Trusts and wills are the main two ways to manage your estate. A will allows you to maintain full control of your assets up until death. They also offer the benefit of simplicity. While you can leave complex instructions for dispersal and conditions, a will can be as simple as a few lines dividing your estate among loved ones. A trust, on the other hand, allows you to manage taxes and long-term dispersals. This can be the best option for pure financial management, as it lets you set up long-term terms for asset management. While more complicated than a will, the assets in a trust also avoid the probate process. While each has its benefits, here are a few situations in which a trust can be useful in place of a will.
A financial advisor can help you create an estate plan to help protect your assets.
Lowering Taxes for Very Wealthy Estates
If your estate is worth more than $13.6 million (as of 2024), it will owe estate taxes on assets above this cap. This amount may be lowered based on your lifetime gift giving.
For very wealthy households, managing estate taxes can be an issue. An irrevocable trust can help. When you put assets into an irrevocable trust, they are no longer in your possession. As a result, those assets won’t enter your estate when you die and your trust can freely disperse those assets to its beneficiaries.
Managing Multi-State Transfers
Managing an estate across multiple jurisdictions can be complicated, expensive and time consuming. This can particularly come up in cases where you own real estate in several states, or outside your state of residence.
If you put these assets into a trust, you can avoid these multi-jurisdictional issues. Your trust will administer the assets or property, distribute them as necessary or manage joint occupancy as appropriate. In particular, if you establish the trust in the same jurisdiction as your estate, you will not need to manage the probate laws of multiple states.
Reducing Probate and Delays
One of the most common reasons for households to establish a trust is avoiding the probate process. Depending on your jurisdiction and the size of your estate, probate can take several months to several years. This adds considerable time and expense to your heirs receiving their assets.
While you will always have an estate that goes through some form of probate, any assets that you put into a trust could avoid this process. Instead of going through probate court, those assets will be distributed directly and, ideally, immediately by the trustee.
Splitting Ownership Among Heirs
You might have assets that you would like your heirs to share. This is particularly common for real estate, like a family home or vacation property and treasured heirlooms. A will can help accomplish this by distributing joint ownership, but this can create disputes, potential for sale and the new owners may further subdivide the property.
A trust can simplify matters. By putting these assets into a trust, you can specify that the trustee will manage this property for the use and benefit of your heirs. That will preserve their access to the asset(s) while also keeping a single owner who cannot sell the property.
Distribution of Complex or Ongoing Assets
In a similar vein, trusts are useful for distributing complex assets or managing ongoing ownership. With a trust, you can appoint a trustee with the specialty knowledge or experience necessary to manage a complicated asset. You can also establish an indefinite trust, ensuring that your heirs will continue to receive the benefits of an ongoing asset without selling it.
For example, say that you have income-generating assets and you would like to ensure that your heirs continue to receive the benefit of this income (for example a series of patents or rental properties). You could appoint a trustee capable of managing those properties, ensuring that your heirs receive competently managed income.
Making Transfers While You’re Alive
Finally, a trust is a good vehicle for making asset transfers while you’re still alive. Many people wish to see their loved ones enjoying the value of their estate. In those cases, a will does you no good. Unilateral gifts might can help you achieve this goal, but those are best for one-time transfers. They are less valuable for ongoing distributions.
If you are looking to set up a stream of income for someone, distribute an ongoing asset (again, like real estate) or want to minimize gift taxes, trusts can be a very effective way of making in vivo transfers.
Bottom Line
Wills and trusts are the main two ways of distributing assets after you die. While more complicated, and often more expensive, there are several situations where a trust can help you achieve your goals much more than a will.
Tips to Set Up Trusts
- Tax management is one of the most popular reasons to build a trust, but getting this right takes a lot of planning and legal counsel. If you’re looking to minimize the taxes on your very wealthy estate, here’s how an irrevocable trust can help.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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