An estate plan can be created with a variety of different tools, but two of the most common options are a will and a trust. Most people are familiar with wills. You likely have heard of a trust, but may be unclear who should use a trust. Here are some of the benefits and drawbacks of using a trust for estate plans.
Benefit: Avoids probate
One of the often-touted benefits of a trust is it allows you to avoid the probate process. Estates with a will, or no plans at all, pass through probate court. Your beneficiaries must wait to receive their inheritance until after it has passed through probate. Going through probate also takes a bite out of your estate. According to Fidelity Investments, it typically costs about four percent of the estate to pay for court and attorney fees. It also means all the assets in your estate become a part of the public record.
However, there are some types of property you can transfer ownership without having to pass through probate. If you name a beneficiary on your retirement accounts or open certain kinds of bank accounts, you can pass these along without going through probate.
Drawback: Costs more and harder to change
Setting up a trust is typically more expensive than setting up a will. It is also generally more difficult to modify a trust. If you set up an irrevocable trust, you cannot make changes after you fund it.
Benefit: Reduces taxes and protects certain interests
Creating a trust can allow you to avoid some estate taxes. If you are married, you can set up a trust so it goes to the surviving spouse. This could prevent the surviving spouse from having to pay estate taxes on this money going forward.
If you are a business owner, you may want to place your business into a trust. Having a business tied up in probate court could hurt your company's future.
Drawback: May not make sense for a younger person
A 45-year-old may want to hold off on creating a trust. You likely have some time before you pass on, and you also have time to accrue more assets. Creating a trust when much of your financial future is uncertain may not make sense. Laws regarding estate taxes and wealth distribution will also likely change over time, so you might want to wait to see what happens.
Drawback: Could be unnecessary for a small estate
Trusts are usually the most beneficial to people with large estates. A trust avoids certain estate taxes and protects an estate from losing assets through the probate process. A trust can also prevent potential court battles that may occur when a large estate passes through the probate process.
If your estate is more modest and you are unworried about privacy, you may want to consider using a will for your estate plans. A younger person who is not a business owner may also find it unnecessary to create a trust.