education | protecting your wealth
Do You Need a Trust? The Answer May Surprise You
By Kali Roberge
There is a common perception that creating a trust is reserved for the uber-wealthy. But is this true? How do you know if a trust is right for you? As you build capital and grow your wealth, creating a trust may become a critical step toward protecting yourself, your family and your money. Anyone with children, a home, a prized collection or assets held in a brokerage account may benefit from the protection a trust provides.
If you've been thinking about trusts but haven't yet taken any measures, here's an overview of who may need a trust and why you may want to start setting one up sooner rather than later.
When to Consider Creating a Trust
It's important to evaluate your family's circumstances when considering trusts. Here are several indicators that you may want to establish a trust as part of a complete estate plan:
- You have children or other minor dependents. If you want to specify exactly how (and when) the money and property you leave behind are passed along to your heirs, a trust may allow you to stipulate how your heirs can use their inheritance.
- Your state has low limits on estate taxes. Tax concerns may apply if you have a large estate. In 2020, the federal estate tax generally may apply when a person's taxable assets exceed $11.58 million at the time of death. However, you also need to consider state taxes, as they do vary. For example, New Jersey may impose an estate tax when assets exceed $2,000,000, whereas neighboring New York's estate tax doesn't kick in until an estate's assets are valued at $10,100,000. Without a trust in place, assets could be taxed at higher rates. For instance, according to the New Jersey Treasury, each beneficiary of an estate could have their inheritance taxed up to 16 percent.
- You have assets without specifically assigned beneficiaries. With a trust your trust assets may avoid going through probate and potentially high probate costs.
- Your state has expensive probate proceedings. Probate is usually public and can be expensive depending upon the value of your estate and the applicable state — and a trust, may help avoid the need to go through probate proceedings.
- Ultimately, when assessing whether or not you should create a trust to protect your assets, costs tied to taxes and probate are big factors. It's a good idea to reach out to your legal or tax advisor for advice on how the tax laws that govern your state will treat the assets you leave behind to help you determine whether to put a trust in place to protect that wealth. When setting one up, it's best to work with an attorney or other legal, tax or financial planning professional who can guide you through the process.
Once you decide to create a trust, you'll want to consider the different types and find the best fit for your situation. There are a number of options to choose from, such as revocable, irrevocable, living, testamentary and charitable, among others.
Reasons You May Not Need a Trust
While it's smart for almost everyone to draft estate planning documents like a will, power of attorney and healthcare proxy, some people may not need a trust. Establishing a trust can cost thousands of dollars in legal fees. If an individual won't benefit from creating one, it's best to save the money (and time).
When considering who needs a trust, you should reach out to your legal, tax and or financial planning professional to see if it is right for you.
For those with family who specifically request a trust or those who have a portfolio that will require considerable effort to distribute once they've passed, creating a trust is a decision that may help to provide peace of mind. If you have even the slightest impression you and your family could benefit from a trust, the time to start exploring your options is now.