Trusts come in all shapes and sizes, and many professionals promote them for various reasons. In part 4 of our blog series on risk management, we are sorting through some of the common reasons to have or not to have a trust as part of your estate plan.

To start off, we need to discuss the differences between a revocable and irrevocable trust arrangement:

• Revocable – A revocable trust can be undone by the creator during their lifetime. Due to its nature, revocable trusts are limited in what they can do from a planning prescriptive. Typically, they are used for administrative purposes, which will be highlighted below.
• Irrevocable – A irrevocable trust typically cannot be changed during the term of its existence. Due to its restrictive nature, an irrevocable trust can have great value as a planning tool to achieve tax savings, estate efficiency, and/or legacy planning goals. However, because these arrangements are irrevocable, the potential benefits need to outweigh the risk of your circumstances or preferences changing down the road.

With that foundation, let’s review 3 of the most common reasons to have a trust in your estate plan:

Probate Avoidance – This is a common reason for setting up a revocable trust. A revocable trust can be valuable for a Pennsylvania resident who owns property out of state. By using a properly structured revocable trust, out-of-state probate can be avoided which makes settling the estate for the executor easier.

Some legal professionals tout probate avoidance as the primary reason to have a “Living Trust” (simply another name for a revocable trust), but in Pennsylvania, this is usually not a beneficial strategy for families with net worths under $10,000,000. Unfortunately, more times than not, a Living Trust makes settling an estate in Pennsylvania more complicated and expensive.

Tax Implications – A trust can be a tool to avoid or defer certain taxes during lifetime or at death; however, these benefits are not as wide reaching as you might hope. Generally, an irrevocable trust would need to be used to recognize meaningful tax savings, and in that case, the owner would need to release control of the assets in the trust. The Federal Estate Tax is the primary tax that an irrevocable trust can help you avoid, and very few taxpayers are subject to this tax with the current Federal Estate Tax Exemption at $12,920,000. Those that are close to this threshold; however, should explore the various planning strategies that could help reduce, avoid, or defer taxes at death.

Control – A non-financial reason to have a trust is to put limitations around assets after death. The most common reason for this is for children, either as minors or young adults. A trust can dictate when and how funds are dispersed so a minor child or a child at risk of making poor decisions does not get significant lump sums of money. This is particularly relevant for a beneficiary that has a history of substance abuse or other addictions.

Another scenario would be to control a specific asset such as a family farm or business. There could be benefits to placing these assets into a trust for the beneficiaries to assure the assets continue to be managed well in the future.

The next time you hear a trust being touted as the solution to all your estate planning problems, remember to ask a few more questions and use this guide as a filter. Like a lot of general advice, it may be applicable to you, and it may not be. We are here to listen to your specific needs and desires and then help you implement a strategy that works best for you.

Securities America and its representatives do not provide tax or legal advice. Please consult the appropriate professional regarding your specific situation.