At What Net Worth Do You Need a Trust?

Trusts are typically thought of as tools for the wealthy, however, affluence is not a prerequisite to reap the benefits of owning a trust. Trusts can be useful estate planning tools for many people, but it may not be worth the expense for people who do not have many assets.

Background: What is a Trust?

A trust is a legal agreement between a grantor and trustee. The grantor usually transfers ownership of assets into the name of the trust to provide for one or more beneficiaries. The grantor must specify who should be the trustee and the beneficiary or beneficiaries. The trustee is the individual or institution who will manage the trust. In many family trusts the trustee is usually a family member or family friend. When the trust holds assets of significant value, an institution such as a bank or trust company might be selected as the trustee. The trustee follows the directions in the trust agreement and local law when managing and distributing the trust assets.

Uses of a Trust

A trust can have many different uses depending on the preferences and goals of the grantor.

A revocable living trust often is used to avoid probate and to ensure a successor trustee will manage the assets if the initial trustee becomes disabled. A revocable living trust often is called a “will substitute” because assets that pass to heirs through a will must go through probate, which is a process administered by a local court. Probate can be an expensive and time-consuming process.

An irrevocable trust can have a number of uses. It can be used to reduce income or estate taxes or both, depending on the terms of the trust. An irrevocable trust also can protect assets from creditors of the grantor or the beneficiaries as well as from poor investment decisions or wasteful spending of the beneficiaries. A “special needs trust” can be created to provide support for an individual who will have lifelong special needs while ensuring the individual is eligible for government assistance programs.

Trusts are incredibly varied and flexible and can be used to achieve many different goals of grantors.

Qualifications for a Trust

There is no required minimum value required of a trust. An attorney will charge a fee to draft a trust agreement, however, so it might not make sense for someone of very modest income to create a trust. The cost varies around the country and based on how complicated the trust is. Fees generally range from $500 to $3,000. Many institutional trustees impose a minimum annual fee for serving as trustee, so again it might not make sense for someone of modest means to create a trust with an institutional trustee.

Things to Consider

A potential grantor should first establish goals for his or her estate. The person should determine how the estate eventually should be distributed and if there are other goals, such as avoiding probate, reducing taxes, and protecting assets from creditors. Then, in consultation with an estate planner, the individual can assess which types of trusts might help meet those goals and what the costs of those trusts might be.