Do You Need a Trust?

Everywhere you turn people advocate trusts. This includes publications such as the Wall Street Journal and the New York Times. But what is a trust, really? How does it differ from a will? Do you really need one?

What are wills and trusts?

A will is a document that outlines what should be done with your assets when you die. If you don’t have a will, the state will impose its own rules about where your property goes. A trust is a legal entity (a bit like a corporation) that survives and functions after death.

What trusts do

Estate planning trusts primarily do three things:

1) They avoid probate, with the costs, public disclosure, and delays that go along with it.

2) Trusts can avoid income taxes that may be imposed on property that passes to heirs by

joint tenancy instead of in probate.

3) Finally, a trust can avoid a marital penalty that is part of the estate tax.

Why avoid probate?

Assets like houses, cars and bank accounts must go through probate when the owner dies. Probate costs start at nearly 5% of the value of assets for estates of $1,000,000 or less, and are a slightly lower percentage for larger estates. This means a cost of more than $47,000 for an estate of $1 million and more than $125,000 for an estate of $5 million.

The average California probate can last up to two years, though sometimes they last a lot longer. Howard Hughes didn’t have a trust. His estate took eleven years to settle, and $8.5 million in unnecessary attorney fees. Trusts pass property in a less formal, private way that can save both time and money. A trust also preserves your privacy. For example, Milton Berle had a trust, so the details of his estate stayed private. In contrast, Jackie Onassis had a will that went through probate, and all of her intimate financial details were on the Internet almost immediately.

The joint tenancy option

The traditional way to avoid probate is to use joint tenancy. In this method, title passes immediately without probate. However, income tax on the sale of property received in joint tenancy can be more than the estate tax on probated property. Trusts can avoid probate and these taxes, too.

Watch out for the marital penalty

For people living past 2010, estate tax is imposed on every person who dies owning property worth more than $1 million. You would think that married couples could pass $2 million tax-free to their heirs, but the tax law is structured so that married couples generally only get to use one exemption instead of two. That can result in up to $500,000 in unnecessary taxes. A trust can avoid this marital penalty, and thus save a huge amount of money for your heirs.

The bottom line

If you have assets worth more than $100,000, the law says your estate must go through probate – unless you have a trust. A trust avoids probate. It can allow your assets to be distributed to your heirs much sooner and less expensively than can be done otherwise. If you are married and own anything that has gone up in value (e.g. real estate, stocks, antiques), a trust could save your heirs income tax on the appreciated value. Finally, if you are married and own property with your spouse worth more than $1,000,000, a trust can save you up to $500,000, or even more. A trust isn’t for everyone, but it can be helpful to many.

Questions? Contact us!