriate if you have a blended family. Life gets complicated, and conflicts may arise after your death, and a trust may allow you to better balance the needs of your spouse and children from a prior relationship. A trust may also simplify things for your family after your death if you own real estate in multiple states. Depending on the laws of the state where the real estate is located, a trust may be used to avoid an ancillary probate in other states. Moreover, a trust is a good way to plan for a spouse’s incapacity. A trust requires that property be controlled by the terms of the trust agreement. Therefore, the trustee is legally obligated to spend the trust funds for the benefit of the beneficiary in accordance with the terms of the trust, thus an incapacitated spouse may be better protected from frivolous spending by a caretaker.
In summary, unless maintaining privacy and avoiding probate or estate taxes are your primary concerns, you probably don’t need a trust. Click here to read my bullet list debunking some common myths about trusts.