Sunday, October 23, 2011

Should I Have a Trust?

You can separate the legal title and management of assets from the benefits derived from the assets through a trust. You can create a trust in your will, called a testamentary trust, or you can transfer assets during your lifetime to a trustee to manage them both during your lifetime and after your death.

There are many good reasons why you might want to create a trust to hold assets either during your lifetime or after your death. For example, if you have young children, you might want to create a trust in your will so that if you die while they are young, someone else will manage the money they will inherit for them until they reach a certain age. Or perhaps you wish to benefit someone with a disability who cannot manage his or her own money. There are many, many situations in which trusts are excellent estate planning tools to accomplish various goals.

While I have seen trusts work very well in accomplishing specific goals, I am leery of generalizations about trusts (or just about anything else when it comes to estate planning). From time-to-time, I see trusts that appear to have been set up for their own sake, without any real purpose.

There can be disadvantages as well as advantages to creating a trust. A trust requires on going administration by the trustee. The trustee may charge for his or her time and effort. Sometimes a family member will act as trustee without charging any fees, but there is still a cost to that person in time and effort. Nor are family members always the best choice. A professional trustee, such as a trust company, may be a good choice, but may be more expensive. There can be tax advantages in using trusts, but there can also be tax disadvantages. Beneficiaries may be unhappy that funds intended for them are controlled by someone else.

Sometimes people tell me that they have heard that trusts are a good idea, and wonder if they should have a trust. I am always happy to talk about trusts, but I think this approach is backwards. Rather than take a concept such as a trust, and see if it fits into your circumstances, start by explaining your circumstances to an estate-planning lawyer, and then ask him or her for advice on estate-planning tools that meet your objectives. The advice you get may include creating a trust. The lawyer should advise you on both the advantages and disadvantages of a trust, and any alternatives, so that you can make a well-informed decision. But don’t create a trust for its own sake.

It is also important to keep in mind that there are many different trusts, which can go on for just a few years, or for over a lifetime, which can be relatively easy for a trustee to administer, or very complex, which can be set up to benefit one person, or many, and which can be relatively inexpensive for a lawyer to draft, or can be quite expensive. The level of complexity should be balanced with your specific circumstances and goals.

Estate planning is often not simple. In some cases very sophisticated estate planning, perhaps including multiple trusts, is appropriate. But my philosophy is don’t make it unnecessarily complicated either. Choose the estate-planning tools that are sensible for you.

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