When Should You Consider Using A Trust for Your Estate Plan

Trusts are an important tool in estate planning and may be created for a variety of reasons, which can include both tax and non-tax reasons. Generally a trust based estate plan, will contain a trust (or two if a couple is married and has an estate at or over the Minnesota or Federal estate tax exemption limit), pour over will, power of attorney and health care directive documents.

Trusts are usually created by a written document that is a contract between the individual setting up the trust, the Settlor, and the Trustee, that the assets will be managed in a specified way and it designates who will benefit from those assets. It becomes your rule book to the distribution of your estate. You name who you want to be in charge of wrapping up your estate.

Trusts may be setup during an individual’s life, which is called an inter vivos trust or living trust. It is also possible to create a trust upon your death if your Will contains provisions that direct that a trust be established on your death, which is called a Testamentary Trust. You’ll often times see a Testamentary Trust in a Will where parents have young kids. The Will is the primary estate planning document and it provides that if both parents pass away that a trust be created for the benefit of their surviving children after going through the court process, probate.

Several non-tax reasons you may want to consider setting up a trust:

1) Avoid Probate/Privacy Concerns

  • Assuming your trust is funded properly and holds title to your assets upon your death (or you’ve designated beneficiaries on assets not owned by the trust), your successor trustee can step in immediately upon your death to begin to administer your estate, unlike probate situations where it can take several months to get an executor appointed by the court.

2) Incapacity of the Beneficiary

  • A minor is considered to be incapacitated and cannot hold title to property. You can set up a trust to manage the property on behalf of the minor beneficiary and designate the terms of any distributions to that beneficiary.
  • Another type of incapacity is an individual with a mental or physical disability that may benefit from a trust. There are several types of trusts that may be used in this situation and can include a Supplemental Trusts or Special Needs Trusts.

3) Business succession planning

  • A trust may hold the stock of a closely held family business. You can name an individual or group of individuals as Trustees of the property, who have the ability to vote the stock. That way if one member of the family business dies or becomes incapacitated there is a means to continue the operation/control of that family business.

4) Managing a Particular Asset – The Family Cabin

  • Family cabins are very common in our lakes area and often times families wish to keep them in the family for multiple generations. Title to the cabin is transferred to the trust, which may also be set up to include additional cash assets to provide a means to pay taxes on the cabin, upkeep, maintenance, etc. It can also spell out the terms for use of the property by all the parties and how to buy out a party if needed.

5) Real Estate owned outside of Minnesota

  • If you own real estate in your name individually that is outside of the state of Minnesota on your death, you would generally need to go through a probate in the state where the real estate is located. This type of probate is called an Ancillary Probate. This could be avoided if you establish a trust and transfer title to this property to your trust also.

6) Spendthrift Children/Children with Alcohol or Drug Issues

  • If you have children that are poor money managers or have drug or alcohol issues, the trust can be a tool to help manage that money on behalf of your child based on the payout and terms you dictate.

As you can see there are many non-tax reasons to establish a trust. There can also be tax reasons to set up a trust based estate plan particularly if your estate is over Minnesota’s estate exemption limit, which is currently at $4,000,000.00.

Careful consideration of all the options should be given to setting up a trust or will based estate plan. No one size fits all.

Please send me an email at rene@breenandperson.com with any topic suggestions or requests you may have. Although we cannot give you legal advice through the column, we can provide some general information that may be helpful for you to know. Our purpose is to educate and we hope that you can take something new away from this column each time you read it.