Personal Finance

Case Study (8):

Estate Planning: Trusts

Trust are being used in estate planning. Here are a few articles:

http://ezinearticles.com/index.php?Legacy-Planning---A-Holistic-Approach&id=1130048

http://www.nolo.com/article.cfm/pg/1/objectId/BD474328-5A05-43D1-A295E5AD51C7EC84/catId/9F594B71-B41B-4513-923BF19B4D9ACDAA/309/227/CHK/

http://www.finweb.com/financial-planning/living-trusts.html

Using these articles and any from your search, please analyze the pros/cons of a trust and why or why not you should consider a trust in your planning.

There are many positive aspects of setting up a Trust, but it is not always necessary. Trusts typically cost in excess of $3000 (Yochim, 2008) so it is important that our needs be carefully identified before deciding to set up a Trust. The other negative that I saw is that once the trust is established all deeds and titles as well as financial accounts need to be transferred into the name of the Trust. This can be expensive and take a lot of time and energy, however, it may be worth it if you are leaving a complex or valuable estate.

Now that the negative points of Trusts have been laid out, they have benefits that can far exceed these costs. The first and most impacting reason for having a Trust is that the inheritance will avoid probate. Probate is the legal proceedings that follow your death to settle any outstanding accounts or debts (Kapoor, et al, 2008). Once debts have been settled and assets are known then the inheritance is distributed according to the Will. The cost of Probate can be as high as 5% of the total value of the estate and last several years before any money is released to your beneficiaries (finweb.com 2008). Since the estate does not have to enter Probate when you utilize a Trust, the assets can be distributed immediately.

There are many specialized Trusts that can be used to eliminate inheritance tax or give financial protection for heirs and spouses. Most of these Trusts have additional restrictions that enable you to utilize the benefits. For example, Irrevocable Trusts eliminate many Taxes, but as their name indicates, once they are in place there is no way to make changes (kiplinger.com 2007). Living Trusts are legal entities that operate while you are still alive, while Testamentary Trusts only go into effect after your death (kiplinger.com 2007). It is important to clearly understand all the options and your personal situation before engaging in any Trust.

Personally, my estate is very small and simple at this time. I will not be arranging a Trust until that changes. If my estate reaches $2 million or it becomes complex, I will consider researching what my best options are. The $3000 price tag is a bit steep right now, especially compared to my net worth of about $45,000, most of which is in my house or my 401(k).

Resources:

Finweb.com (2008). Living trusts. Financial Web. Retrieved August 22, 2008 from: http://www.finweb.com/financial-planning/living-trusts.html

Kapoor, Dlabay, Hughes (2008). Focus on personal finance: an active approach to help develop successful financial skills, 2nded. McGraw Hill Irwin, New York.

Kiplinger.com (2006). Putting your trust in trusts. Kiplinger.com. Retrieved August 23, 2008 from: http://www.kiplinger.com/basics/archives/2007/09/trusts.html

Loquvem, J. (2008). Legacy planning - a holistic approach. Retrieved August 22, 2008 from: http://ezinearticles.com/index.php?Legacy-Planning---A-Holistic-Approach&id=1130048

Randolph, D. (2008). Make a trust. Nolo.com Retrieved August 22, 2008 from: http://www.nolo.com/article.cfm/pg/1/objectId/BD474328-5A05-43D1-A295E5AD51C7EC84/catId/9F594B71-B41B-4513-923BF19B4D9ACDAA/309/227/CHK/

Yochim, D. (2008). The truth about living trusts. The Motley Fool. Retrieved August 22, 2008 from: http://www.fool.com/personal-finance/taxes/the-truth-about-living-trusts.aspx