Do I Need a Trust? 7 Reasons You Might Want One

This is a member post from Holly Donaldson, CFP®, an advice-only financial planner in the Advice-Only Network.

"Do I need a trust?" Although it's a legal question, it's frequently asked of financial advisors. What do they say?

• "Hey, I'm not an attorney," is one possible, but maybe not the most helpful, answer.
• "Hey, I'm not an attorney, but I can play one," may be polite, but inadvisable.
• "That's interesting you bring that up. I'm curious how you heard about trusts." This reply seems a little better. It keeps the focus on the questioner, and it's pretty safe legally.

Pros and Cons of Trusts

For some people, trusts are a mysterious-yet-evil domain of the ultra-rich. This belief isn't surprising. When was the last time you saw positive media coverage of a trust? It tends to pop up when a billionaire's "trust fund baby" is arrested.

Why do people sometimes think they need a trust? Answers they give can range from "I dunno" to AI citations of articles, websites, conversations with friends, family members, or even an estate planning attorney. Commonly, they believe it will help save income tax or protect assets. The mixed messages can get pretty confusing.

There are dozens of kinds of trusts. For this post, "trust" means a revocable living trust. They tend to be the most common and relevant.

Trusts aren't for everyone. They are costly to set up. Some people have difficulty implementing and maintaining them. They are powerful. Scary powerful, sometimes.

Rather than answering "Do I need a trust?" directly, I prefer to respond with some common reasons you might want one. It seems to help people discover for themselves whether a trust might be useful.

7 Reasons You Might Want a Trust

1. You own property in more than one state or country

Trusts avoid probate, if drafted, executed, and implemented properly. Property in two states or countries means probate in two states or countries. In some states, probate attorneys charge a percentage of the probated asset value. California's statutory fee schedule is one well known example. Dollars spent now on a trust could seem small compared to the dollars spent on lawyers and court fees in two places later.

2. You are concerned about a grown child's ability to handle money

A child gets the money with no strings attached if it's left through a joint account, will, payable-on-death (POD) designation, or beneficiary designation. Trusts let you build strings. One common example is to pay one third of the principal at age 30, one third at age 35, and the remainder at age 40. As your family ages and changes, you can revise trust provisions like these. I've had one client start at 30-35-40 and amend it to 50-55-60, and one client do the opposite. Revocable living trusts are amendable.

Related reading: What to Do With an Inheritance

3. You have a concern about a child's current marriage

Trusts can be written so that inherited assets can be protected in a divorce. Assets inherited other ways, especially if commingled with other marital assets, can be harder to protect.

4. You have a concern about a child's future marriage

Trust provisions can be written for future spouses, too.

5. You aren't as concerned about dying as about living a long time with chronic illness or dementia

What happens if you're unable to manage your finances? People often don't consider that a will only applies upon death. That's why they should have a power of attorney (POA). Although much work has been done to get institutional agreement on POAs, your designated POA person might still face a custodian, attorney, or title company who won't recognize it, or who at least gives your person a hard time about it.

If an asset is in a trust, your person, the trustee or co-trustee, generally faces fewer roadblocks than with the POA.

6. You are in a second (or more) marriage and have children from a previous one

Let's say you both agree that the spouse gets the house, but the kids get the money you brought to the marriage. With a will and beneficiary designations, this basic idea can be accomplished. Sometimes life (and death) work out that simply. Yet sometimes they don't. (See points 4 and 5.)

It's possible your spouse could be left without enough money to live in the house, or the kids could be left with nothing. If either of those scenarios bothers you, a trust can allow for changing circumstances as you both age.

7. You are concerned about a loved one's vulnerability in their time of grief

Probate is public. Probate court records, including asset inventories and beneficiary names, are available to anyone who asks. If you've ever known someone who has been through it, then you are familiar with the annoying phone calls and direct mail received after losing someone. If you haven't, you might be shocked to know that people troll public records.

Some trolls, I mean, people, especially like the records that declare which investment account(s) and which beach condo go to whom. Then, out of the goodness of their hearts, they find the grieving loved one and offer to provide assistance and support in their time of need. (Ahem.)

Unlike probate, transferring property through a trust happens privately.

Ask Your Attorney

In summary, these are only seven of several reasons you might want a trust. But the best person to ask is a board-certified estate planning attorney. Find one through your local estate planning council at naepc.org, or ask your financial advisor for references.

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