I had lunch today with a professional from a capital management firm I trust. He asked what the threshold is for recommending a trust. By threshold, he meant what level of assets justified using a trust as an estate planning tool. He mentioned that in the past he and considered the threshold to be the estate tax exemption, combined for a married couple. Using that threshold a single person would need 1 million in assets, and a couple, 2 million in assets next year, if Congress fails to act.
His threshold is correct, but incomplete. It is correct in that a trust works wonderfully to minimize estate taxes when a married couple has assets (real property, IRAs, 401(k)s, insurance benefits, equities, bonds, cash, etc.) in excess of the estate tax exemption. Many people incorrectly assume that because of the unlimited deduction for spouses, estate planning doesn’t need to occur until one spouse meets the man (or woman) in the sky. My friend is wiser that. He knows that by using an AB trust families can keep more money out of the hands of Uncle Sam.
My friend didn’t understand the non-tax related benefits of trusts, so I’ll outline the three biggest reasons to use a trust below.
- Avoid Probate. As I’ve written before, Oklahoma probate procedure is expensive, time-consuming, and public. A well drafted estate plan can help you avoid probate.
- Distribute Property Your Way. Using a will you can control who receives property, and what property they receive, but you have little control over when or how they get the property. This is particularly a problem for couples with young children and/or grandparents who want to give directly to grandchildren. Do you want you beneficiaries to inherit a large portion of money when they are 18? Many people, myself included, think that is too young. A trust allows you to make distributions based on milestones, like graduation, marriage, or having children, or you can make distributions why your beneficiaries are 25 or 30. The point is, you get to decide.
- Avoid a Contest. A will is far more likely to be contested than a trust. A will only goes into effect when you die. Your beneficiaries don’t know your wishes entirely until they are in an already stressful situation. Further, all they have to do to prove your will invalid is prove that your were incapacitated or under undue influence when you signed the will. With a trust they have to prove that you were incapacitated or under undue influence when you signed the trust, filed the trust documents, transfered any property into the trust, when investment decisions where made regarding the property in the trust, or when any distribution was made to any beneficiary or the owner. For a trust existing for any length of time, that is almost impossible to prove.
