Many people think you need to own a mansion or have a ton of money to have a Trust. Not so. Regardless of the size of your home or bank account, you can create a Trust that would benefit a loved one. Here are eight reasons you might need a Trust.
Do I Need a Trust or a Will?
First, we should look at the differences between a Trust and a Will. They are separate estate planning documents serving specific purposes. Let’s drill down into each:
Trust
There are several types of Trusts, the most common are a Revocable Living Trust and an Irrevocable Living Trust. A Revocable Living Trust can be changed or terminated at any time where an Irrevocable Living Trust cannot be amended or voided. In most cases, you set yourself as the Trustee in a Revocable Living Trust, and therefore in some way you still control the assets as you control the Trust that owns the assets. In the Irrevocable Living Trust, you transfer ownership of your assets to the Trust and usually appoint someone else to serve as Trustee. Generally this is done for Medicaid long term care planning.
Both hold assets while you are alive that automatically transfer to designated beneficiaries upon your passing. You appoint a trustee to manage the assets on behalf of the beneficiaries.
A Trust controls your assets while you are living, ensures they will go to your beneficiaries after you die, and may avoid the probate process, keeping your affairs private.
Will
You list assets you want to leave to beneficiaries of your choosing when you die. A Will also allows you to name an executor also known as a Personal Representative for your estate and guardian to care for your minor children if something happens to you. A Will must go through probate, which is a public, and sometimes a lengthy and costly process.
How Does a Trust Work?
Here’s an example. You want your children to inherit your home and financial accounts when you die. You create a Trust and retitle your home and accounts, naming the Trust as the owner. You name your children as the beneficiaries to inherit the assets after you pass.
You choose someone as the trustee to oversee the Trust. However, you have the option to serve as the trustee yourself, naming as successor trustee to take over if something happens to you. After you die, the trustee distributes the assets to your children according to the instructions you placed in the Trust.
Why You Might Need a Trust
- Caring for Your Surviving Spouse – You can set up a Trust that provides an income stream to your surviving spouse. Any monies left in the Trust when the surviving spouse dies will go to the named heirs.
- Protect Your Children from Themselves – The trustee can distribute money accordingly if you have a child who has a substance addiction or has not made good financial decisions.
- Shielding Assets from the Nursing Home – Sadly, many elders end up in a nursing home when they can no longer care for themselves. According to the Centers for Disease Control and Prevention, about 1.4 million American are currently long-term care nursing home residents. That number is expected to spike to about 27 million by 2050. With the average cost of nursing home care being roughly $7,700 per month, the money you saved for your retirement years can be quickly wiped out. In this case, you may be forced to sell your home and assets and turn the funds over to the nursing home to continue your care. If you qualify for Medicaid, the government can seek reimbursement from your estate after you die. Keep your home and assets out of the hands of the nursing home and Medicaid by creating an Irrevocable Living Trust. Since assets in this Trust are no longer owned by you, they are shielded from the government or long-term care facility seeking compensation.
- Creditor Protection –Generally, an Irrevocable Living Trust protects your assets and property from creditors, lawsuits, and bankruptcy. If assets are placed in a Revocable Living Trust, creditors may have the legal right to go after your assets.
- Planning for Incapacity – If a serious accident or illness strikes and you are impaired, your successor trustee can step in and use the assets in your Trust to pay bills per the terms of your Trust.
- Provide for Your Children – You can create a life gift for your children by placing assets in a Trust with instructions of how much and how often the funds are to be allocated during their lifetime. If you bequeath assets to your children in a Will, they will receive a lump sum inheritance which could easily be spent very quickly.
- Avoid Probate – One of the biggest advantages of a Trust is avoiding the probate process, saving time and money.
- Charity/Gifts – A beneficiary in your Trust or Will does not have to be a person. You can leave assets to your favorite charity or organization.
The Cost of Creating a Trust
The cost of creating a Trust can range from about $100 for an online Gentreo Trust to $1,000 or more if created by an attorney.
As you can see, a Trust can help you and your loved ones in many situations.
