Estate Planning Benefits of Trusts other than Avoiding Estate Tax

by Glenn Fishburne Givens on Sep. 18, 2017


Summary: This article describes the three main benefits of trusts besides avoiding estate taxes including avoiding probate, distribution planning and asset protection for children in first marriages.

For 2015, the federal estate transfer tax exemption is $5.43 million of net assets per individual.  This means that up to $5.43 million of net assets can pass through one's estate to beneficiaries of a future generation free of estate transfer tax.  Because of this fact, many people are not concerned with the usage of trusts in their estate plan.  This lack of concern could be a mistake.

A person may determine that because she has less than $5.43 million of net assets there is no reason to use a trust as a tool to avoid estate tax.  This may be a mistake.  There are at least three other very common reasons for using a trust in an estate plan besides avoiding estate taxes.

These three other common reasons are distribution planning, probate avoidance and asset protection planning.  From one perspective, estate planning is the use of documents to answer certain questions that a particular document allows you to answer in effectuating your estate plan.  For example, as far as distributing your assets, a will allows you to answer the questions of "Who will receive your assets?"  "What they will receive?" and "How much they will receive?"

Additionally, a trust has the added facet that allows one to answer the question of "When your beneficiaries will receive your assets?"  Answering this question is valuable in doing distribution planning for children or grandchildren under age forty.  You might not want your child or grandchild to receive the entirety of the portion of your estate they are to receive at an age of less than forty or less than thirty.  

You might want to stagger the distributions of a child's or grandchild's share over the course of several years - such as part at age thirty, part at age thirty-five and the balance at age forty.  A will cannot hold the distributions or stagger the distributions.  A trust can.

You may want to stagger the distributions of your estate until a child or grandchild reaches a more mature age to increase the odds that the child or grandchild will be frugal and responsible with your inheritance.  In that case, you would want to use a trust in addition to other estate planning documents.  Of course, you do not have to stagger distributions with a trust.  It is merely an option.

You can use a trust to avoid probate.  To use a trust in avoiding probate, you would set up a revocable living trust and fund the trust before you die with enough assets and the type of assets that would allow you to avoid probate.  Assets can pass a variety of different ways and avoid probate.  These ways include expiration of a life estate, through a surviving joint owner, under a beneficiary designation or simply by not having enough assets to warrant having an estate go through probate.  If one is an owner in fee simple of real property or a portion of real property or individually owns greater than $25,000.00 of personal property at the time of death, one's estate must go through probate.  Now, if you have assets that cannot avoid probate without using a trust or you do not want to avoid probate through other means besides using a trust, then you can set up a revocable living trust and put those assets into the trust (fund the trust) before you die thereby avoiding probate with such assets when you die.

Why should you care about having your estate avoid probate?  There are several drawbacks for an estate that has to go through probate.  First, because of your recent death, it is a difficult time for your family to have to go through a long, sometimes cumbersome and sometimes difficult probate process.

For larger estates that require professional help, there are legal and accounting costs that have to be paid to help probate an estate.  Sometimes these costs can be quite expensive.  Setting up and administering a trust will not be inexpensive, but most of the time it should not be as expensive as going through probate.  But, this cost comparison does not account for the usage of a professional trustee who charges fees for trust administration.  People can save money on trustee fees by appointing responsible family members as trustees who perform trust administration for little or no cost though.

Also, trusts do not charge probate fees.  Probate Courts charge probate fees based on the amount of gross assets at the time of death when an estate goes through the probate process.  For the first million dollars of gross assets that goes through probate, $1,845.00 of probate fees are charged.  For every additional million dollars of gross assets, $2,500.00 of probate fees are charged.  For a probate estate (assets passing through probate) of three million dollars, that is $6,845.00 of fees that one would ordinarily not otherwise have to pay if one avoided probate with those assets.  

In the area of estate planning, there are a few different trusts one can use for asset protection planning.  The types of trusts I am referring to protect the assets for the children of your marriage against a subsequent spouse of your surviving spouse or the children of your spouse's subsequent marriage.  While I am not going into detail about the definitions of these trusts, one can use a unified credit trust, a qualified terminable interest property trust or a reverse qualified terminable interest property trust to give income from the principal of such trust to and to allow for very reasonable distributions of principal from such trusts to your surviving spouse for life while also requiring that the remaining principal of such trusts after your surviving spouse's death be distributed to the surviving children or grandchildren of your marriage.  In other words, you can ensure that your spouse is provided for during your spouse's lifetime while also ensuring that the remainder of your trust assets go to your children only - not someone else's children and not a subsequent spouse of your surviving spouse.  In other words, with these asset protection trusts, you are protecting your assets for your children and protecting your assets against outside beneficiaries while providing for your surviving spouse during your spouse's lifetime.

There are several reasons for considering the use of trusts in your estate plan besides just avoiding estate taxes.  These reasons include using trusts for distribution planning, probate avoidance and asset protection planning.  A trust can be a useful tool in your box to effectuate your estate planning goals.          

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