Ask an Advisor: Should I Put My Home and Other Assets in a Trust? When Does it Make Sense for the Average Retiree?

Trusts can be useful estate planning tools, but they are not automatically necessary for every retiree. Whether one makes sense depends on your assets, family situation, privacy concerns and goals for transferring wealth. For many retirees, a simple will and a few beneficiary designations may accomplish the same goals with less cost and complexity.

A financial advisor may be able to help you review how your estate plan fits within your broader financial picture. Connect with a financial advisor at no cost.

What Are Trusts and How Do They Work?

A trust is not an investment or an account type. It’s a legal arrangement that determines how your assets are managed during your lifetime and distributed after your death. It is an entity that can hold title to these assets or receive them as a beneficiary.

One of the biggest advantages of a trust is that assets titled in the trust generally avoid probate. Probate is the legal process of administering an estate after someone dies. Depending on where you live and how complex your estate is, probate can be relatively straightforward or it can be expensive and time-consuming. A trust can allow trust-owned assets to pass to beneficiaries under the terms you set, without requiring your successor trustee to take those assets through probate. This also helps your family maintain privacy, as the probate process is public. Trusts are not.

A trust can also make things easier if you become incapacitated. If you become unable to manage your finances, your trustee can typically take over management of trust assets without waiting for a court to appoint a guardian or conservator. While a durable power of attorney can also help accomplish this, financial institutions occasionally hesitate to accept older powers of attorney.

(And if you need help determining whether a trust may make sense for you, consider working with a financial advisor.)

What Trusts Don’t Do

People sometimes overestimate what a trust can do.

A trust generally does not reduce income taxes. It usually does not eliminate estate taxes, although certain types of trusts can be used for estate tax planning. And if you retain control over the assets, a trust generally does not protect them from your creditors.

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When Do You Need a Trust?

For the average retiree, whether a trust makes sense often comes down to personal circumstances and goals.

For example, someone who owns property in multiple states may benefit from a trust. That’s because it can help avoid separate probate proceedings in each state. Someone with a young family may appreciate the additional control a trust provides in regard to when and how assets pass to children. Parents of beneficiaries with disabilities or beneficiaries who struggle with managing money may also benefit from the structure a trust can offer.

On the other hand, someone with a relatively simple estate may not need one. Suppose a retiree owns a home, has retirement accounts with up-to-date beneficiaries, maintains payable on death designations on bank accounts, and wants everything divided equally among adult children. In that situation, a properly drafted will and beneficiary designations may accomplish all of the retiree’s goals without the added expense of creating and maintaining a trust.

It’s also important to remember that simply creating and signing trust documents isn’t enough. Assets generally must be retitled into the name of the trust for the trust to control them. If someone creates a trust but never transfers ownership of their home or other assets into it, many of the expected benefits may never materialize.

(And if you need additional advice related to your financial plan or estate plan, speak with a financial advisor.)

Next Steps

Like any tool, the usefulness of a trust depends on the job you need it to do. For some retirees, it can simplify estate administration, preserve privacy and make it easier for loved ones to manage affairs during incapacity. For others, it may add complexity without providing significant additional value.

Start by identifying your goals. Are you trying to avoid probate? Protect a surviving spouse? Simplify things for your children? Plan for incapacity? Your financial planner and an attorney can help you answer those questions. Then, once those objectives are clear, they can help determine whether a trust is a suitable solution or whether a will and beneficiary designations are sufficient.

Estate planning isn’t about having the most complicated documents. It’s about having the right documents for your particular situation.

Estate Planning Tips

Retirement accounts, life insurance policies, annuities, bank accounts and transfer-on-death accounts pass by beneficiary designation, not by the terms of a will. A practical step is to review all beneficiary designations once a year and after major life events, such as marriage, divorce, birth of a child, death of a beneficiary or a new job. Make sure primary and contingent beneficiaries are listed, names are spelled correctly and percentages add up to 100%.
A financial advisor with estate planning expertise can potentially help you align your financial goals with your wealth transfer and legacy goals. Finding a financial advisor doesn’t have to be hard. S m artAsset’s free tool matches you with 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.