Have you ever built a home from the ground up, or been involved in a major renovation?
If so, you’ve likely experienced setbacks, changes to the plan and probably more bumps along the way than you ever would have imagined.
Yet, when the project is finally complete, you feel the pride of crafting a structure that will last, one that you can enjoy, share with family and friends, and perhaps even pass on to the next generation.
Crafting an estate plan can feel similar. Just like a home, the plan you need in your 20s is different from the plan you need when raising young children, which is different from the plan designed to transfer wealth to adult children, grandchildren and future generations.
In this article, I want to help you understand what a trust really is, when it’s helpful, when it’s not, and how to think about it in the context of your own family and stage of life.
At each stage, you’ll rely on different tools to achieve your goals. Trusts are often an important part of estate planning, and they can be used in many different ways. But, just like designing a home that fits your family, trusts are not the right fit for everyone.
To build or renovate a home, you need a vision and a plan – as well as a great team! The same is true for an estate plan. Depending on your needs and goals, a trust may be a helpful tool. Think of a trust as the framing for your construction project.
What is a trust?
A trust is a legal structure created to hold and manage assets for the benefit of others. A trustee acts like the general contractor, following the blueprint (the trust document) and making sure everything is carried out as intended for the beneficiaries.
The great team I work with includes Attorney Heather Dykstra. She points out that a trust should be carefully drafted to addressed each client’s specific needs. Those needs may include tax planning, asset protection, planning for minor beneficiaries, succession planning for future generations or simply avoiding probate upon death.
While there are legal guardrails, there is still considerable flexibility in how trusts can be designed. Some of the most common situations where trusts are used include:
- Young children (often through a testamentary trust created in your will)
- A loved one with disabilities (a special needs trust)
- Charitable giving (charitable remainder or lead trusts)
- Multi-generation planning (marital and dynasty trusts)
The evolving estate tax exemption
Times change, and it seems like the pace of change accelerates over our lives. Over time, trends and styles change in our homes and estate planning needs to keep pace with changing times, too!
In the 1990s, hunter green and dusty rose dominated home design, and the estate tax exemption hovered around $600,000 per person. Many middle-class families built trusts into their plans as a way to avoid estate taxes.
As styles evolved to granite countertops and smart homes in the 2000s, the estate tax exemption climbed into the millions.
Today, under current federal law, the exemption is historically high at $15 million per person, or $30 million for a married couple. For most families, federal estate tax is no longer the primary driver of planning decisions.
Much like evolving building codes, tax law changes shape how estate plans are designed.
Most families today will not benefit from a trust if the only goal is to avoid estate taxes. In fact, trusts are often taxed at higher rates than individuals, which can produce the opposite result.
Dykstra shared that today, few trusts are created to avoid or limit exposure to federal estate tax. Most are put in place to have some control over how and when assets are distributed to beneficiaries. Not only does a trust allow you to put a distribution plan in place for your assets, but it can also be drafted to give a trustee flexibility and discretion to address future unknowns or changes in the law.
So how do you know if a trust might be right for you?
Minor children
Consider your life stage and goals. Do you have minor children or grandchildren you’d like to provide for? Children cannot legally control inherited assets until age 18. A trust can provide structure and protection.
Dykstra cautions the following: If you only have a will or have your minor children identified as your beneficiaries, your assets will be distributed directly to those beneficiaries when they attain the age 18. As we all know, very few 18-year-olds possess the maturity to make appropriate decisions with respect to financial management. This can lead to the purchase of unnecessary assets and the rapid depletion of their inheritance. It can also affect their ability to qualify for financial aid for post-secondary education.
Do you care for someone with a disability who may need long-term support?
Do you have charitable goals you want to integrate into your estate plan, possibly in a tax-efficient way?
If your financial life is more complex, there may be additional planning tools to explore with your advisory team.
Common pitfalls
Your team can help avoid common pitfalls.
In addition to potentially higher tax rates, trusts require separate tax filings, which can add complexity for heirs. More commonly, trusts are created but never properly “funded.”
You’ve likely seen unfinished buildings that were framed but never completed. The same happens in estate planning. A beautifully drafted trust that is never funded is like a house with no plumbing or wiring: impressive on paper, but unlivable in reality.
For a trust to work, assets must actually be transferred into it, whether by retitling accounts, updating beneficiaries, or using tools such as Ladybird Deeds for real estate.
No matter which structures you use, the goal is the same: a plan that is thoughtfully designed and fully developed.
A good estate plan, like a good home, is only a success when it is complete and ready to support the people who will one day rely on it.
Rebecca Teahen, CIMA®, is a financial advisor with Baird who partners with women and families to build meaningful financial, estate, and philanthropic plans. She is based in Traverse City and works with clients across the country. Reach her atrteahen@rwbaird.com.Heather Blanton-Dykstra is an attorney with Kish, Dykstra, and Scott, P.C., specializing in estate planning, estate and trust administration, and probate litigation.The information offered is provided to you for informational purposes only. Robert W. Baird & Co. Incorporated is not a legal or tax services provider and you are strongly encouraged to seek the advice of the appropriate professional advisors before taking any action.