As an estate planning attorney, the number one question I receive is, “Do I need a trust?” While many attorneys default to selling clients on establishing trusts, trusts are not a one-size-fits-all solution to estate planning. Instead, your decision to establish a trust should be based on your circumstances and objectives. Below, I explain what a trust is, describe the two types of trusts, and provide examples of the individuals best suited to establish a trust.
What is a Trust?
Simply put, a trust is a contract. The person creating the trust—called the “grantor”—contracts to distribute the ownership or benefit of property to someone else—called the “beneficiary”—on some date or upon some event, such as when the grantor dies. Most trusts distribute property from one generation to the next within a given family, but many Americans also establish trusts benefitting charities.
Types of Trusts
There are two types of trusts: irrevocable trusts and revocable trusts. An irrevocable trust is a permanent trust, meaning once it is established, it cannot be undone or significantly altered. Property is often placed in an irrevocable trust to remove it from the grantor’s control or benefit for reasons discussed below. Conversely, a revocable trust is a non-permanent, alterable trust. These trusts enable grantors to maintain their control of and benefit from property while easing its transfer upon death.
Who is a Good Fit for a Trust?
For most Americans, whether to establish a trust is really a question of whether to establish a will or a trust to distribute their property—most notably homes, cars, and personal effects—when they die. To simplify the decision, I advise my clients to establish a will instead of a trust unless:
- They want their heirs to avoid probate. Many individuals have horror stories about going through the probate process with their parents’ estates and want to avoid this for their children. To remove property from the probate process, individuals transfer ownership of that property to one of the two types of trusts.
- They have a net worth greater than their state’s estate tax threshold. Eleven states and the District of Columbia impose a significant tax on large estates, including my home state of New York. One method to avoid estate tax on property is to transfer it to an irrevocable trust and remove the grantor’s ability to control and/or benefit from that property.
- They own homes in multiple states. Unless transferred to a trust or deeded properly between spouses, homes are subject to probate. For my clients who own homes in multiple states, such as New York and Florida, placing their homes into a trust prevents their spouse or children from having to hire probate attorneys in multiple states just to obtain legal ownership of those homes.
- Their heirs need assistance with their inheritance. Parents and grandparents often want to avoid their descendants inheriting too much too soon. Even more critical, however, is ensuring that wealth passed to descendants who are minors, have special needs, or struggle with addiction is properly spent. The best way to accomplish this is via a trust.
- They need public assistance with their long-term care. As the cost of long-term care in the home or a facility continues to dramatically increase, more middle-class Americans are relying on Medicaid for assistance with those costs. To meet Medicaid’s income and asset requirements, however, many individuals must transfer their control and benefit of property to an irrevocable trust.
Next Steps
If you have not established an estate plan, or established one many life events ago, contact an estate planning attorney to determine if a trust meets your circumstances and objectives. Life is unpredictable, and the earlier you get an estate plan in place, the better off you and your family will be if the unpredictable or unfathomable occurs.
Kylan Johnson is an attorney and the owner of Hudson Valley Estate Planning PLLC in Sleepy Hollow, NY. He can be reached at 914-714-4227 and [email protected].
