Do you need a trust? What to know and consider

Trusts are often mentioned in discussions about estate planning, but many people are uncertain about whether they need one, what a trust can do, and how they can accomplish their estate planning goals with or without one. This article explores these questions, especially focusing on clients with younger children and how they can ensure their wishes are met.

Who needs a trust?

A trust isn't just for the wealthy; it's a tool that can serve various purposes depending on individual circumstances. You might consider a trust if you:

• Want to avoid probate: Trusts can help bypass the often lengthy and costly probate process, allowing for a smoother and more private transfer of assets.
• Have minor children: A trust can specify terms for financial support and care of minor children, ensuring they are taken care of in the manner you specify.
• Own property in multiple states: Using a trust can simplify managing real estate in different states by avoiding multiple probate proceedings.
• Seeking to control how your assets are used: A trust can set detailed rules about how assets are to be handled and spent (e.g., education funds, business continuity, or special needs care).• Concerned about privacy: Trusts are not public documents (unlike wills), so they keep your estate matters private.

What does a trust do?

At its core, a trust is a legal arrangement where one party (the trustor) gives another party (the trustee) the right to manage assets for the benefit of a third party (the beneficiary). The main functions of a trust include:

• Asset management: The trustee manages and invests the trust assets according to the terms laid out by the trustor.
• Distribution control: Trusts can specify how and when beneficiaries receive assets, which is particularly useful for beneficiaries who may not be financially savvy or who might need long-term care.
• Tax benefits: Certain types of trusts can reduce estate taxes or offer other tax advantages.
• Protection from creditors: In some cases, trusts can offer protection from creditors and legal judgments.

How do I accomplish my wishes without a trust?

If a trust does not seem appropriate for your situation, there are alternatives:

• Wills: A will is a simpler way to ensure that your assets are distributed according to your wishes after death. However, wills must go through probate.
• Joint ownership: Assets owned jointly, typically with a right of survivorship, pass automatically to the co-owner upon your death.
• Beneficiary designations: Retirement accounts, life insurance policies, and some bank accounts allow you to designate beneficiaries who will receive assets directly, bypassing a will and probate.
• Gifts: Giving assets while you are alive can be a way to manage where your assets go and can also provide tax benefits.

Accomplishing wishes for clients with younger children without a trust

For clients with younger children, ensuring their care and financial stability is paramount. Without a trust, here are ways to fulfill these wishes:

• Guardianship: Designate a guardian in your will to take care of your children if you cannot, ensuring they are raised by someone you trust.
• UTMA/UGMA accounts: Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts allow you to leave assets for your children that a custodian manages until they reach adulthood.¹
• Life insurance: A robust life insurance policy can provide for your children’s financial needs in your absence. Ensure the policy’s beneficiary arrangements are clear and reflect your wishes.
• Education funds: Consider setting up a 529 college savings plan that grows tax-free to fund your children's education.

Deciding whether to set up a trust involves considering your specific financial, familial, and legal circumstances. While trusts offer comprehensive solutions for many estate planning issues, alternatives exist that might better suit less complex situations, especially for those with younger children. Consult with a financial advisor or an estate planning attorney to explore what best meets your needs and ensures that your wishes are carried out effectively.

Source: https://www.investopedia.com/terms/u/ugma.asp