Tips for determining which trust is right for you


Vanguard estate planning experts Alisa Shin and Sarah Price explain how trusts work and how to determine which type of trust is suitable for your needs. 

Other highlights from this webcast:

Notes:
  • All investing is subject to risk, including the possible loss of the money you invest.
  • This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.
  • Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency.

TRANSCRIPT 

Gary Gamma: “What factor should be considered to know if a trust is right for you?” So, when is the will versus the trust the appropriate mechanism? Do you have anything that you can throw out that helps people understand when they might want to consider one or the other?

Alisa Shin: So, I think when we talk about trust, we need to talk about two different types of categories of trust. One is a revocable trust and it sounds exactly what it means. You can revoke the document, you can get rid of it, you can change it, you can make— Amend it. You can make a lot of different— Change it in any way that you want from time to time. The other type of trust that we have are irrevocable trusts and so, let’s talk a little bit about the first one. A revocable trust is one in which you would have to talk about what Sarah was talking about, to avoid probate. That’s typically why a revocable trust would be used, that you want to avoid probate because you live in a state that the probate process is very cumbersome or expensive and your attorneys would likely have you have a revocable trust. If you own real estate in multiple states, you would also likely have a revocable trust to avoid having to raise an ancillary probate in each of those states that you own real estate in. The third reason for a revocable trust is to plan for your incapacity. In many cases, it’s a much more streamlined process transition if you become incapacitated and can no longer take care of your financial affairs. Revocable trusts really set forth what should happen in that instance versus relying on a power of attorney. But if you’re thinking about an irrevocable trust, then usually those trusts are trusts that are for the benefit of somebody else. There are probably four main reasons why clients might create an irrevocable trust for their beneficiary either during their lifetime or at their death. One is if you have concerns about how the beneficiary might manage or spend money. A lot of those instances, when your beneficiaries are in younger years. Secondly, is if you have concerns about future creditor issues that your beneficiary might have. And that includes a divorcing spouse. A lot of times, trusts can be designed to protect those assets from a divorcing spouse or a future creditor. If you have a beneficiary for instance who’s a doctor and sued, and their malpractice insurance is not sufficient, it’ll make it really difficult to— For that creditor to get any of the inherited assets. The third reason is to protect the assets from future taxation. Again, like we had mentioned earlier in the show, trusts can be designed in such a way that a beneficiary could have— Could benefit in large part from those assets but at the beneficiary’s death, whatever remains in those trusts can pass tax-free to the next generation of beneficiaries. And the last reason really is if you know or have very strong feelings about who should receive the money after your primary beneficiary has passed away, a trust is a great way to set that structure up to ensure that the people that you want to benefit or the charities that you want to benefit that will in fact benefit at the primary beneficiary’s passing.

Sarah Price: Well, as kind of piggybacking what Alisa said earlier, the revocable trust is just that. It’s very flexible, it’s completely amendable, changeable during your lifetime, which is why a lot of people are drawn to that, I would say. If you can move assets in and out of it freely, even though as she said they’re titled now, the name of the trust, there’s not a tax consequence for moving that into a revocable trust. You still own it, you still have those ownership powers over the asset to sell it, to buy new assets, in the name of the trust. And that’s generally why people go in that direction in addition to the benefits she mentioned before, avoiding probate, allowing planning for incapacity purposes. Maybe if you own real property, in more than one state, it offers privacy. Some people have an interest in the estate administration being a private matter, and that generally happens with a trust administration. On the irrevocable side, you don’t have the flexibility of being able to change the trust. So, after it’s in place, it’s in place. And with a few exceptions, state-specific exceptions, you may be able to make slight tweaks to it, I would say, but you should think of it as not being amendable. It’s not changeable. It does allow you to move assets into the trust that are then removed from your taxable estate. Because it is a standalone entity, it does file its own tax return, has its own taxpayer ID number. So, it is a bit more, I would say, complex, complicated than establishing a revocable trust.

Important information All investing is subject to risk, including the possible loss of the money you invest. This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation. Vanguard Asset Management Services are provided by Vanguard National Trust Company, which is a federally chartered, limited-purpose trust company operated under the supervision of the Office of the Comptroller of the Currency. © 2016 The Vanguard Group, Inc. All rights reserved.