February 1, 2024 | Time For A Trust? If So, What Kind?

Let’s say you own a bunch of uranium stocks and your nest egg is becoming an “estate.” Well done!

Now it’s time to avoid excessive taxes and make the eventual transfer to your kids and grandkids seamless and stress-free.

One way to do this is via a trust, a legal entity that holds and disburses money while bypassing some or all taxes. The Nestmann Group, which specializes in stuff like this, just posted a primer that might be helpful:

Family Trust vs. Living Trust: What’s the Difference?

A few weeks ago, a client came to us wanting to know the difference between a family trust vs a living trust. Most of the time, the terms are interchangeable. But there are some nuances.

Traditionally, a family trust is simply a living trust created for the benefit of family members. In other words, family members are the beneficiaries.

A living trust is a more general term used when the beneficiaries can be anyone or anything — family, friends, charities. In a few cases, even pets.

What is a trust?

In simplest form, a trust is a legal entity that allows someone to structure his assets in a way to benefit other people. It’s usually part of your estate plan.

There are three roles:

• Grantor: The person who creates the trust and transfers their assets into it. In some states, this role is called a settlor.
• Trustee: The individual or entity responsible to manage the trust and its assets in accordance with the trust’s terms and the best interests of the beneficiaries. In both living trusts and family trusts, this is often the grantor so long as they are alive and mentally competent.
• Beneficiary: The person or group of people who are designated to receive the benefits or assets from the trust.

The grantor transfers his assets into the trust, to be managed by the trustee for the benefit of the beneficiaries.

INTRODUCING THE PROTECTOR

A trust protector is a newer role that acts as a check and balance. They keep an eye on what the trustee is doing and makes sure the trustee is always acting in the best interests of the beneficiary. If needed, they can even remove/replace the trustee.

Revocable vs Irrevocable Trusts

Both living and family trusts are considered “revocable”; they allow the grantor to change or cancel the trust at any time.

An irrevocable trust makes it very difficult — if not impossible — to change, cancel, or remove assets from a trust once created. Basically, the grantor gives up all rights to those assets, although they can continue to manage them on behalf of the trust’s beneficiaries.

Which type you use depends on your goals.

Pros and Cons of Family Trusts and Living Trusts

Advantages

• Avoid probate. Many people use wills to set out their last wishes. However, not only is this process public, it can take years to complete, and cost the beneficiaries a fair bit of money. It also opens the door to fights between heirs. A living trust avoids that. It’s fast, private, and often cheaper than a will after all costs are considered.
• Control. During your lifetime, you keep control over all your assets in the trust.
• Benefits for the beneficiaries.A living trust can be drafted so that after you pass, the trust changes form in a way that offers strong asset protection for your beneficiaries.

Disadvantages

• Upfront costs and fees. Setting up the trust involves more legal fees than preparing a will. Attorney fees and administrative expenses may be greater.
• Transfer process can take time. Formally changing title to move assets into the trust can take time and effort. Assets left outside the trust may still need to go through probate.
• Doing business with those assets can be harder.Dealing with trust assets can be more complicated and require extra paperwork. This is especially true if you need to borrow money for assets held within the trust.
• It can’t cover everything.Certain assets like retirement accounts, health savings accounts, and life insurance cannot be transferred into the trust.
• No asset protection. A family trust / living trust does not offer any asset protection. If you lose a lawsuit, the creditors can force you to turn over any assets held within the entity.

So should you create a trust?

In most cases, yes, a living trust / family trust should be the foundation of your planning. It’s a simple, cost-effective way to make sure your heirs are taken care of after you pass.

So when is it not appropriate?

#1. If you have a “simple” or ”small” estate.

If your estate is straightforward and doesn’t involve complex assets or large sums of money, creating a trust may not be necessary. A simple will might be enough. And if it’s really small enough, you might not have to go through probate.

So how do you know if you have a “small” estate? Every state has guidelines, which vary widely.

For example, in Georgia, it’s just $15,000. If your estate is smaller than that, you can apply to avoid probate entirely.

California, on the other hand, currently allows estates up to $184,500 to bypass probate under certain conditions.

#2. If assets have terms that allow co-owners to receive them automatically if one co-owner dies.

You might not need a trust if you own assets jointly with someone else and there are provisions in place that automatically transfer ownership to the surviving co-owner upon your death.

Joint bank accounts and retirement accounts commonly have such a provision. So do “pay on death” accounts you hold in your own name.

#3. If your state has provisions that allow assets to be titled in a way that automatically triggers a transfer when you pass.

Some states have laws that allow certain assets to be titled in a way that automatically transfers ownership upon your death.

Real estate is commonly held like this, for example, through a concept known as joint tenancy; when one owner dies, the other automatically takes over their share.

For state-specific advice, see these:

How to Create a Nevada Living Trust in 2024

Learn the basics of a Nevada Living Trust: The good, the bad, and how it compares to other options like a will. Plus estimated fees. Updated for 2024. Read More

How to Create an Illinois Living Trust in 2024

Learn the basics of an Illinois Living Trust: The good, the bad, and how it compares to other options like a will. Plus estimated fees. Updated for 2024. Read More

Maryland Living Trust: Is it Right for You?

Learn the basics of a Maryland Living Trust: The good, the bad, and how it compares to other options like a will. Plus estimated fees. Updated for 2024. Read More

John Rubino February 1st, 2024

Posted In: John Rubino Substack

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