Who Should Consider Setting Up a Trust?

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When you prepare for the end of life, you’ll probably create a will.

But what about a trust? Do you need one? And how exactly do they work?

That’s what a listener of the Clark Howard Podcast recently asked.

Do I Need a Trust in Addition to a Will?

Estate planning can be complicated. But these days, a will is generally simple to create and execute. There are even Clark-approved online options.

However, trusts are not as straightforward. In Clark’s words, “trusts are one of the most misunderstood things and oversold items involving estate planning in the United States.”

It’s no surprise, then, that one of Clark’s listeners felt unsure about trusts on the Feb. 9 podcast episode.

Dustin in Wisconsin asked: “I am currently working on my will and many people have mentioned that a trust is necessary to go along with the will. I have read a lot of conflicting information about tax ramifications and what not to put in your trust. Can you give any recommendations for setting up trusts or if I should even be doing it?”

What’s a Trust? And Is It the Same Thing as a Trust Fund?

First, there’s a difference between a trust and a trust fund — although they are closely related. Trusts are complex legal structures in which an individual (the “trustor”) gives someone else (the “beneficiary”) property, bank accounts, or other assets. How this differs from a will is that there is a third party (the “trustee”) who will manage these assets for the beneficiary. The trust fund is simply the legal entity that holds the assets.  

Trusts can be revocable or irrevocable, funded or unfunded, and living or testamentary.

There is no one ideal way to design a trust. They can have many benefits including legal protection, tax benefits, and even help to achieve very specific goals like giving a grandchild a set amount of money on a milestone birthday. How a trust is designed depends on the goals of the trustee. 

Who Needs a Trust?

Want to know if you need a trust? Go to a legal specialist.

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“The party that would be able to tell you whether you need a trust is not any old lawyer,” Clark says. “It needs to be a lawyer who does wills, estates and trusts full-time. You only, only do estate tax planning with a lawyer that [focuses on] wills, estates and trusts.”

However, there are some specific situations that Clark associates with potentially having use for a trust.

  • A family where people fight often, possibly involving divorce (it’s easier to contest a will than a trust)
  • A blended family
  • When someone has special needs and requires ongoing care
  • Someone who’s extremely wealthy
  • If you own your own business

The amount of money it costs to set up a trust varies greatly. It can range from under $1,000 for something extremely simple to tens of thousands of dollars.

“There are simple versions of trusts. Let’s say you’re somebody who has a vacation home in a different state than you reside in. You may have a trust in that situation,” Clark says.

“Or you may have that property in an LLC. There are specialized situations that come with wealth. And that’s when this becomes a key issue.”

Final Thoughts

The key to estate planning is working with a legal expert who specializes in wills, trusts and other related topics.

A good estate planning expert should be able to tell you whether you need a legal trust or whether a will should suffice.

Like many things in life, the more wealth you accumulate, the more complex your estate planning often becomes.

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