Do you really need a trust if your estate is under $2 million?

Do you really need a trust if your estate is under $2 million?

When people ask this question to an estate planning attorney, they’re usually asking whether their estate is “big enough” to justify a trust. The truth is that trusts are about control, privacy, and family dynamics — not just money.

Do some research and you’ll probably hear the following:

“Trusts are only for the wealthy.”

“My friend told me if I don’t get a trust it’s going to be a big problem for my family later.”

I hear these conflicting statements all the time, and it’s no wonder. When it comes to the question of whether you really need a trust for your estate plan, the information available can be overwhelming and sometimes contradictory.

Let’s fix that. This article will go over the real reasons someone should pursue a trust in their planning, the reasons they maybe shouldn’t, and how to make this assessment for yourself.

Trust Basics

Before we get into whether and when a trust might be necessary in one’s estate planning, we need to go over exactly what a trust is and what it does for you. First, a clarification: when I refer to “trusts” in this article, I’m specifically referring to a revocable living trust, which is the most common type of living trust used for everyday estate planning.

Why is it the most common? Focus on the word “revocable.” All trusts fall into two categories:

Revocable: the Grantor (the person setting up the trust) can revoke the trust at will. This means they can add or remove assets from the trust, change its terms, or tear it up and eliminate the trust entirely, whenever they please throughout their life.

Irrevocable: the Grantor transfers property to a new entity that holds the assets and is governed by its terms and the Trustee, who is typically not the Grantor. The Grantor cannot remove property from this trust, change its terms, or end the trust once it has been set up.

Generally speaking, irrevocable trusts are reserved for special situations that don’t apply to most people, such as special needs planning or avoiding the federal estate tax, which has a threshold currently well into the eight figures and is not applicable for most families.

Thus, most individuals and families that I meet with will be discussing the revocable living trust, as it provides several benefits while maintaining the flexibility that irrevocable trusts do not have.

Trust Benefits

So why bother with a trust at all? That’s the question most people researching their estate planning options will eventually come to. There are a few main benefits to using a revocable living trust in your estate plan as opposed to just a last will and testament:

Avoid probate – this is the big one. Many people will tell you that you MUST get a trust because probate is terrible and needs to be avoided at all costs. That’s true – in some cases. Read on below to find out if you fall into one of those situations.

Maintain privacy – every last will that goes through probate becomes a public record, whereas trusts remain private. If you don’t like the sound of other people reading your estate plan, you may want to consider a trust.

Exert additional control/protect inheritance – this is where most people gain a real benefit from using a revocable trust. With this type of trust, you can set terms on an inheritance (like 20% at age 25, or $100,000 upon graduating college, etc.). You can also protect an inheritance from being squandered or misused, as explained in further detail below.

That’s it. There are other benefits to revocable living trusts in various niche situations, however the primary benefits are the ones listed here. Notice what’s missing: none of these benefits require a large estate to make the trust beneficial.

Are there special trusts designed for the very wealthy? Absolutely. They are typically irrevocable and specifically designed to move assets out of the grantor’s estate for the purpose of reducing estate taxes. However, unless your estate is valued above the current, very high federal estate tax threshold, this type of estate planning just isn’t required.

So let’s keep our focus on the three primary benefits of a trust. In the next section I’ll go through each one and provide an example of how a trust can help someone looking for these types of benefits from their estate plan – even if their estate is worth less than $2M.

Reasons for Trusts for Estates Worth Less Than $2M

Probate Avoidance

Probate is the process of wrapping up one’s affairs through coordination with the surrogate court in the county where the individual resided. In New Jersey this process is not as bad as it might seem.

Usually, the process will take one to two months, and it’s mostly a matter of filling out paperwork, gathering and distributing assets. Many attorneys will assist clients with this work for a reasonable fee, but I have found that most of my clients are capable of handling simple probate on their own.

So when is probate not “simple?” There are a few situations that can make probate both more complicated and more expensive:

Out-of-state assets – if you have assets in multiple states then you’ll need to initiate probate in those states. Some states’ probate process is more complicated than New Jersey’s, and this can lead to having to hire attorneys in both states – which can get expensive. If you have assets in two or more states, you should probably consider a trust, even if your estate’s overall value isn’t that high.

Complicated asset portfolio – if your asset portfolio contains things like multiple business interests or partial interests, stock options that haven’t vested, or any other asset that could potentially be difficult to transfer ownership of, it may make sense to consider putting that asset into a trust. If it’s held in trust at your death, ownership simply passes on to the beneficiary when you die, and no further work is required.

Potential disputes – when a will is submitted for probate there is an opportunity for others to dispute its terms or legitimacy. If you believe someone in your life plans to dispute your estate plan, avoiding probate and using a trust (as further explained below) can provide added protection and avoid a lengthy court battle.

If any of these apply to you, probate can quickly become more expensive, slower, and more stressful than most people expect, making the use of a revocable living trust much more logical.

Privacy

As mentioned above, all wills that go through probate become part of the public record. That means anyone can file a “Freedom of Information” request and receive a copy of the will.

Why would someone do this? There can be many reasons from nosy neighbors to potential beneficiaries contemplating disputing the estate. However, the most common answer in New Jersey has to do with real estate.

In New Jersey, there is a thriving business that consists of buying up homes below market value and then flipping them, usually after minor renovations. One widely known source of below market homes is purchasing them from an estate.

The reason is straightforward – many times when a family is dealing with a loss, and the loved one that passed owned a home that none of the other family intends on living in, then someone is tasked with selling the home and distributing the proceeds. It’s a sad truth that the person tasked with doing this is often a close loved one of the deceased, and they will often accept a quick, cash offer on a home just to be done with what can often be a taxing, and given the sentimental value of a family home, heartbreaking endeavor.

Savvy business owners who are aware of this will file these Freedom of Information requests throughout the state, looking at any will that seems to match up with this scenario. If they find one they will aggressively call the beneficiaries, usually for months on end, attempting to secure a sale of the property at a below market rate.

If you use just a will in your estate plan, this can’t really be avoided. However, a trust is a private document that does not go through the probate process, and thus precludes anyone from seeing what’s being distributed in the estate, eliminating this issue entirely.

Additional Control / Inheritance Protection

Saving the best for last – the main reason that people without massive estates still really benefit from using a revocable living trust is when they have a need to either exert additional control over how and when their estate is distributed, or if they are concerned that the estate would be accessed by a creditor of a beneficiary. Let’s discuss each possibility.

Many times in my work I’ll speak with a family that has concerns about how one of their beneficiaries will use their inheritance. This can be for many reasons, including:

They are a minor – and by minor, I mean more than just the legal age of majority. Many parents I work with find that even age 18 is just too young for their kids to inherit without oversight, and so we design a trust with specific oversight to ensure that the inheritance is used how it’s intended, not thrown away by someone who might not be old enough to understand how to manage money properly.

They have addiction issues or special needs – sometimes it’s not the age, but other circumstances that mean a beneficiary is just not going to be capable of overseeing their own inheritance. In these situations a trust is essential to ensure they gain the full benefit of what they are inheriting without creating any additional problems.

They have money issues – revocable living trusts DO NOT provide asset protection for the Grantor (you – or the person creating the trust), however they can provide meaningful protections for beneficiaries when properly structured and administered. If you’re concerned that one of your beneficiaries might have judgments, liens or even the potential of a future divorce hanging over their heads, you probably want to consider setting up a trust to protect what they inherit.

In addition to issues with beneficiaries, protecting the inheritance from a dispute can often make the use of a trust over a will a prudent decision.

You anticipate a dispute – disputing an estate generally comes via one of two claims: either the person that created the estate plan was pressured into it, or they lacked the mental capacity to create the plan. When you set up and maintain a trust, often for years after its creation, the fact that you continued to keep said trust in existence is substantial evidence that you were not coerced into creating the trust or lacked the capacity to create it in the first place. If you think someone may try to dispute your estate plan, a trust will go a long way in preventing that from happening.

Once again, you can see that while there are many great reasons to consider adding a revocable living trust to your estate plan, none of these reasons have your net worth as a main decider when it comes to choosing whether this is the right path for you and your loved ones.

Recap

When you might need a trust

The reasons a revocable living trust might be beneficial in your estate plan are not tied to the value of your estate. Instead there are several specific situations where using this type of trust would be helpful:

-       You own property in more than one state.

-       You want to control how and when an inheritance is distributed.

-       Privacy matters to you.

-       One or more beneficiaries would benefit from oversight or protection.

If any of the above resonate with you, then it’s worth having a conversation with an attorney about whether to add a trust to your estate plan.

When a last will is sufficient

Despite what you may hear, not everyone needs to have a revocable living trust in their estate plan. In fact many individuals and families can accomplish all of their estate planning goals through the use of a well drafted last will and testament. This is often true when:

-       All of your assets are in New Jersey.

-       You feel confident that your beneficiaries are ready to inherit without oversight.

-       There are no concerns about privacy or potential estate disputes.

-       Your assets are straightforward (no complicated business interests or financial holdings that may make probate more problematic).

If these statements feel accurate for your situation, then a trust may be more than you need.

Conclusion

I hope this article provided you with some clarity on when a trust might be beneficial…but in doing this work every day I’m keenly aware of how overwhelming all of this information can be, even when we as lawyers try our very best to explain it clearly.

What should you do? The question depends entirely on your unique situation and goals, and that’s why your best bet is to set up a consultation where we can meet, discuss all of this and how it pertains to your life.

During the consultation, we’ll look at your assets, your family dynamics, and your goals — not just your net worth — and decide whether a trust actually makes sense for you.

I look forward to speaking with you soon.

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