What is a Trust anyway? Think of a trust this way: A trust is a legal entity created by a party (the trustor) in which a second party (the trustee) holds the right to manage the assets or property for the benefit of a third party (beneficiary). It becomes confusing when you consider that the trustor, trustee, and beneficiary can be a combination of the same or different people.
Tax savings. Traditionally, trusts have been used by estate planning attorneys as a strategy to reduce federal and state inheritance taxes. In the past, a trust was a document the estate planning attorney regularly used to save estate taxes, sometimes as high as 40%! But, if you die this year and if your estate is valued at less than $11.18 million, and up to $22.36 million for a surviving spouse, there is no federal estate tax due. So, the question is: Who needs a trust?
Well, some still see the benefit of a trust for saving taxes. For example, in Pennsylvania’s estate law, there still is a state inheritance tax which can be as high as 15% from dollar one depending upon the beneficiary. For example, leaving $100,000 to a brother or sister means there will be a $15,000 inheritance tax! Setting up an irrevocable trust may avoid some, if not all of that tax.
But are trusts only a vehicle for tax savings? Or are there other benefits of a trust? Let’s explore a few other benefits:
Control your wealth. Should you become incapacitated, a properly funded revocable trust (that is one that can be changed by the person setting it up) may ensure that trust assets will remain available for you, managed by another and when you die they assets pass where you wish outside of probate. Spouses with children from different marriages often find a trust to be a wise method to protect the potential disinheritance to a child. Further, if a beneficiary has special needs, is irresponsible, or children from spouses in multiple marriages, a trust may be a sound technique to direct your legacy where you want it to go. With a properly structured trust this can occur safely without additional future legal expense. Note however, there is no Pennsylvania inheritance tax savings here, just control.
Privacy and avoiding probate expenses. Pennsylvania probate costs are based upon the size of the estate which passes through probate (the act of taking a will to the authorities for processing). It stands to reason that if assets that pass via beneficiary designation do not pass through probate therefore there will be less expense. To save the expense, it may be wise to create a trust to avoid some, if not all, the probate expense. Further, there is a privacy component to avoiding probate. Probate is public and some, if not all, your records are open for inspection by the public. If privacy issues are a concern, and you wish to avoid this, you may want to consider a trust.
Protection of your legacy. A properly structured and funded trust may protect you from creditors and may provide an opportunity to protect your estate form irresponsible beneficiaries.
Picking the right trust for you and your situation. There is no right answer and not everyone needs a trust. A word of caution: stay away from those that push the living trust as the be all and end all. Everyone does not need a trust and the same trust does not fit everyone’s needs.
As discussed above, a revocable trust will protect your privacy interest and may avoid some, if not all, the probate expenses. It will not save state or federal inheritance taxes.
If making gifts during your lifetime, or if a large life insurance policy is needed to cover a buy/sell agreement for business owners, an irrevocable trust (one that cannot be changed once established) may be the correct choice.
Getting good advice. Whether you need a trust, and if you do, what is the best trust for your situation is not a decision that can be made after receiving a free dinner and listening to a 45-minute presentation at a local restaurant. For those who have been putting off wealth transfer strategies or for those who have traditional estate planning strategies that have not been examined in a few years, it may be time to talk to someone who will listen to your needs and to your individual situation to provide the best alternatives.
You should always speak with an attorney who understand the complexities of tax, probate and estate planning. You should make sure that you speak to a lawyer that will listen to you, take the time to understand your situation and recommend a plan that achieves your specific objectives. A lawyer or other individual (living trust company) that is quick to sell you what they have, rather than what you need, may not be a trustworthy advisor.
For more information or to discuss your individual needs call me at 215 886.6600.
– Jim Egbert is a Montgomery County, Pennsylvania estate planning lawyer.