The financial advisor said that a trust would save everyone and their heirs a tremendous amount of time as well as money in probate fees and lawyer fees.
Trusts do have benefits, but I must disagree with the financial advisor. I do not believe that trusts are for everyone.
My general thoughts about trusts are as follows.
Do trusts have advantages? For some, yes.
- Trusts are helpful and beneficial when someone desires to give property to another who is not capable of handling money.
- Trusts are also beneficial to enable high net worth individuals avoid estate taxes. However, you must have a substantial amount of assets to be subject to Federal Estate Taxes. Currently, the unified credit is $4,505,800.
- Trusts may be beneficial if you desire secrecy and don’t want anyone to find out how much property you did or did not have.
But, do trusts have disadvantages? Yes!
- Estate plans with trust agreements usually cost more than estate plans without them.
- If you create a revocable inter vivos trust, you are adding a layer of expense and work to your finances. You will likely fund the trust with your real estate, bank accounts, stocks, bonds, and the rest of your other assets.
- The trust you wish to create will most likely be a pass-through entity for tax purposes, just as a limited liability company, partnership, or c-corp. However, it will add an extra layer to you tax returns.
- If you want to sell or dispose of real estate that is owned by the trust, the purchaser will demand to see the trust agreement, and you will be required to record a memorandum of your trust agreement with your county’s register of deeds office.
- You must manage and deal with trust property as a trustee rather than an ordinary individual. This will most likely require the assistance of an attorney.
- You probably will acquire more assets in the future. If you forget to place those assets in the trust, you will have circumvented the trust’s purposes.
- When you die, your trust will become irrevocable. At that time, your successor trustee will become the new trustee. Usually, the successor trustee will not be an attorney and will not be familiar with the law. This can create a conflict between the beneficiaries of the trust and the trustee. The beneficiaries may believe the trustee is breaching his fiduciary duties to properly administer the trust and to timely distribute the trust assets to the beneficiaries. Once there is a conflict, that conflict can result in a lawsuit. Instead of your assets going to your beneficiaries, your assets could be used to pay a lawyer to defend the trustee against a lawsuit from your loved ones.
- The main point the financial advisor was trying to make was that a trust would save you and your loved ones lots of time and lots of money in lawyers fees and probate fees. I question her reasoning. First, probate fees, i.e. court costs payable to the court, are capped in North Carolina at $6,000. In fact, if your estate has a value of $100,000, you should pay approximately $520 in probate fees to the Court. (Real Estate is typically not a probate asset in North Carolina and is not consider part of your estate to calculate the amount of Costs the Court collects.) The probate fees payable to the Court mentioned in this paragraph does not include attorney fees.
- It is highly likely that an estate will have to be opened for an individual when they pass regardless of whether they have a trust. A probate estate may be necessary to pass title to an automobile titled in the individual’s name, or to ensure that all the individual’s debts have been paid.
- After the trust is created, you and your successor trustee will most likely end up paying an attorney to assist you with administering the trust. Over time, a trust will most likely be more expensive to administer than going through probate without a trust.
- As to keeping your assets a secret, I don’t believe I have ever seen anyone go to the courthouse to look at someone’s estate file to find out how much property that person did or did not have. The only people I see looking through those files are attorneys and paralegals that are examining real estate titles. Those attorneys and paralegals spend enough time to ensure a piece of real estate is free of liens and then move on.
Are there alternatives? Yes!
In North Carolina, there are ways to avoid probate without placing your assets in a trust. When I say probate, I am referring to the process at your death where your personal representative collects your assets, properly disburses and distributes those assets, and accounts to the clerk of court for those assets. Here are some ways to avoid probate:
- If you have life insurance, make sure you name a beneficiary on the life insurance policy. Life insurance with named beneficiaries are not part of the probate estate.
- If you have an IRA, name a beneficiary for the IRA.
- Name beneficiaries on your brokerage accounts and certificates of deposits.
- Make sure your bank accounts are payable on death to another.
- Use 529 College Savings Plans.
- Give your property away before you die if you can afford to.
There are ways to make sure your assets pass automatically at your death without being subject to probate. Speak to a professional to make sure your accounts are titled the way you wish.
Conclusion
Going back to the financial advisor I was watching on TV, she must have assumed that if you had a trust, you would no longer need an attorney. Unfortunately, I believe the opposite. Trusts are complicated legal documents. They contain many difficult property law and tax law concepts. They contain legalese. To properly administer a trust, the trustee needs the assistance of an attorney.
If you are a high net worth individual or want to give property to someone that cannot manage property, a trust will help you.
However, if you are not a multimillionaire and your heirs are capable of handling property, think twice before creating a trust. All the reasons you think a trust are right for you, might be the reason why you should avoid creating a trust.
These are just general thoughts on the topic. This topic becomes more complicated when you consider debts. Every person’s situation is unique, so please speak with your advisors before you decide.