When we receive calls from clients who want help putting together an estate plan, many of them want us to draft a simple will. Considering that around two-thirds of U.S. adults do not have an estate plan, a simple will can ensure that your property falls into the right hands upon your death. However, after consulting with us, many of our clients realize that their needs and goals are best met if they create a trust. How do you know whether creating a trust is right for you? Here are a few things to consider.
Privacy Considerations by Avoiding Probate
One reason why it may be preferable for you to create a trust is to keep your financial matters private. Whenever a person dies, any assets that pass-through probate will need to be accounted for in Court and will become a matter of public record. Examples of probate assets include any real and personal property that you may own (jewelry, clothing, artwork) in your own name. Typically, any property that passes through a Will is subject to probate.
By contrast, assets that pass outside of probate typically include any property that you jointly owned with someone else, IRAs, 401(k) plans, and life insurance proceeds that are payable to designated beneficiaries, payable-on-death accounts, and any assets held in a revocable trust. Properly drafting and funding a revocable trust can ensure that all of the assets that are held in the name of the trust are properly distributed to your loved ones without court intervention or public knowledge.
Do You Own Properties in Multiple States?
If you own real estate in multiple states, creating a revocable trust as a will substitute may be right for you. Generally, a probate proceeding will need to be initiated in each State where each property lies before title to real estate can pass to your intended beneficiaries. To save your loved ones thousands of dollars in probate fees and possible attorney’s fees, you may want to consider creating a revocable trust, transferring your properties into the name of the trust, and directing your successor trustee about who you want to receive each of your properties upon your death.
Asset Protection
One significant advantage to creating a trust over a Will is asset protection. Many people create irrevocable trusts to insulate their assets from taxes or creditors. A common irrevocable trust that our clients with disabilities often create is a Special Needs Trust, which prevents assets in the trust from being counted to allow them to become eligible for public benefits programs such as Supplemental Security Income (SSI) benefits and Medicaid. That being said, creating an Irrevocable Trust requires significant aforethought since the creator of the Trust will relinquish control and access to the trust assets.
Creativity
Finally, we often recommend clients create a Trust if they want to creatively address problems that a Will cannot. For example, many trusts are created to help clients avoid paying estate tax. Examples of such trusts include:
- Irrevocable Life Insurance Trusts (ILIT): An ILIT is created to own and manage a life insurance policy where the proceeds are paid directly to the trust beneficiaries upon the death of the insured. A major benefit of an ILIT is that the life insurance policy proceeds are removed from your estate, thereby reducing estate taxes. Also, the life insurance proceeds can provide liquidity to help pay for any estate taxes or debts.
- Qualified Personal Residence Trust (QPRT): A QPRT allows you to transfer your primary residence or vacation home to the trust for a fixed term, after which it passes to beneficiaries. This transfer reduces the value of your estate and can lower estate taxes, but you must pay rent to live in the residence during the trust term.
- Spousal Lifetime Access Trust (SLAT): A SLAT allows a person to transfer assets to a trust for the benefit of their spouse while reducing estate taxes. The beneficiary spouse can access the trust assets during their lifetime, but the trust assets pass to the named beneficiaries upon the death of both spouses.
- Grantor Retained Annuity Trust (GRAT): A GRAT allows you to transfer assets to the trust for a fixed term, during which you receive an annuity payment. At the end of the term, the remaining trust assets pass to the named beneficiaries. The value of the gift to the trust is determined by the IRS, which takes into account the annuity payment and the length of the term.
- Charitable Remainder Trust (CRT): A CRT allows you to transfer assets to the trust, which then pays you or another named individual an annuity for a fixed term or for life. After the term, the remaining trust assets pass to a designated charity or charities. This transfer can provide you a tax deduction and reduce estate taxes.
- Charitable Lead Trust (CLT): A CLT allows you to transfer assets to the trust, which then pays a designated charity or charities an annuity for a fixed term or for life. After the term, the remaining trust assets pass to the named beneficiaries. A CLT can provide you a tax deduction and reduce estate taxes, while also allowing you to support a charitable cause.
These are a few reasons why creating a trust may be right for you. Are you still unsure about which estate planning option is best for you? Contact us today at 703-558-9311 to schedule your free consultation with us or click here to fill out our contact form and we will contact you. We serve families living in Virginia, the District of Columbia, and Maryland.