It is likely that many who read the title to this article almost immediately had thoughts like these: “Why would I need a trust? I don’t have that much money!” Or, “I’ve got a will in place, and my estate isn’t that complex. Besides, establishing a trust is probably too expensive.”
The fact is, however, that trusts aren’t just for the super-wealthy. There are many reasons beyond the sheer size or complexity of the estate why a trust could make sense. Let’s take a look at some trust basics and then consider how a trust might apply in some situations that you may not have considered.
Trusts 101
At its most basic, a trust is a legal structure that can own or control property, distribute assets, and perform other functions that a natural person might do. The person who creates the trust (the grantor) can stipulate the terms of the trust, including the timing and conditions that must be met in order for certain things to happen. Some trusts are created by the terms of a will; these are called “testamentary trusts,” and they take effect upon the death of the grantor, when the will is probated.
But not all trusts require the death of the grantor to take effect. A “living trust” operates during the lifetime of the grantor and may even remain under the grantor’s control as long as the grantor has the capacity to direct the trust; such a trust is called a “revocable trust,” since it is within the grantor’s power to change or even revoke the trust while competent to do so. An “irrevocable trust,” as the name implies, is a trust that the grantor cannot alter or revoke, even during the grantor’s lifetime. There are good reasons why a person might choose either a revocable or irrevocable trust, as we’ll explain below.
When Should a Trust Be Considered?
Why would someone need anything more complicated than a will? Well, perhaps the main reason is because in order for a will to take effect, the maker of the will has to die. In other words, there may be advantages, in some situations, to asserting control and conditions for an estate before the estate owner’s passing. These might include:
Concerns about future capacity. Someone facing severe health uncertainties might wish to direct how their assets will be handled in the event that they are no longer able to make their own decisions, though still living. A trust can be designed to stipulate their wishes, and it can take effect when the grantor is judged to no longer have decision-making capacity.
Children or other loved ones with special needs. Creating a trust for the benefit of persons with special needs allows the grantor greater control over the amount of assets set aside for the beneficiary and also the timing and method for distributing the assets. The trust can also appoint a successor trustee (a person or entity who ensures that the terms of the trust are carried out) to direct the trust in the event of the grantor’s death.
Dividing a complex estate. Certain types of assets—businesses, real estate, or collectibles, for example—are harder to divide evenly than cash or securities. When an estate has significant holdings of this nature, a trust can spell out exactly how the grantor wants the assets directed, to whom, and when.
Controlling Estate or Inheritance Taxes. When a grantor places assets in an irrevocable trust, those assets are no longer considered part of the taxable estate. Persons with significant estates may wish to utilize a trust to reduce the tax bill otherwise payable by their heirs. These assets can then be transferred to the heirs according to the terms of the trust. In some cases, the grantor may even choose to retain an income from the earnings generated by the trust’s principal.
Protecting assets from creditors or lawsuits. Persons in professions prone to litigation—such as physicians or attorneys—may wish to protect personal assets from the claims of creditors or claimants in a lawsuit. A properly designed irrevocable trust can help to insulate assets from such claims.
Creating a philanthropic legacy. Persons who wish to support a cherished cause or establish a lasting legacy often utilize trusts to hold and distribute assets according to their philanthropic aims.
There are many more specific situations where a trust can provide advantages. The bottom line is that there are many more reasons to consider a trust than simply having a large or complicated estate. Still, because the creation of a trust requires the assistance of qualified legal counsel, it’s important to consider carefully what you are trying to accomplish by establishing a trust. The greater your clarity around what you’re trying to do, the more efficient and cost-effective the process will be.
At Mathis Wealth Management, our fiduciary obligation to our clients means that we provide guidance based on a careful consideration of each client’s specific needs and circumstances. To learn more, visit our website to read our recent article, “Use It or Lose It? Your Lifetime Gift and Estate Tax Exemption and the 2025 Sunset.”
