Non-Tax Reasons for a Trust in an Estate Plan

We’ve all heard of “trust fund babies” and know its negative connotation.  But trusts are not just for the rich and famous.  In fact, with current estate and gift tax exemptions at a high of $11.4 Million, most people are not even planning around estate taxes anymore.  Yet revocable living trusts are growing, despite this change. Here are the primary reasons why:

  1. Privacy.  When assets are passed to heirs through an estate administered in the Court system, heirs, assets, and expenses are all in the public record.  This is troubling to those who want to keep their heirs from being preyed upon by opportunistic predators looking to swindle them out of money or property.  When a revocable trust is used properly and funded prior to death, even if the value of the trust is listed, there is no public record of who is getting what, or when.  This can help families keep their financial affairs private and protected.  
  2. Protection.  Assets given outright to heirs become the property of those heirs and without knowing better, those heirs may not keep inherited property protected for their future.  An inherited asset could become available to the heir’s creditors, potentially to a spouse in a divorce proceeding (depending on certain factors), and may affect the heir’s ability to apply for financial aid or receive Disability or other public benefits (which can be devastating for such an heir).  However, with careful planning, a Trustee can be instructed when to make distributions to an heir, how to make distributions on an heir’s behalf, and how to protect assets from potential exhaustion.  Also, a trust can be named as a beneficiary on life insurance policies and even deferred income plans like 401K and IRA plans, thus avoiding the potential for an heir to come into a windfall or withdraw excessive funds, defeating the delayed taxation of a deferred income plan.  
  3. Minor Children. With minor children, you will need a trust if to avoid court involvement.  Many parents opt to put a testamentary trust in their will directly, rather than creating a revocable trust and funding it during life.  After all, it’s unlikely that both parents will die during the minority of children—despite our absolute need to plan for that possibility.  On the chance that it happens, a testamentary trust can meet the basic need for a trust.  However, a Will is public record, as discussed above, so all the details of the trust and the beneficiaries (who they are and what ages they are to receive funds) are publicly available.  This makes most parents nervous, since they don’t want to expose their children to potential financial attack.  A trust keeps things private while also being available as the named beneficiary on life insurance and IRA/401K plans, thus protecting assets even further for your children, be they minors or adults.  It also keeps the courts out of the picture in most cases.  
  4. Blended Families.  Even with divorce rates falling, a significant number of families exist where each spouse has children, even if they also share children.  This can get confusing when it comes to estate planning, and this is where trusts really shine.  Spouses can utilize trusts to make sure that their own children are protected if the non-parent spouse survives the parent spouse’s death.  A trust can make provisions for care of the surviving spouse during life while still protecting assets for the children of the deceased.  This is also an important consideration for younger spouses with children, due to the chance of remarriage if a spouse dies young.  If the surviving wife remarries and leaves everything to her new husband, the children of the deceased husband could be left out.  Unless the surviving spouse plans accordingly, the wife’s children may inadvertently not inherit anything of hers, which is usually not the intended result.  
  5. Lifetime Planning.  Even if you have no concerns about your estate—your children are grown and you are not worried about privacy or protection—you could still end up in a situation where a trust is helpful.  If you need someone to intervene in your financial affairs due to mental incompetence, having a funded trust can make the difference of a lengthy and expensive Guardianship proceeding (and subsequent court-mandated guardianship) or not.  A successor Trustee can take over your duties if necessary and keep your household and life running smoothly when you aren’t able with much less disruption than otherwise experienced.    If you are facing any of these situations, or if you have questions about how trusts may benefit your estate plan, Hutchens Law Firm attorneys are here to help you understand and make the decisions that are right for your family.   Interested in reading our blogs? Send an email to marketing@hutchenslawfirm.com to be notified when we have new estate planning vlogs and online articles. Susan K. Hill is an estate planning attorney at Hutchens Law Firm serving the Fayetteville and Wilmington communities. She holds a Master of Laws in Taxation (LL.M.) which allows her to assist clients with complex estate and business matters as well.

Published by Susan K. HIll