Trusts are an important part of an overall estate plan, and should not be overlooked
For the average investor, setting up a trust with your estate attorney as part of estate planning can make a lot of sense. For wealthy investors, it can be nearly essential. So why then do only 33% of Americans have a will or living trust?1 Truth is, as helpful as trusts can be, there are a fair number of misconceptions about them — and those misconceptions can get in the way of taking action.
The beauty lies in the benefits
Trusts come with benefits for both the trustor and their heirs. The provisions of a trust ensure how the assets are distributed and, unlike a will, are private and not subject to probate. This means:
- Privacy — for you and your beneficiaries. Your information and legacy remain confidential, out of the public eyes of a court.
- Potentially improve the distribution of assets. Going through the court process can take time and comes with its own share of fees.
- Setting up a trust may be less expensive than the cost your loved ones may incur with the probate process. That’s because probate related fees to the attorney and the court can add up quickly.
Beyond avoiding probate court, protection is another benefit of setting up a revocable trust. This protection can play out in two ways.
First, when you pass away, the assets can continue to be held for your beneficiaries and protected from creditors and divorcing spouses.
Second, you maintain control of the trust while you're living. Should you become incapacitated, the successor trustee — the person designated to manage the assets and make payments on your behalf — should ensure you have the care you need.
Common misconceptions about trusts
Because of the complexities that go with trusts — from the different kinds to the highly detailed laws that govern them — there are a number of myths that are associated with trusts.
Myth 1: Trusts are expensive
Truth is, when you compare the cost of creating a trust to the costs associated with probate (e.g. probate court and lawyer fees), probate may be the more expensive of the two.
Myth 2: All assets should be put in a trust
Not necessarily. There’s a process for distributing the assets in a trust, so it will take time. If there are loved ones who will need money immediately, those funds may be something to leave out of the trust. The most common designations are to individuals — for example, all to a spouse or in equal shares to children. However, a trust also can be named as an IRA beneficiary, and in many instances, a trust is a better option than naming an individual.
Myth 3: If you have a trust, you don’t need a will
A will is needed to deal with any assets left out of a trust that do not convey via beneficiary or transfer on death designation. To ensure all assets are distributed as intended, even those left out of a trust, a will should always be in place.
Myth 4: Trusts ensure that my heirs will avoid probate court
Trusts can enable your estate to avoid probate, but a poorly drafted trust can result in probate court. Similarly, assets owned outside of the trust may still be subject to probate. As mentioned earlier, working with an experienced estate attorney is key.
Myth 5: All trusts offer tax advantages
Not all types of trusts offer tax advantages. For example, revocable trusts don't offer tax advantages and don't require the trustee to file a separate income tax return during their lifetime.
These are a handful of the myths that create an air of confusion. The technical complexity of trusts is all the more reason to talk with your financial professional, who can partner with you and your trust attorney in this area. Reach out to Our Team to learn more.
1. Caring.com 2022 Wills and Estate Planning Study
This material has been prepared by LPL Financial, LLC.
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.