Do I need to establish a trust?

One of the more commonly pitched financial protection vehicles to high-income individuals is a trust, or living will.  It is essentially a document that lays out instructions to distribute your belongings to your heirs at the time of your demise. We briefly discussed an overview of this vehicle in a prior post, Do doctors need to establish a trust for their heirs?

In this post, we will review step-by-step how to decide whether you and your beneficiaries will benefit (get it?) from a trust.  Remember that there are essentially two goals of a trust: (1) to eliminate any ambiguity with distribution of your wealth when you are pushing up the daisies, and (2) to avoid probate court.  Why is probate court so bad? It really isn’t, but the process can delay the distribution of your estate by months and chew up a chunk of funds for legal fees. 

In some cases where your heirs might not have the money to pay the legal fees, a trust can allow you to set aside a certain amount of your estate to pay the legal fees.  The options can be endless.

Estate Tax

Right off the bat, if you have greater than $11.58 million or more in the year 2020 you probably need to establish a trust and enlist the advice of an estate professional.  This is a sizable amount, and it would save a lot of headaches if there were explicit instructions to distribute your wealth.  Additionally, many states impose estate taxes on a much smaller amount.  Check with your state’s limits to help decide if you’d benefit from a trust.

Step One: List your valuables

The first step is to decide what you have that is worthwhile to give.  This includes bank accounts, retirement accounts, real estate, and the various pieces of artwork that you collected while you were in Egypt.  The greater number of people and items that you have to distribute, the more likely a trust would prove helpful.  Think about it.  If you only needed to give everything to your spouse or single child, then there is usually not a huge need to establish a trust. 

Step Two: Eliminate accounts with POD options

Payment on death—this is essentially an option that many investment and bank accounts have that allows the owner to list a beneficiary to the account.  Sometimes these are listed as beneficiary options on your accounts.  By default, your beneficiary receives access to the account when the primary owner of the account expires.  There is no probate process needed to reassign ownership of a bank account to a beneficiary.

The accounts that you have listed in Step One that have a beneficiary option do not necessarily need to go into a trust.  What you are left with will help you decide whether it would be worthwhile to establish a trust.
For simple estates, most people are left with their primary home, their vehicles, and any other items of value that may not have a title or deed, like a painting or jewelry.  The big ticket item is usually the primary home.  

Alternative options to transfer ownership of property

Just like your investment and banking accounts, there are few options to transfer ownership of real estate without going through a trust.  As of 2020, the following states allow a form of “transfer on death” deeds on property:

  • Alaska
  • Arizona
  • Arkansas
  • California
  • Colorado
  • Hawaii
  • Illinois
  • Indiana
  • Kansas
  • Maine
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • Nevada
  • New Mexico
  • North Dakota
  • Ohio (similar concept in the form of an affidavit)
  • Oklahoma
  • Oregon
  • South Dakota
  • Texas
  • Utah
  • Virginia

There are states that also offer enhanced life estate deeds, also called Lady Bird Deeds:

  • Florida
  • Michigan
  • Texas
  • Vermont
  • West Virginia

If you do not live in any of these states, then this option is does not apply to you. A Lady Bird Deed is simply an equivalent to the payment on death forms that banks often provide.  While every state has different rules, you simply need to transfer your existing deed to the new deed and record it with the local government.  Many legal services will offer this option for no more than $100—if you do it yourself, your cost would only be your county’s recording fees and the cost of a notary.

Making the lives of others easier is not a bad thing

If you life in any of the above mentioned states and your primary household is the only big ticket item that you own, then you can still avoid probate court by updating the deed to your house.  

What is left can go into a trust

Personal artifacts and jewelry can certainly go into a trust, but you have to decide whether there is truly any benefit for doing so.  How many of these items are there, and how many people do you intend to distribute these items to?  Would it be possible to gift these items to them while you are still alive? 
Ultimately, you have to decide how much simpler you can make your heirs’ lives when you’re no longer around.  If that means establishing a trust to simplify the inheritance process, it would be worthwhile investment.

Do you have a living trust for your heirs?

All statements in this article and website are only opinions and should NOT be construed as professional advice.  Consult a tax planning professional if you are seeking help in the matters discussed in this post.

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