For many people, estate planning starts with a will, a durable power of attorney and a healthcare proxy.
These documents are important. They help determine who receives your property, who can make decisions for you and how your wishes are carried out if you are no longer able to speak for yourself.
But in some situations, they may not be enough.
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A trust can be an important part of an estate plan, but it is also one of the most commonly misunderstood estate planning tools. As an estate planning attorney with several years of experience, I have heard a number of assumptions.
Some people assume a trust is only for the very wealthy. Others think a trust is only about taxes. Some believe that if they have a will, they have already avoided probate.
None of those assumptions is necessarily true. My job is not only to ensure an efficient and orderly transition of assets for my clients, but also to ensure that they understand why I am recommending certain documents, including a trust, as part of their estate plan.
What is a trust?
At its most basic level, a trust is a legal arrangement. Think of it as a contract between the person creating the trust and the person responsible for administering it.
The person creating the trust may be called the grantor, settlor or donor. The person responsible for managing the trust is the trustee. The people who benefit from the trust are the beneficiaries.
The trust says, in effect:
- Here are the assets
- Here are the people I want to benefit
- Here is how I want the assets managed and distributed
- And here is the person I am trusting to carry out those instructions
That trustee has a fiduciary obligation to administer the trust according to its terms and in the best interest of the beneficiaries.
Trusts are not just about avoiding probate
One of the most common reasons people consider a trust is to avoid probate. That is a valid reason, but it is not the only one.
Probate is the court-supervised process for administering assets that are part of someone’s probate estate.
In Massachusetts, for example, the probate process requires forms to be filed with the court, reviewed and approved. A personal representative must be appointed.
There is also a one-year creditor period during which creditors can file claims against the estate. If assets are distributed too early and a valid creditor claim later appears, the personal representative can be responsible for that claim.
Probate can add time, expense and administrative burden at a point when families are already dealing with a loss. A trust can help avoid that process for assets that are properly transferred into the trust.
For example, if a house is owned by the trust, the trustee can administer or distribute the property according to the terms of the trust, rather than requiring the family to go through probate for that asset.
But a trust is not the only way to avoid probate. Beneficiary designations can also do a significant amount of work. A checking account, savings account, retirement account or other financial account may be able to pass directly to a named beneficiary outside of probate and accomplish much of what is needed in some circumstances.
A will does not avoid probate
Another common misconception is that having a will means your family avoids probate.
A will is important, but it does not keep you out of probate. In many cases, the will is the document that gets filed with the probate court to begin the probate process.
What a will does is provide direction. It tells the court and the personal representative how you want your probate assets distributed. It can reduce uncertainty and clarify your wishes. But the will still has to be accepted by the court, and the personal representative still has to be appointed.
A trust works differently. A revocable trust, often called a living trust or inter vivos trust, is created during your lifetime. It can hold assets while you are alive and provide instructions for how those assets should be administered after your death.
A common estate plan may include a health care proxy, durable power of attorney, pour-over will and revocable trust. The pour-over will acts as a backup, directing any assets that end up in the probate estate into the trust. The trust itself typically contains the detailed instructions for administration and distribution.
When does a trust make sense?
A house is often one of the major reasons people create a trust, because transferring the house into the trust can allow it to be administered without probate. A trust may also make sense if you want to leave assets to a minor child, niece, nephew or grandchild. Most people would not want an eight-year-old to receive a large sum outright. They also may not want the child’s parent or guardian to have unrestricted control over the money.
In that situation, the trust can provide that funds be used for the child’s education, health, support or other needs. It allows the person creating the trust to provide for the beneficiary while putting guardrails around how the money is managed.
Trusts can also help when a beneficiary is not great with money, has creditor issues or struggles with dependency issues. The goal is to protect the assets and provide structure. A trust can also be amended during your lifetime, if it is revocable, to reflect changing circumstances.
What about blended families?
Trusts can be especially helpful for blended families.
A person in a second marriage may want to provide for a surviving spouse while also ensuring that children from a prior relationship ultimately receive an inheritance. If everything is left outright to the surviving spouse, the surviving spouse may later change their estate plan, remarry, spend the assets or leave the remaining property to different beneficiaries.
A trust can create more clarity and help avoid conflict. It can allow assets to be used for the surviving spouse during the spouse’s lifetime, while preserving what remains for children or other beneficiaries after the spouse’s death.
Are trusts only for people with more than $2 million?
No. Tax planning is one of the more common reasons to use a trust, but it is not the only reason.
In Massachusetts, the state estate tax threshold is $2 million. For married couples whose combined assets exceed that amount, trusts may be used to shelter assets and defer or reduce estate tax exposure. Assets can include cash, a home, retirement accounts, bank accounts, brokerage accounts and business interests.
But many people who are below the estate tax threshold may still benefit from a trust for non-tax reasons, including probate avoidance, privacy, real estate planning, minor beneficiaries, family complexity or beneficiary protection.
What does a trust cost?
The cost varies by region, law firm and complexity. Some firms charge a flat fee. Others charge hourly. A straightforward trust may cost a few thousand dollars, while more complex planning can cost more. While that upfront cost can feel significant, for many families, it is often less than the expense and delay of probate later.
The key is to start with your goals. What do you own? Who do you want to benefit? Are those beneficiaries ready to receive assets outright? Are there family dynamics that could create conflict? Are there tax, probate or creditor issues to consider?
A good estate plan should not be more complicated than it needs to be. But it should be thoughtful enough to accomplish what you actually want. A trust can provide that structure when a will or beneficiary designation alone does not go far enough.