DO YOU REALLY NEED A TRUST? A look at why not creating a trust may make more sense

Everyone needs a trust, right? Well, sort of….

Let’s consider why you are creating a trust and whether you even need one in the first place.

There used to be great tax benefits if you left money in trust. Years ago, when all you could leave free of estate tax was $600,000, setting up a family trust and a marital trust made a lot of sense and gave you financial flexibility.

With the marital trust, the owner of the property who died could insure that his or her wealth would benefit the surviving spouse, and then on the surviving spouse’s death, the property stayed in the family. The owner of the property got use of the unlimited marital deduction so that an estate tax was paid not on the death of the owner, but it was delayed, and paid upon the death of the surviving spouse. Trusts also helped a married couple take advantage of the amount of wealth which each could leave free of the estate tax without un-necessarily wasting tax benefits.

But are taxes as important today? Since the tax act signed by President Obama in January of 2011, tax planning has gotten a lot easier. Now, each person can leave $5.25 Million free of estate tax: married couples can leave $10.5 Million free of estate tax.

So, if 99% of all US estates are under $5.25 Million, why do you need a trust? Why not just leave the money outright to your chosen beneficiaries?

Well there can be some advantages to leaving money in a trust, rather than just leaving an inheritance outright to a beneficiary. First, if the beneficiary has creditor problems, his or her creditor shouldn’t be able to touch that money. OK, but those cases are rare. What else? Well, you get to rule from the grave: by leaving money in trust, you get to also leave instructions to your trustee on how to distribute, or NOT distribute, money to your chosen beneficiaries. Control freaks take note. OK, not a bad point, right? Why else would you create a trust? Well, professional money management. If a beneficiary of yours, such as a surviving spouse, or a son or daughter or grandchild does not have the experience to manage wealth, maybe you should leave money in trust so that it is professionally managed. OK, that makes sense, but couldn’t you just leave money to your beneficiaries with the suggestion-in writing, in your will— that they hire a particular bank or broker? Of course.

Well, is there a downside to leaving money in trust rather than just giving it to a beneficiary? Well, do you know how trusts actually work?…..how a trust REALLY functions? In a trust, you typically don’t give a beneficiary un-restricted right to the money held in trust. (If you wanted the beneficiary to have unlimited or un-restricted access to the money, what do you need a trust for? You would simply throw the money in the laps of your beneficiaries when you die.) So, if the beneficiary wants money, a beneficiary typically asks the trustee for the money, and the trustee considers the request of the beneficiary, and then distributes, or NOT distributes, the money based upon what the trust document says and the reason for the request for trust money. If the trust says the trustee can distribute money for health, maintenance and support, the trustee will determine whether the request for trust money by a beneficiary constitutes a request for money for health, maintenance and support. So……………let me ask you……. Is trust money for a new car for your wife “maintenance?” How about trust money for a cruise once a year on a luxury cruise line that your husband wants to take with your children and grandchildren after you have died? Is that “support” ? What if your wife and you rented a summer house in Aspen each year? Now you are dead and she wants to keep renting the house: is that permitted by the terms of the trust which you left your money in for her?

Do you really want your spouse to have to ask a third person, like a bank, a trustee, for money? Do you really want to put him or her through that? Why not just give your spouse the money-un-restricted? (I know that some control freaks out there are “afraid” that their spouse will marry a fast talking, n’er-do-well who will fleece your spouse out of the money, right? OK, so why not give your spouse 90% of your wealth outright and leave 10% in trust: a slush fund for rainy days? “In emergency, break glass” fund.)

Here’s another good reason not to leave money in trust when you are gone: second and third marriages. Why create a so called marital trust that benefits your second spouse and, upon that spouse’s death, the trust money “goes” to your kids from your first marriage? My experience suggests that after you die, with money on the line and in the trust, your second spouse and kids from another marriage won’t get along. Why put them in the same financial “stew?” Answer: cut checks ! Give $ to your spouse outright. Give some $ outright to your kids. Enjoy ! Now your spouse’s and your kids’ financial paths need not cross.

In the end, your estate lawyer should be explaining to you, clearly, how a trust will function when you are gone. Trusts have a lot of great legal and financial advantages. But recognize that trusts are handcuffs on wealth.

Trusts restrict access to money. If that’s what you intend, that’s fine. But, what are you really trying to accomplish when you are dead? If it’s to be generous and share your wealth, why not just leave money outright to your beneficiaries, whether it’s your kids or spouse? And let them do what they want with it.

You’re dead anyway.