“What’s the big deal about having a trust anyway?” This is a question I’m often asked in client meetings, though not always in such a brash fashion. Usually the topic of trusts comes up after a client hears that a friend has set one up, which piques my client’s interest. They’ve heard about trusts before but figured they were mainly for the ultra-wealthy set up as a type of sophisticated tax avoidance plan. While this might be true sometimes, taxes are often not the main reason for setting up a trust these days. There are, in fact, many reasons to have a trust.

So, Why Have a Trust?

One very common reason is to protect someone important in your life. Most of us have loved ones we want cared for after we die, but sometimes that means we have to protect them from themselves. You may have someone who can’t be trusted to spend money wisely. Another may have bill collectors calling at all hours of the night. Can I be so bold as to ask you: “If you were to die tomorrow, would someone like that be in line to inherit your hard-earned nest egg?” If so, a trust is a tool that may keep the bill collectors from being the ones inheriting your money, and it can also impose some discipline on an heir who might otherwise drain an inheritance too quickly. (You’ll be thanked one day.)

A trust often includes provisions for exactly when an adult child will obtain complete control of the assets. This is a very personal decision for each family. I once had a client tell me, “I want to protect my kids from themselves in their 20s, but I also don’t want control them for the rest of their lives from the grave.” Sometimes, trusts have various distribution milestones (for example. 25% upon age 35, 50% upon age 45, the remainder at age 55) that determine when the trust assets will ultimately be depleted. These milestones are at the discretion of the person setting up the trust and can be a great way to help introduce the trust assets to the beneficiary.

Another Kind of Protection

If protecting the people you love from themselves is a good reason for a trust, another reason is to protect people you love from other family members. Traditional families, blended families, and blended marriages can all bring their own complications into a family’s finances. I find it healthy for spouses to agree how they want to handle the eventual disbursement of assets to their heirs and then put it in writing so that there’s no ambiguity on the matter. A trust can be used to make sure that you take care of your spouse’s needs after your death, but also to ensure that the assets remain in your family’s bloodline in the event your heirs have marital complications

Trusts can Uncomplicate Your Estate Transfer Process

One more reason to set up a trust is to help simplify the estate transfer process for your heirs. For example, let’s say you own property out of state. If you die, that property will have to go through what’s called ancillary probate. This is an additional legal process that takes time, paperwork, and often, additional probate costs. But you can avoid all this if you title your out-of-state real estate properly in a trust. This goes for all types of assets: assets placed in a trust bypass probate (the process of transferring assets by will or statute) will go straight to the heirs as instructed in the trust documents. This can reduce costs, simplify the process, and may also bring an added layer of privacy to the situation.

There are many reasons for having a trust, and the examples in this article just scratch the surface. A trust can be appropriate for a variety of reasons, and the size of your net worth is only one part of the equation. I recommend you consult an estate-planning attorney if you’d like to explore whether a trust makes sense for your specific situation. Your financial advisor can then coordinate with that attorney on how your trust fits into your overall financial plan.

Helping you to understand the different aspects and benefits of trusts is just one of the many services provided by Modera. If you’d like to have a conversation about trusts or any other financial options for directing wealth to your heirs, please contact us.

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This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. The case study represented here is hypothetical in nature and is used for illustrative purposes only. It should not be construed as a testimonial.  Each client’s situation and circumstances are different, and the foregoing should not be relied upon as legal or financial advice for one’s individual circumstances. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements and opinions expressed in this article are subject to change without notice based on changes in the law and other conditions.