What is a Trust? How does it work?

Today, we’re going to cover:

Do I need a trust?

I have a trust; how does it work?

Can a trust help me save money on taxes?

Common mistakes to avoid with old estate plan documents.

I regularly hear prospective clients say, "Yes, I have a financial planner," but when I ask about estate planning, they say, "No, he/she hasn't spoken with me about that."

I'm always confused when I hear this because most people we work with aren't worried about running out of money during retirement. Therefore, how the money is passed to your beneficiaries is critical unless you're okay with Uncle Sam taking another big fat piece out of the pie even after you've passed away.

Common Myths About Trusts. 

1. Trusts are only for the ultra-wealthy. See the list of fundamental reasons for Trusts below.

2. Any attorney can create a trust. Attorneys are like doctors. Your family doctor is not going to perform surgery on your broken hand. Utilize an Estate Planning Attorney for estate planning documents like wills and trusts.

3. Trusts are expensive. Technology has reduced the time attorneys must spend creating documents and has helped control costs. The average fees for estate planning (the legal instructions for your millions of dollars) range from $2,000 to $5,000 for a Wills and Trusts package for a married couple and roughly half for an individual. This typically includes Wills, Trusts, Financial and Medical POAs, and Health Care Directives. The same package without Trusts costs $1,000 to $3,000.

4. A Trust will help me pay less income tax. This is likely the most fundamentally false statement we hear from people today. A Revocable Living Trust, the type of trust used in common estate planning for 99.99% of people, will provide precisely ZERO income tax benefits while you are alive. Trusts have their own tax rates, which are much higher than tax rates for individuals. In 2024, any income owned by a trust over $15,200 is taxed at 37% (set to increase to 39% in 2026). We’ll cover this in greater detail in an upcoming post.

Do I need a trust?

If you’re reading this article today, then the answer is, most likely, yes.

Do you have minor children?

Do you have children over age 21, but not yet “adults”?

Do you have a few million dollars in life insurance policies?

Do you have real estate assets? Business interests? Collectibles? Art?

Is your spouse financially educated and savvy? (I don’t mean frugal)

Have you been divorced and/or remarried?

Do you or your current spouse have children, no matter their age, from a prior marriage?

Do you have wealth (including your life insurance policies) beyond what you believe your beneficiaries would be comfortable/capable of managing on their own?

Do you have grandchildren you wish to leave assets to?

Are you currently single?

Answering YES to any of these questions can be simple reasons to justify adding a trust to your estate plan.

You do not need to be ultra-wealthy for a trust to provide tremendous value should something unexpected happen.

Separately, if you have accumulated significant wealth, a properly structured trust is a critical piece of the puzzle regarding who and how your wealth is passed on. If you already have a trust and it has not been updated in a long time, you should have it reviewed and updated. More on this below.

What is a Trust?

A Trust is a legal document that can provide specific instructions about how your wealth is distributed and create an entity that assumes ownership of the assets upon your passing.

Why is this different than a will? When written, a will will never be able to assume ownership of assets. A will is never more than a piece of paper that defines "who gets what."

The critical difference between a will (a piece of paper with instructions) and a trust (an entity capable of assuming ownership) is what is called Probate

"Probate is the legal process by which a deceased person's estate is settled."

You want to do everything possible to avoid assets passing through probate before being given to your beneficiaries.

Probate can be a lengthy and costly process. Additionally, all information passed through probate becomes public for anyone across the globe to see.

Additional purposes a Trust can provide:

1. Specific oversight and guardianship of assets after You are gone for the people you care about most.

2. Protection from claims and creditors.

3. Ability to keep assets on your side of the family.

4. Ability to provide for disabled children

Common Mistakes to Avoid in Trust Documents

1. Failure to update old trust documents with old provisions not aligned with current law.

2. Failure to state conduit vs. accumulation provisions for retirement assets.

3. Failure to include spendthrift provisions to protect from claims and creditors.

4. Failure to name contingent trustees and beneficiaries or failure to update.

Securities offered through LPL Financial, Member FINRA/ SIPC. Investment advice offered through IHT Wealth Management, a registered investment advisor. IHT Wealth Management and AutomotiveWealth are separate entities from LPL Financial. 

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