One of the most common questions I am asked by a new client in an initial estate interview is "Do I need a trust?" The following are circumstances where a trust might be necessary or helpful to your asset planning:
A trust may be necessary if your assets will be subject to federal estate tax following your death. There are planning tools that an experienced trust attorney can use to reduce, or even eliminate, this tax liability. However, for 2019, the federal estate tax exemption (the amount that an individual can leave heirs without paying federal estate tax), is $11.4 million. A married couple has over $22 million in exempt assets. In addition, Michigan does not have an estate tax. You may have been successful in building wealth. Nevertheless, unless you exceed these multi-million dollar limits, you do not need a trust for federal or Michigan tax planning purposes.
Plan For Minor Children
Another reason to have a trust is if you currently have children under the age of 18. Under Michigan law, minor children cannot legally manage their money. If you have a minor child when you die, your child's inheritance will have to be held in a minor conservatorship. A conservatorship is a probate court supervised account that lasts until the child is 18. The minor child's funds are restricted and can often only be withdrawn with court approval. More significantly, once the minor child reaches the age of 18, he or she can access all of the funds.
While your 8 year-old child may be mature in your eyes, he or she may not be able to manage hundreds of thousands of dollars at age 18. Also concerning is the fact that your child might be overly generous or vulnerable to exploitation by others.
Use a Trust to Delay And Manage Your Children's Inheritance
A trust allows you to control how, and when, your children receive their inheritance. For example, you can authorize your trustee to distribute trust assets for your child's education. The child can access a percentage of the remainder, at scheduled ages, such as 21, 25 and 30. Likewise, you can establish criteria for your child to receive funds, such as obtaining a four-year college degree. In short, you can set reasonable guidelines for dispersing your funds to your children both while they are minors and into adulthood. For this reason, I strongly recommend a trust to clients with minor children.
Manage Your Assets For A Blended Family
A trust is also a valuable planning tool if you have re-married and you and your spouse may both have children from a prior relationship. With this planning tool, you can provide for your surviving spouse to receive income and principal during his or her lifetime, with the remainder of assets transferring to your children after your surviving spouse dies. A trust can also provide a framework for how long your surviving spouse can remain in your house after your death and parameters for what would happen if he or she re-marries or moves out of the home. In a blended family situation, a trust can be beneficial in resolving any potential conflicts that might arise between your surviving spouse and your children if you die.
Perhaps the number one reason a client will raise the issue of a trust is to avoid probate. Opening an estate through the probate court involves filing fees and administrative requirements that you may wish to avoid. The court will also assess a probate fee based on the total value of your probate estate. While this fee may not be significant, you may also want to avoid giving a portion of your estate to the State of Michigan.
Do you have to a have a trust to avoid probate? No. Any asset that is in joint names or has a beneficiary designation will transfer directly to the named person and will not go through probate. However, if you have assets in your name only that are not jointly held or beneficiary designated, those assets will need to be probated after your death.
Most often, it is real property that is probated because it is in the name of one person, either by purchase or because one spouse has died. A house cannot be designated to a beneficiary and must be probated to be transferred to an heir or beneficiary. A trust can be used to transfer real property and other assets to avoid probate after the death of the owner.
Probate is a public proceeding. the documents used to open a probate proceedings, including the will, can be obtained from the court. If other documents are filed, such as an inventory of assets or annual account, those too can be obtained by a third-party. If you wish to disinherit a child or have concerns that a nosy relative might want to see the value of your estate, you may wish to consider a trust. A trust is a private document and is generally not filed with the probate court. Furthermore, any documents relevant to the value of the trust are again, generally private.
Concerns about a contest
A trust may be a better option for you than a will if you have concerns that a family member or beneficiary may seek to set aside your wishes after your death. As noted, unlike a will, a trust is typically not filed with the probate court after death. This means that it is more difficult for an aggrieved relative to obtain information about your dispositive wishes. The Michigan Trust Code also imposes time restrictions for an interested party to contest a trust.
There are several circumstances, such a significant gross estate or minor children where I might advise a client that a trust is necessary to obtain their planning objectives. Even when a trust is not required, a client may still want to take advantage of other benefits that a trust might offer such as probate avoidance and privacy. You should speak with an experienced trust and estate attorney to determine whether a trust is the best option for your planning needs.
You are welcome to contact us at the e-mail link below, or talk to one of our friendly staff members at (734) 669 3838 to schedule a free consultation to discuss your trust and estate plans.