Some common misunderstandings frequently heard when discussing the use of trusts are “we’re too young to have a trust" or “we don’t own enough for a trust.”
Many individuals, and even some practitioners, believe young families with children don’t need trust-based planning. Perhaps it is more accurate to say they don’t believe they can afford it. Nothing could be further from the truth. Families with children at home and any assets at all simply can not afford NOT to plan properly.
Two Types of Trusts
Broadly, there are two types of trusts – testamentary trusts, and inter vivos trusts. A testamentary trust is a trust that comes into being on the death of the person who set up the trust. Often, its creation is provided for in the will of the testator. An inter vivos trust is a trust established during the lifetime of the person establishing the trust. Inter vivos trusts can be revocable or irrevocable.
A testamentary trust is created by a person’s will. Because the will has no legal effect until the person dies, the trust comes into existence only after the person has died. A testamentary trust can be used for management purposes (think when the beneficiary under the will is either a minor or simply doesn’t have the maturity to manage money or assets); to provide regular income rather than a single, lump sum; or to reduce estate taxation while still passing on the estate to the intended beneficiaries.
An irrevocable inter vivos trust is used to reduce the value of the person’s estate, thereby limiting (or, possibly, eliminating) the amount of the estate that is subject to the estate tax. An irrevocable trust, however, can be a blunt instrument, and not necessarily susceptible to the changing needs or wishes of the persons creating it or ultimately benefiting from it.
A revocable inter vivos trust provides more flexibility than the irrevocable trust and is often used as an alternative to a will. While a will may be necessary to finish disposition of the deceased person’s assets, most of the deceased person’s estate will avoid probate, having already been transferred to the revocable trust during the person’s lifetime. The revocable trust provides advantages with regard to management and privacy of a person’s estate.
Estate Planning Is a Form of Insurance
Certainly as with any planning, it is a form of insurance. Should nothing happen to any member of the family, the planning has simply been an insurance that wasn’t used. But consider the consequences of the failure to plan.
The untimely death of a parent leaving minor children can easily result in the necessity of a conservatorship to provide protection for that minor child. Such a conservatorship can require annual accountings, bond fees, probate court costs, and legal or administrative fees to administer. Properly structured, a trust can avoid this.
Consider also the time of distribution to children. Under state law, a person becomes an adult at age 18 in Arkansas. If assets are held for that person, they have full control of those assets at age 18. History has proven people of that age can rarely manage assets prudently. This can be avoided by using trusts.
There are other issues such as incapacity which can be much better handled by the use of a trust.