Estates, trusts, and the future. Oh my!
If you don’t know what to think when it comes to your estate, what kind of planning it needs (Does it need any?), where a trust plays into the equation, and what it all means for your future — you’ve come to the right place to sort it all out.
And getting your estate and trust sorted out sooner rather than later has big benefits for your wealth during your life as well as for your loved ones when it comes time to pass down that wealth.
Keep reading to learn what your estate is (Yes, you have one!); how to use a trust to manage it to its fullest potential; how to get started on such a trust; and plenty more in this ultimate guide to your estate, trust, and final legacy.
What is My “Estate” and When Should I Start Thinking About It?
Your “estate” is the sum of the things you own — from physical items like a car and a home to the more intangible such as a bank account or an investment.
Estate planning is the process of creating legal documentation that will protect all the assets you earn over your lifetime and will eventually guide the transfer of these assets to your heirs after you’re gone.
And the best time to start thinking about your estate is now.
Effective estate planning will enable you to continue to care for your loved ones by guiding how any remaining cash assets are distributed, help you keep precious possessions in the family by deciding how they’ll be managed after your death, and so on.
What’s one of the most important estate planning elements for creating these kinds of guidelines and ultimately protecting your estate? Trusts.
A Key Element of Every Estate: Trusts
Keep reading to learn about trusts versus wills, what you need to know about the most important types of trusts, the biggest advantages and disadvantages of trusts, and plenty more.
What Is a Trust — And How Is a Trust Different from a Will?
A trust is a legal entity that can take ownership of your assets. Trusts are guided by legal documentation that you draw up — most often with the help of a legal professional — to describe how you want these assets to be managed.
On the other hand, a will is a legal document that you can use to outline what you want to happen to your assets and any minors in your care at the time of your death.
While the core goal of each of these estate planning elements is similar, there are some key differences of which to be aware.
Trusts can be used to protect your assets while you’re alive, which makes them ideal if you fear you’ll ever become temporarily incapacitated — or if you just have particular assets you wish to remove from your possession. It’s also helpful to know that it’s rare for a trust to go through the probate process. Probate, which we’ll explore in more detail later, is a public legal proceeding that can quickly become expensive and drawn-out for any heirs mentioned in your estate planning documents.
Generally, wills are easier and more affordable to create and don’t require as much ongoing maintenance as trusts — mainly because they only go into effect at your death. The tradeoff is that wills are very often subject to the probate process.
The Most Important Types of Trusts
There are plenty of different types of trusts that offer special features to fit any lifestyle: Marital trusts, charitable trusts, life insurance trusts, generation-skipping trusts (just what they sound like), spendthrift trusts (also what they sound like), and more.
While you can certainly dig into each type when consulting a legal professional to create your own trust (more on that later), the most important types of trusts with which you need to become familiar are revocable and irrevocable trusts.
Revocable trusts are those which can be updated and even resolved so you can regain control of your assets while you’re living.
Irrevocable trusts, as the name suggests, can’t be modified once created. These types offer the most protection for your assets while you’re living and can also ease expenses associated with taxation and debt collection for your heirs.
How Trusts Work (The Basics)
Trusts all start with you.
As the grantor, you’ll (ideally) work with a legal professional to create the documentation that guides the trust and outlines how your assets are to be distributed and used. This legal document may be called a Trust Agreement, a Deed of Trust, or a Trust Deed.
The assets described within the trust can include anything in your estate — cash, real estate, traditional and digital investments, and possessions like artwork and antiques. And your guidelines for these assets can include how they can be used and even when they can be used.
In the trust, you’ll also assign a trustee who will carry out the guidelines you’ve outlined. Whether you go with a family member, friend, or paid professional for this important role, it’s important to choose someone who is willing to manage the trust to your specification and for as long as is required.
Finally, you’ll name your beneficiaries — which are the people who will receive assets or proceeds from the assets within your trust.
Major Advantages of Trusts
Sound like a trust might be a good fit for your life, your assets, and your beneficiaries so far? Great — let’s seal the deal by exploring some of the biggest benefits you have to look forward to.
Maintain Control of Your Assets Through Incapacitation
Revocable trusts are ideal for helping you — or another trusted individual — continue to guide how your assets are managed if you’re alive but temporarily (or even permanently) incapacitated from an injury, a heart attack, dementia, and so on.
That’s because with a revocable trust you can appoint yourself as a trustee and even name a successor trustee — such as your partner — to manage things during your incapacitation. If you recover, you can resume your role as trustee.
Why is a trust as important to have as a power of attorney in cases of incapacitation? Trusts let you provide more detailed instructions for your assets, are recognized by major financial institutions, and hold your successor trustee to a higher fiduciary standard.
Manage Your Assets to Their Highest Potential
One of the leading reasons people set up trusts is to manage their assets in a way that continues to benefit their heirs long after they’re gone.
For example, you can use a trust to limit your child’s access to their inheritance until they’re enrolled for college. Or, you might use it to ensure that the family business stays in the family instead of being sold off after your passing.
Sidestep the Probate Process
If a person passes away without a documented trust, it’s likely that their heirs will have to deal with the probate process we mentioned earlier. Probate is a legal process in which a judge, instead of you or your trusted loved ones, determines how your estate is distributed.
For an average estate, probate can take anywhere from six months to two years and can eat up as much as 8% of the value of the entire estate thanks to legal fees, accounting fees, etc.
In addition, probate is a matter of public record. That means there is no right to privacy if anyone — from creditors to predators — wants to take a peek at what your estate holds or who will be receiving what from it.
Mitigate Tax Expenses for Your Heirs
When personal property changes ownership — such as when it’s passed from you to a beneficiary upon your death — it’s subject to federal estate tax and, sometimes, additional estate taxes and/or gift taxes at the state level.
As of 2020, this federal tax shouldn’t kick in until the transferred assets reach a value of over $11.58 million.
So for those who are passing down very high-value assets, a trust can help save their heirs a considerable sum that could have been lost to taxes.
Provide for Minors and Dependents with Special Needs
A trust can help you establish rules to keep providing for any minors in your care at the time of your death.
In addition, a trust can be set up in a way that provides for someone with special needs while minimizing the chance that you could compromise their ability to access Medicaid, Social Security, or any other type of government assistance.
Key Disadvantages of Trusts
While there aren’t many, there are some important disadvantages of creating a trust that you should be aware of before diving in.
In order for a trust to be truly effective in saving money and eventually avoiding the probate process, you must be downright diligent to appropriately “re-title” and otherwise transfer ownership of your assets so that they’re owned by the trust instead of by you.
And, once a trust becomes its own entity, it develops some of the same responsibilities that people have. Every year, someone may have to file taxes on behalf of your trust as well as prepare Schedule K-1 forms for each beneficiary.
To take care of the above maintenance, it’s likely that you’ll have to reimburse the person who is managing the trust on an ongoing basis.
In addition, you should be prepared to spend $1,000 to $3,000 on attorney fees associated with drafting your trust documentation as well as additional expenses required to keep it up to date during your lifetime.
How to Create a Trust
While we highly recommend seeking legal counsel to finalize your trust, the best thing you can personally do to make it a success is get prepared.
- The name of your trust
- The description of your trust, which should include the basics of why you’re creating it
- The name of the trustee
- The trustee’s responsibilities and capabilities
- The names of the beneficiaries
- The assets that will be owned by your trust
- Any guidelines for the assets in your trust
- A backup plan in case the trustee or beneficiaries want to give up their responsibilities in your trust for whatever reason
Once you’ve got these details nailed down, it’s time to find a trust and estate attorney — ideally one with experience in your location and with any unique situations you want to account for within your trust.
How to Keep Your Trust Safe for Your Heirs
In 2020 and beyond, just as important to your estate plan as your trust will be the digital vault you use to securely store and seamlessly share it with beneficiaries.
This modern need is exactly why we created Kubera — the most modern wealth and beneficiary management platform.
Kubera enables users to track and manage all of their assets — from traditional assets like investments, cash, and real estate to cutting-edge digital assets including cryptocurrency, domains, and revenue-generating digital platforms — on one intuitive, secure platform.
In addition to assets, Kubera’s members can track and manage all their important legal documentation — such as that which goes into creating trusts and wills — using our unique beneficiary management feature that allows you to name an heir who will get access to your entire portfolio when you become inactive on your account.
Having a trust doesn’t just protect your future — it protects the future of your estate and the heirs that will use it to continue your memory.
Try Kubera for free today and set your legacy up for success.