Depending on your financial situation, setting up a trust can be the best way of handing down assets. Trusts are not just for the very wealthy -- they can be advantageous for anyone with an estate worth $100,000 or more. The main reasons people set up trusts are to avoid high tax rates and the cost, delays and publicity associated with probate court, the court that handles wills.
Everyone wants to avoid probate proceedings if possible. Estates worth more than $100,000 are usually subject to probate under state law, and the probate process typically ends up costing 2 to 4 percent of the estate's total value. This money goes to court and legal fees, because the executor of the will has to catalogue the dead person's property, pay any debts and taxes, and then prove the validity and legality of the will in court before he can distribute property to the heirs. Probate is also slow. The courts are always busy, and there can be delays of a year or more before the heirs receive anything.
Trusts avoid probate entirely. Once you set up a trust, all the assets in the trust are considered separate from you and owned by the trust. The trust involves three parties:
- the grantor, or person setting up the trust
- the trustee, or the person in charge of the trust's assets
- the beneficiary, or the heir or heirs who will benefit from the trust after the grantor dies.
The grantor can be either an individual or a couple, and it's even possible for the grantor and the trustee to be the same person. The majority of trusts are living trusts, or trusts that are set up while the grantor is alive. You can put all kinds of assets into a trust, including savings accounts, stocks, bonds, real estate and personal property.
Trusts are most cost-effective with estates worth $1 million or more. The taxes on these estates can be extremely high if they're handled through probate. On estates worth more than $4 million, taxes reach 46 percent [source: Savewealth.com]! This percentage is the gift tax demanded by the government, and it becomes even higher if you will money to your grandchildren instead of your children.
Another good way of minimizing taxes on your estate is by making gifts called inter vivos to your heirs while you're still alive. One person can give up to $12,000 a year to an individual free of tax, and married couples can give $24,000.
It's possible to change a will and update an estate plan whenever you want. For most estate planning, you need the help of a good lawyer, which means there are costs involved. Making a basic will typically costs between $300 and $2,000, and making a basic trust plan generally costs between $1,600 and $2,300 if you are single, and between $1,800 and $3,000 for couples. Trust plans also include the drafting of a will.
There's no avoiding death. But with careful planning, you can keep the financial repercussions of your death from being painful to your loved ones. You can start with the information and resources listed below.
Related HowStuffWorks Articles
More Great Links
- Bryant, Charles W. "How Wills Work." Howstuffworks.com. 1998-2008. (5/15/08). https://money.howstuffworks.com/will.htm
- Canadian Centre for Elder Law. "Frequently Asked Questions." (5/16/08). http://www.ccels.ca/forolderadults.htm
- CNNMoney.com. "Lesson 21: Estate planning." 2008. (5/14/08). http://money.cnn.com/magazines/moneymag/money101/lesson21/
- Cornell Legal Information Institute. "Estate Planning." (5/15/08). http://topics.law.cornell.edu/wex/estate_planning; http://topics.law.cornell.edu/wex/Estates_and_Trusts
- Encyclopedia Britannica. "Inheritance: Wills." 2008. (5/16/08). http://www.britannica.com/eb/article-13110/inheritance#13110.toc
- Irving, Shae. "How a Financial Power of Attorney Works." Nolo. 2008 (5/15/08). http://www.nolo.com/article.cfm/ObjectID/8DB3E0EC-D6CA-4479-B3FA7E9174E0827A/catID/E85249E7-10F0-4A02-B3DAEF61C2BCF1B3/309/292/ART/
- Medicare Interactive. "How does power of attorney work?" 1/2/08. (5/15/08). http://www.medicareinteractive.org/page2.php?topic=counselor&page=script&slide_id=1337
- Savewealth.com. "Guide to Estate Planning." 1998-2008. (5/15/08). http://www.savewealth.com/planning/estate/; http://www.savewealth.com/planning/estate/taxes/; http://www.savewealth.com/planning/estate/livingtrusts/