A common misconception about trusts is that they are only suitable estate planning tools for the wealthy.  While most wealthy families will elect to use one or more trusts as part of their larger family estate plan, trusts can also serve as an important part of the estate plan for any family, even those with relatively modest financial holdings. In reality, trusts can be an affordable and effective estate planning tool for nearly any family.

The reason for the misconception that trusts are just for the wealthy may be the conflation of the ideas of trust planning and federal estate tax avoidance. While trusts are often used for the purpose of estate tax avoidance, there are many more unheralded reasons to use them as part of an estate plan, even in cases where the subject estate will never reach an asset level that would require a federal estate tax return. Many of those reasons have nothing to do with the value of the assets owned, but rather the smooth transfer of assets, and the effective management and control of those assets after the death of the trustmaker.

The three most common reasons for the use of trusts in estate plans with assets below the federal estate tax threshold are:

  1. Avoidance of Probate
  2. Control and/or Protection of Assets After Death
  3. Passing Assets to Minor Beneficiaries

Avoidance of Probate:

The general rule in Indiana is that formal probate administration can only be avoided if “the value of the gross probate estate, wherever located (less liens and encumbrances), does not exceed fifty thousand dollars ($50,000).” (See Indiana Code Section 29-1-8-1)

Does a gross estate of $50,000 sound “wealthy” to you? I’ll delve into the probate process in a separate blog posting, but suffice to say many of our clients come to us with a primary goal of avoiding probate for the following reasons:

  1. Delay: The probate process often takes a year (or sometimes more) to complete.
  2. Attorney’s Fees: The probate process can result in substantial attorney’s fees paid by the estate.
  3. Privacy: The probate process can result in the beneficiaries and the assets of the estate becoming public record.

To avoid these potential negative outcomes of the probate process, we can use trust documents as part of a comprehensive estate plan to help the client avoid probate entirely, ensuring a quick and smooth transition of assets after the client’s death.

Control and/or Protection of Assets After Death:

Reasons abound for wanting to protect or control assets passing to your beneficiaries after your death. For example, your beneficiaries may have, or potentially develop, creditor problems, spending issues, substance abuse issues, special needs, domestic/divorce issues, serious health problems, or some combination of these. An estate plan which incorporates a trust can help minimize the negative impacts of these issues while ensuring that your assets are actually used to benefit the intended beneficiary and not his or her creditors, spouses/ex-spouses, or others who may intend to prey on said beneficiary’s newfound inheritance.

Passing Assets to Minor Beneficiaries:

Any time there are potential beneficiaries who may be minors or young adults at the time that they could possibly inherit assets, it is advisable to plan for such event with trust language. In the absence of a trust to capture and manage such assets for the benefit of those minors or young adults until they’ve reached an age at which it’s likely they’ll be able to responsibly manage them, the default is that such assets would pass outright to the beneficiary at age 18.  It’s my preference, for obvious reasons, to avoid an outright distribution to a beneficiary at 18, and instead to use trust language to hold those assets for their benefit all the while being able to pay out for expenses like healthcare, educational fees, tuition, etc, but not directing a full payout until somewhere between 25 and 35.

In conclusion, don’t be lulled into a false sense of security about your estate plan by telling yourself that you don’t need to consider the use of a trust because you don’t deem yourself to be “wealthy.”  Our families and loved ones can greatly benefit from a well-planned estate using a trust or trusts regardless of the total value of the assets therein.

If you have questions about trusts or estate planning, please contact us to discuss. Consultations on such matters are free, and attorney Greg Halcomb will be happy to provide you with the information that you will need to make sound decisions about how to structure your estate plan and ensure a smooth transition of assets to your intended beneficiaries.