Do Most People Need a Living Trust?
Living trust and estate planning form on a desk.

Do Most People Need a Living Trust?

Avoiding the costs and extensive time needed to settle an estate through probate is one reason people like to use trusts in estate planning. This type of trust allows you to designate a trustee to manage the assets in the trust after you have passed.  This is especially important if heirs are minor children or adults who cannot manage a large inheritance. A living trust, as explained in the article titled “The Lowdown on Living Trusts” from Kiplinger, has additional benefits. However, there are some pitfalls to be cautious about, especially concerning transferring assets.

Certain assets do not belong in a living trust. Regardless of their size, some assets should never be placed in a living trust, including IRAs, 401(k)s, tax deferred annuities, health savings accounts, and medical savings accounts and others .

Placing these assets in a trust requires changing the ownership on the accounts. Don’t do it! The IRS will treat the transfer as a distribution. You will be required to pay income taxes and penalties, if any are triggered, on the entire value of the account.

You may be able to make the trust a beneficiary of the retirement accounts. However, it is not appropriate for everyone. Changes to IRA distribution rules from the SECURE Act may make this a dangerous move, since the trustee may be required to empty the IRA within ten years of your death.

For practical purposes, assets like cars, boats or motorcycles do not belong in a trust. To transfer ownership to the trust, you will need to retitle them. This would result in fees and taxes. You would also have to change the insurance, since the insurance company may not cover assets owned by trusts. The cost may outweigh the benefits.

Assets belonging in a trust include real estate, especially your primary residence. Placing your home in a trust will minimize the hassle of transferring the home to heirs, if this is your plan. If you own property in another state, transferring the title to a living trust allows your estate to avoid probate in more than one state. Remember to get a new deed to transfer ownership to the trust. If you refinance or take a home equity line of credit, you may need to transfer the property out of the trust and into your name to get the loan. You will then need to transfer the property back into the trust.

Financial assets can be placed in a trust. Stocks, bonds, mutual funds, CDs, money market funds, bank savings accounts and even safe deposit boxes can be placed in a trust. There may be a lot of paperwork, and in some cases, you may need to open a new account in the name of the trust.

Once the trust has been created, do not neglect to fund it by transferring assets. Retitling assets requires attention to detail to make sure all of the desired assets have been retitled. The trust needs to be reviewed every few years, just as your estate plan needs to be reviewed. Be sure to have a secondary trustee named, if you are the primary trustee.

Trusts are an excellent option if you live in a state where probate is onerous and expensive. Assets placed in the trust can be distributed with a high degree of specificity, which also provides great peace of mind. If you believe your oldest son will benefit from receiving a large inheritance when he is 40 and not 30, you can do so through a trust. The level of control, avoidance of probate and protection of assets makes the living trust a powerful estate planning tool.

Reference: Kiplinger (March 24, 2022) “The Lowdown on Living Trusts”

What are the Pitfalls of a Charitable Remainder Trust?

If you have discretionary funds and are philanthropically minded, a charitable trust can serve you well, giving money to an organization you want to support, while passing assets to beneficiaries without burdening them with estate or gift taxes, but is it right for you? Some of the answers can be found in a recent article from U.S. News & World Report titled “Should you Set Up A Charitable Trust?”

Some basics to consider about charitable trusts are:

  • There are a number of different types.
  • Consider all disadvantages and alternatives.
  • Make sure it works with your estate plan and your long-term financial plan.

The most common types of charitable trusts are the Charitable Remainder Trust (CRT) and the Charitable Lead Trust. For the CRT, funding begins with cash or other assets, like stocks. The trust pays an income stream to family members or beneficiaries while they are living or for a set period of time. When they die, or when the time period ends, the remaining assets in the trust go directly to the charity.

For a Charitable Lead Trust (CLT), payments first go to the charity and then the remainder transfers to the beneficiary at the end of the trust term. One of the benefits of the CLT is to reduce the beneficiary’s tax liability, while giving the estate a charitable deduction.

An estate planning attorney will help refine these choices to the ones best suited for each individual. The CLT and CRT let you support a cause you believe in, while alleviating the tax burden to loved ones.

Charitable trusts are also useful when wishing to sell an asset. If an asset with a large capital gain is to be sold, like real estate, individual stock or a business, the asset may be moved into the charitable trust. The trust becomes the owner of the asset, and then the asset can be sold, avoiding the capital gain. Speak with your estate planning attorney to ensure that this is done correctly.

What about the disadvantages? There are fees to establish and maintain a trust. Charitable trusts are usually irrevocable, so if your financial situation changes, you may not be able to gain access to the funds. There may also be some pushback from heirs or family members who would rather see your money being given directly to them and not a charity.

Make sure that the benefits you and your heirs seek to gain from establishing a charitable trust, whichever type you use, outweigh the management costs. Do not create a trust with money you may need in the future. Charitable trusts are feasible only if you have already paid off all debts and are confident you will not need any of the assets in the future.

The exact amount to put in the trust should be carefully considered, with an eye to future expenses and your overall financial status. Your estate planning attorney may wish to meet with you and senior officers from the charity to ensure a clear understanding of your wishes and make sure that this is the best solution for all.

Reference: U.S. News & World Report (Feb. 23, 2022) “Should you Set Up A Charitable Trust?”