At What Net Worth Do You Need a Trust?

What does the word “trust” bring to mind for you? If you said a rich twenty-something with a trust fund, then you’re probably not alone. Many people associate trusts with the fabulously wealthy. But should a regular, everyday person also consider establishing a trust? At what net worth is a trust considered a necessity? If you’re looking for the answer to those questions, you’re in the right place. Here’s what you need to know!

What is a trust?

A trust is a legal arrangement where one party (the trustor or settlor) transfers assets to another party (the trustee) to manage and distribute those assets for the benefit of a third party (the beneficiary). There are several types of trusts, each serving different purposes and offering different benefits. Some of the most common types of trusts include:

• Revocable Living Trust:
  • Allows the trustor (creator of the trust) to retain control over the assets during their lifetime.
  • Can be modified or revoked by the trustor at any time.
  • Typically used for probate avoidance, incapacity planning, and efficient asset management.
• Irrevocable Living Trust:
  • Cannot be modified or revoked by the trustor after it’s established.
  • Provides asset protection and estate tax benefits.
  • Common types include irrevocable life insurance trusts (ILITs), charitable remainder trusts (CRTs), and Medicaid asset protection trusts.
• Testamentary Trust:
  • Created through the trustor’s will and takes effect upon their death.
  • Allows for more control over the distribution of assets after death.
  • Can be used for minor children, individuals with special needs, or beneficiaries with specific requirements.
  • Special Needs Trust (SNT):
    • Designed to provide financial support to individuals with disabilities without disqualifying them from government benefits like Medicaid or Supplemental Security Income (SSI).
    • Allows funds to be used for supplemental care and services beyond what government benefits provide.

Net Worth and Trusts: Everything You Need to Know

Net worth refers to the value of assets that an individual or entity owns, minus any liabilities or debts. When establishing a trust, understanding your net worth is crucial. This will help you determine the type of trust that best suits your financial situation and estate planning goals. However, is there a specific net worth you should have before you set up a trust?

The answer to that question is simple.

No!

You can create a trust with any amount of assets, as long they have some value and are transferrable. “Assets” refers to more than just money. You can put nearly any form of assets in a trust, including:

• Digital assets
• Intellectual property
• Personal property
• Life insurance policies
• Retirement accounts
• Bank accounts
• Investments

What Factors Determine the Need for a Trust?

If you’re not sure what the benefits of establishing a trust might be, then allow us to explain! Trusts are versatile estate planning tools that serve various purposes, including:

Asset Protection

If you have substantial assets that you want to protect from creditors, lawsuits, or potential claims, establishing a trust can provide a level of asset protection. Irrevocable trusts, in particular, offer strong protection because assets transferred into them are no longer considered part of the trustor’s estate.

Probate Avoidance

Assets held in a trust typically bypass the probate process, which can be time-consuming and costly. This allows for faster distribution to beneficiaries and maintains privacy, as trust documents are not typically made public like probate documents.

Tax Planning

Trusts can be effective tools for minimizing estate taxes and maximizing the amount of wealth passed on to your beneficiaries. Certain types of trusts, such as irrevocable life insurance trusts (ILITs) or charitable trusts, offer tax advantages that can help reduce the overall tax burden on your estate.

Complex Family Situations

If you have a blended family, minor children, beneficiaries with special needs or disabilities, or heirs who may not be financially responsible, a trust can provide a mechanism for managing and distributing assets in accordance with your wishes. Trusts offer greater control over how and when assets are distributed, allowing you to address the unique needs of your family members.

Why Should I Establish a Trust?

While there’s no set monetary limit to trust funds, it’s important to note that the median size of a trust fund is around $285,000 (according to New York Life). Additionally, if you have fewer assets, then a trust might not make sense for your particular situation. From a set-up fee to tax preparation fees, you might incur several different costs. Some trusts are also more difficult to maintain than others, which might diminish their value over time. Assess your individual financial situation and then decide if a trust is right for you. If you’re not sure and need further guidance, contact an estate planner or elder law attorney for further guidance.

Common Scenarios That Require a Trust Regardless of Net Worth

Did you know that establishing a trust isn’t solely contingent upon your net worth? In fact, certain circumstances may actually require that you create a trust! Not sure what those are? Don’t worry—we’ll go over those now!

Special circumstances (e.g., minor children, beneficiaries with special needs)

If you have minor children, establishing a trust allows you to designate a trustee to manage assets on their behalf until they reach a certain age or milestone specified in the trust document. This ensures that assets are managed and used for the benefit of your children per your wishes.

Alternatively, if you have a loved one with special needs or disabilities, establishing a special needs trust (SNT) ensures that they can receive financial support without jeopardizing their eligibility for government benefits such as Medicaid or Supplemental Security Income (SSI). Special needs trusts can provide supplemental care, therapy, and quality of life enhancements beyond what government benefits cover.

Privacy Concerns and Avoidance of Probate

If you value privacy and wish to keep your estate affairs confidential, establishing a trust can help avoid the probate process, which makes wills public documents. Trusts allow for the private transfer of assets outside of probate, maintaining confidentiality and minimizing the risk of disputes. Of course, as previously discussed, they may also help you avoid the probate process!

Business Ownership and Succession Planning

If you’re a business owner, you might want to make a trust to ensure that somebody else runs your business if something happens to you. In fact, your business could be at risk if you don’t you a trust in place to protect it!

Should I Consult Financial and Legal Advisors Regarding a Trust?

When you’re considering establishing a trust, it’s always a good idea to consult with both financial and legal advisors. First, a financial advisor can provide valuable insights into how establishing a trust fits into your overall financial plan, including tax implications, investment strategies within the trust, and funding considerations. Meanwhile, estate planning attorneys are experts in the complex legal aspects of trusts. They can help you select the appropriate type of trust based on your goals and circumstances and ensure that it’s legally valid and enforceable.

Additionally, trusts require ongoing management and administration to ensure that they continue to fulfill their intended purpose over time. Financial advisors can assist with investment management and asset allocation within the trust, while legal advisors can guide trust administration, amendments, and updates as your circumstances change. Overall, consulting with both financial and legal advisors ensures that you receive comprehensive guidance and expertise throughout the trust establishment process. If you decide a trust might be right for you and your assets, make sure you consult both a financial and legal advisor as you begin that process!

Takeaway

Overall, the need for a trust is influenced by a combination of legal, financial, familial, and personal factors. While you don’t need to have a specific net worth to establish one, it’s important to remember that they often incur a variety of fees that may not make a trust worth it for every person or their estate. Finally, an experienced estate planning attorney or financial advisor can help you assess your specific needs and determine whether a trust is appropriate for your situation.

Still looking for more information about trusts? Then visit our Estate Planning Blog for more great articles just like this one!