Wills vs. Trusts II: Do You Need a Trust?
Trusts are subject to misinformation in Oregon. Entire industries exist to scare people out of probate and create these large estate vehicles that are not always necessary. Most clients who fall for these sales pitches would save money by drafting a will and never creating the trust.
When used for the right reasons, a trust protects your family’s interests. If it is created solely to avoid probate, you will lose more money and time than you will save. Here is an overview of what a trust can and cannot do in Washington, Multnomah, Marion and Clackamas counties.
Why Create a Trust
Trusts may be created while you remain alive or in a will to be effective upon death. When you are deciding between a will or trust, the trust vehicle being discussed is a living trust, which remains in effect unless you make it revocable upon death. If you choose that direction, a trustee can distribute assets without filing a probate proceeding.
These are reasons why clients may choose a trust.
Estates valued under $1 million are not taxable in Oregon. Unless you expect your assets to grow substantially in the future, you do not require a trust for tax protection if you fall under this threshold.
If your estate values higher than the $1 million mark, a trust provides tax management strategies that prevent diminishing the value of your assets. This saves you and your heirs money and controls your tax burden.
Since a trust can maintain your assets in escrow and not distribute them all at once, it is a good way to assure heirs meet particular obligations before receiving their share. Both living and testamentary trusts can include provisions that require meeting lifetime goals (like finishing college) before payout or simply make smaller payments each month rather than one large payout.
A trust is also more efficient than a conservatorship when it comes to your minor children. Once your children are in the custody of guardians, they can start receiving support from the trust immediately. This skips over the lengthy effort of creating a conservatorship. You have the option of sending guardians monthly payments to prevent squandering or holding assets in trust until your children become adults.
Provide care for special needs
If you have children or other family members who require lifelong care for special needs, a trust is the best way to protect them. Inheriting your assets the typical way through one payout risks canceling out benefit programs. Also, if these family members are mentally unable to handle assets directly, a payout can be squandered.
The special needs trust prevents a loss of benefits and can time payments to provide care for life. Clients who create a special needs trust often have provisions that transfer an allowance to the family member but also pays group homes, medical professionals, and education resources directly so services continue without interruption.
Handle out-of-state property
If you live in Oregon but own a hunting cabin in Alaska, the cabin cannot be distributed or liquidated through an Oregon probate proceeding. Your personal representative must file a separate probate action in Alaska to handle that cabin.
You avoid this scenario by transferring out-of-state property to a trust. Unlike probate proceedings, it does not matter where property is located when it is managed in a trust. If you own out-of-state property, this makes transfers much smoother and your family avoids additional legal procedures.
Manage assets continuously through incapacity
A will is only effective when you die. The same is true of a testamentary trust so neither vehicle helps you should you become incapacitated.
If you have a living trust, the situation changes. Since living trusts continuously manage your assets, that continues even if you are physically or mentally incapacitated. Trusts normally name you as the primary trustee but also contain provisions for successor trustees if something happens to you.
This is an excellent bit of peace of mind if you are self-employed or manage multiple properties. Many people create trusts because they want their business transactions to continue without interruption.
What Trusts Don’t Do
Trusts work best for particular circumstances. Many of the reasons to create a trust may also be realized through other more cost-effective strategies. That is why you must consider a trust very carefully because there are some things it will not do.
Save money on legal fees
Creating a trust is expensive. The more complex you make it, the more you will pay your attorney to draft it. Including out-of-state property raises fees as does adding conditions before family members receive a distribution.
There is an entire industry out there that profits from scaring people into avoiding probate. A vast majority of these customers would likely enjoy the same benefits drafting a simple will and finishing an efficient probate. If your estate is below the threshold for taxation, it is likely you will spend more on attorney fees to create a trust than you would save by avoiding taxation or probate.
When you have a will, probate is swift. It is not the burdensome frightening experience trust companies want you to believe. If you do have special circumstances where a trust would help, a simple will and probate is more cost-effective.
A trust does not exist unless you transfer assets into it. This is an area where you need to stay vigilant as long as it is in effect.
You must remain mindful that newly acquired property transfers to the trust. If you keep half your property in trust and the rest outside of it, there is still a risk that you will still require a probate proceeding and face estate taxes. There is responsibility and management involved that is not required if you draft a will.
Change “payable on death” beneficiaries
Life insurance policies, annuities, and retirement accounts allow you to designate beneficiaries to receive those assets. Just as these assets do not distribute through a probate, they do not go through your trust either.
If you want to group all these accounts into the trust, you can make it the beneficiary. But you must do that through your account holder–not during trust creation. A trust does not have the ability to change beneficiaries even if that is what you desire.
Gruber & Associates, P.C. is located in West Linn, OR and serves Washington, Multnomah, Marion, and Clackamas counties. To determine whether you need a will, trust or a combination of both, contact us today to schedule an appointment.
Learn more in Part III of the Wills vs. Trusts series!