What are the Advantages of a Trust?

Trusts are frequently used in estate planning to improve on your estate plan and to provide for family issues.  There are three main purposes for using a trust as a part of your estate plan.  The purposes are:

  • Saving estate taxes
  • Control over the beneficiary’s inheritance
  • Probate avoidance

You may use a trust for one, two, or all three of these purposes as described below.

A trust designed to save federal estate tax is complicated and is only used by people with a net worth in excess of the federal estate tax limit.  In 2011/2012 this limit was $5,000,000.  These advanced trusts allow a marital couple to shelter up to $10,000,000 from federal estate taxes.  The tax rate is 35% of the value of the estate over the base limit.  If your estate is less than $5,000,000 these trust are not necessary for you.  In 2013, the credit goes down to $1,000,000 unless Congress changes the rules. 

While only a few people need a trust to save estate taxes, many people may benefit from a trust that provides control over the inheritance.  These types of trust can be effectively used for estate of several hundreds of thousands of dollars and up.  The trust places controls, safe guards, and a distribution plan around the inherited assets.  For example, your child is 16.  If you die, you would like the trust to provide for your child’s support until age 25 and then the child receives one-half of the trust at age 25 and the other one-half at age 30.  These control based trust manage an inheritance for special needs beneficiaries, minor beneficiaries, spendthrift beneficiaries, and anytime there is a reason to delay the inheritance or to protect the inheritance from risk.  They can also protect the inheritance from law suits and divorces that may happen to the beneficiary.  For example, dad dies and leaves his money in trust for his daughter providing income to my daughter for life and the remainder at her death to my grandchildren will not be a marital asset if the daughter divorces her husband.

The other purpose for a trust is to avoid probate.  Assets owned by the trust, at the death of the person who set up the trust, do not go through probate.  This saves time and money.  (See Avoiding Probate LINK)  Again there is no dollar limit on probate avoidance.  Many people with small estates can benefit from avoiding probate.