When is a Trust Necessary?

The four primary advantages to using a Trust as opposed to just a Will include:
  1. Avoiding Probate Court,
  2. Reducing the Costs of Administration,
  3. Creditor Protection, and
  4. Protecting Beneficiaries from immature spending even after age eighteen.

Savings of Costs

Using a Will, alone, requires assets owned by you, at the time of death, to pass through Probate  Court. When assets pass through Probate, there are court costs, filing fees, and a substantial amount of legal work required.

Using a Trust allows you to avoid Probate and substantially reduce the cost of  Estate administration.

Estate Tax Benefits

By using a Trust, we can ensure that married couples take advantage of each others estate tax credit irrespective of what the Federal or State law is in the future. A trust alone does not automatically avoid estate taxes, but allows for planning which limits a family’s exposure. (See Estate Tax)

Creditor Protection

A Trust can provide protections from creditors of your Estate. In Ohio, unsecured creditors (such as credit cards, student loans, business debt, and medical debt) attach to your Probate Estate. If your assets do not go through Probate, but are instead transferred by using a Trust, unsecured creditors are unable to reach your Trust assets.

During your life, creditors can still reach assets in your Trust. In addition, if there is a lawsuit filed prior to death or the debt is secured by property (such as a mortgage, car loan, or other collateral) the creditor will be able to reach the assets of the Trust.

Even with secured debt, a Trust is preferable.  If, for example, your home is “underwater” your family may not want to continue making the payments after your life. Without a Trust, the deficiency owed (anything above the amount the house is sold for at auction) would attach to the other Probate assets. With a Trust, that deficiency would still attach to Probate (but all of the other assets would be in Trust and thus, not subject to Probate creditor claims).

An important provision to this standard is that most marital debt is jointly secured. To avoid this issue limit any, unnecessary, joint debt.

If joint debt is necessary, make sure to maintain adequate life insurance.  It is important to maintain insurance to counterbalance debt that your family would not otherwise be able to maintain after your life.

If your parents or other family members are planning on leaving you an inheritance, there are also ways to protect the inheritance from  creditors. (See Creditor Protection Trusts).

Time

Administration of a Will: Creditors have six months after death to submit a valid claim against your Estate; this includes mailing the statement to the Executor. There is also a required three month Will contest period after the Estate is opened.

From start to finish, expect the Probate process to last at least seven months to a full year before the assets are fully settled. In some situations, distribution from a Will can take years of administration.

Protecting Beneficiaries from Themselves

For most, the age of 18 years old is not the pinnacle of maturity. With a Will or Beneficiary designation, minor children will have full control over all of their assets when they reach age 18; this would include life insurance proceeds, retirement accounts, real property, etc.

To protect children, and any other beneficiary from themselves, we use a Trust to mandate the use of all Trust assets. This would allow children, before and after the age of 18, to receive distributions for essential in life such as health, education, support, and maintenance.

Then, upon a date or event, the remaining Trust assets are distributed. This could be at a specific age (i.e. 25, 30, 35,) or upon the achievement of a certain level of education (i.e. college graduation, purchase of a home). This limits the likelihood that the child will squander the assets intended to care for his or her well-being and education.

Control of Distributions from a Trust

Here is a concrete example of how a Trust may be more beneficial than just using a Will:

Parents die in a car accident leaving eight-year-old twin girls. The parents’ net assets include
 
  • House                                                             $ 100,000.00
  • Vehicles                                                          $ 20,000.00
  • Life Insurance                                                 $ 200,000.00
  • Investments/Retirement Accounts                 $ 80,000.00
  • Total value of all assets                                                                                                                                                                                          $400,000.00

If there is only a Will, the sum of all assets will be controlled by the Probate Court until the girls reach age 18. At age 18, the remaining balance is distributed, outright, to each child.

Regardless of a child’s maturity or intelligence, 18 is not an ideal age to receive a large lump sum of money. Such a distribution can be more harmful than helpful.

If there is a Trust the assets will be controlled by a Trustee with Probate Court oversight until the girls reach age 18. Unlike a Will, the Trust can limit distributions after age 18.

Appointing a responsible Trustee to governor distributions ensures that the funds are only used for essential expenses, such as securing a college education, providing for health expenses, support for living expenses, and maintaining a reasonable lifestyle.