You probably already know how important estate planning is to protect your assets as well as your family after you are gone. However, there is more to estate planning than will creation, although that is an essential aspect of the process.
Establishing a trust is also beneficial for estate planners. Despite popular opinion, trusts are not just for the ultra-wealthy alone. They can also be helpful to people with more modest estates, as explained here.
Understanding what happens during probate
Probate is the process of proving a will’s validity, paying off debt, and distributing assets to the court. Most wills go through probate, and if there are no issues the court should act in accordance with your wishes. However, if a family member contests the contents of the will or there are claims that it was fraudulently created, the process can drag on for many months. This will also cost your estate more money, which may detract from inheritances going to your beneficiaries.
Some assets naturally avoid probate. This includes retirement accounts and life insurance policies, since these assets are associated with beneficiary designations. By designating a beneficiary on individual accounts and policies, these assets will pass directly to heirs upon your death. Bank accounts with a payable on death or transfer on death also will not be subject to probate. Neither will any assets you own jointly, as these will naturally pass to the co-owner.
How a trust can help you avoid these issues
Establishing a trust protects all other assets in your estate from probate. While there are many different types of trusts, most estate planners choose between revocable and irrevocable. Revocable trusts, also known as living trusts, can be changed after being implemented. Conversely, irrevocable trusts cannot be changed once created. Their inability to be changed protects assets from taxes, which is why larger estates opt for irrevocable trusts when there are concerns about estate taxes on the federal and state level.
When you establish a trust and fund it with your assets, the trust becomes the owner. That means those assets are no longer held in your estate, which means they cannot be subject to probate. Trusts also afford more control over how your assets are distributed. With a will, assets are transferred to heirs in one lump sum, but with a trust you can set up incremental payouts to help family with financial planning.