Life, by its very nature, is uncertain, and nowhere is it more important to consider those uncertainties than when planning how the fruits of a lifetime will protect and sustain loved ones or continue to support cherished causes in the way someone wishes. In the past, trusts were mostly viewed as a strategy for preserving estates by reducing the impact of high estate tax rates. Even with increased estate tax exemptions – $5.45 million individually in 2016 – there are other compelling reasons that trusts can serve an important role in estate planning.
Whether or not someone’s assets fall within the estate tax exemption, trusts help ensure, among other things, that funds are preserved for future generations and that details of the estate remain private since, unlike wills, trusts do not become public record as part of a court filing. “Even with the exemption for estate tax at nearly $11 million for married couples, there are many other reasons to consider trusts,” said John Lopez, a partner of Norton, Hammersley, Lopez and Skokos, a Sarasota law firm concentrating in estate planning, business, tax, real estate, trial practice, and dispute resolution. “If you leave a large inheritance to someone, no matter how well intentioned or honest that person may be, they simply may not handle the money well.”
In addition, as people age, they may become vulnerable to unscrupulous individuals. “There has been a lot of discussion about issues with the guardianship process in Florida,” Lopez said. “If someone leaves all their money to a spouse, then that person can become a target to be preyed upon and wind up in the guardianship system as a result. Having a trust avoids the need for guardianship to protect someone financially.”
That kind of forward thinking can also help in other circumstances. “When I talk with clients, I tell them the divorce rate today is well over 50 percent. That means if they have four children, statistically two of them will divorce,” according to Norton Hammersley partner John Compton. “If you leave them a large sum of money, and they comingle those funds, which likely will happen, then those funds may be taken by a spouse in a divorce even if your child did not do anything wrong. There are ways to hold inherited funds in trust and keep them out of divorce proceedings.”
In second marriages, particularly where children are involved, having a trust is not only appropriate, but also prudent even when someone is certain a spouse will do the right thing by children from another marriage. That’s because circumstances often change over time. “We have worked with many clients whose parent died and the money went to a surviving spouse who then made a new will and that money ended up somewhere else,” Lopez said. “A very good relationship with the stepparent during a parent’s lifetime can deteriorate over time after death.” That deterioration doesn’t necessarily arise from disagreement, but fades over time because the person through whom they were connected is gone.
Trusts can also protect assets in other situations, such as a lawsuit following a car accident or from creditors. “Many people bought investment properties and then got caught during the housing downturn,” Compton said. “If they had money in a trust, those funds would still be there.” Sometimes people think they don’t have enough assets to make a trust worthwhile or are concerned about the cost. “People may think they don’t need a trust unless they are a multimillionaire, but by the time they consider their home, life insurance and other assets, that can add up. Avoiding going to probate court is another good reason to have a trust,” Compton said. “It can take six to 12 months to settle an estate and, depending on the size of the estate, the cost can be up to 3 percent of the total. The cost savings of having a trust can be significant in the long run.”
One pitfall of which people may be unaware is that if an estate goes to probate, the court will appoint a personal representative who must be a blood relative or reside in Florida. If the will names an executor who does not meet those criteria, the court will choose the representative. That is not the case with trusts, although there are advantages to choosing a professional, or corporate, trustee through a large institution like a bank rather than a relative or friend. “We prefer to have a corporate trust company so there is a neutral third party who will follow the terms of the trust and ensure the funds are invested prudently to preserve assets,” Lopez said.
Those whose trusts were created many years ago may want to consider consulting an attorney. “Spouses used to need separate trusts forcing assets to be divided between them, and some of these became very complex,” Compton said. “People have come in with a big book and a bunch of trusts and have walked out with a much simpler estate plan.” It’s also a good idea for most people to stay away from online legal sites unless their financial life is simple enough for them to file a 1040EZ tax form, and even then they should be cautious. “It’s easy for an innocuous mistake to turn into a huge problem. As a start, people need to talk with an experienced estate-planning attorney and assess all the possibilities. Consider how your spouse or children handle money and if it is important to leave a legacy for your grandchildren or to your charities,” Lopez said. “For many, trusts provide a good answer.”