We Asked Our Experts: Do You Need a Trust?

Basic estate planning usually starts with a will, which deals not only with your property but also with important decisions like who will care for minor children if both parents are deceased. But wills aren't necessarily the best, final option for every estate, especially given the legal proceedings that must occur before any assets are distributed. 

That's where a trust can help. 

A trust is a fiduciary arrangement that specifies how your assets are to be distributed, usually without the involvement of a probate court. They can be structured to take effect before death, after death, or in case of incapacitation. In contrast, wills take effect only upon death and typically need to be authenticated by a probate court, which can take time and involve additional costs. 

Trusts can be arranged to accomplish a variety of different goals. For example, you can use a trust to transfer property, help minimize estate taxes, preserve assets for minors until they are adults, or benefit a charity. 

And while trusts have a reputation for being expensive, some attorneys offer a basic trust package for a flat fee. That said, the bill can add up quickly if you and your attorney need to spend a lot of time discussing your goals before the trust agreement is drafted. The kind of assets included in the trust and the complexity of the distribution strategy can also affect pricing. So, it makes sense to do some planning beforehand. 

To learn more about the benefits and drawbacks of trusts, as well as the ways in which Schwab can help clients work through their estate-planning needs, we talked with three Schwab professionals: Brad Reeves, a branch manager in Austin, Texas; Lauray Kennedy, a senior wealth consultant with Schwab Private Wealth Services in Westlake, Texas; and George Pennock, director of tax, trust, and estates for Schwab Wealth Advisory in Henderson, Nevada. 

Brad: In a word: specificity. A trust allows you to be very specific about how, when, and to whom your assets are distributed. On top of that, there are dozens of special-use trusts that could be established to meet various estate planning goals, such as charitable giving, tax reduction, and more. 

George: A trust not only identifies who may benefit from trust resources but also how and when, including in cases of incapacity. Anyone concerned about facing a stroke, dementia, or Alzheimer's may want to consider using a trust to help ensure their resources are preserved, managed, and spent in line with their wishes while they're under the care of a loved one or health professional. 

They're also extremely flexible in terms of how you deploy them. For example, you can appoint a trustee to help assist beneficiaries who may struggle to manage their bequest. You can also structure trusts to protect the beneficiaries from creditors, manage their state income taxes, and/or preserve the generation-skipping tax exemption.

George: A major limitation of wills? You have to die first. If you're incapacitated, a will has no legal effect, so any health care or durable powers of attorney you might have in place will guide any decisions made on your behalf. This could create problems if you need to complete financial transactions with outside parties who have trouble accepting or even refuse to accept the power of attorney.

Lauray: The probate process can be lengthy and potentially costly. Keep in mind that each state where assets are held in title of the decedent will need to be probated, resulting in additional costs. 

Also, a will is a public document that could be scrutinized or contested, as well as give the public access to information that you might wish to keep private. Any assets held in a trust can typically be managed by the successor trustee in a more private manner than a typical probate proceeding.

Brad: Many people draft wills with trust provisions, otherwise known as "testamentary trusts." Basically, this means the will includes instructions to establish a trust after the grantor's death, at which point the trust will function much like any other trust. However, a key difference is that testamentary trusts do end up going through the probate process—which means they could theoretically be contested in court and potentially even ruled invalid. (Grounds for challenging such a trust could include allegations of fraud, improper execution, mental incapacity on the part of the grantor, or even ambiguities.) 

A living or "inter-vivos" trust, on the other hand, allows the owner to plan during his or her lifetime, thereby bypassing the probate process and controlling decisions related to the distribution of assets.

George: A revocable living trust is the most common tool used by estate planners and represents a fundamental building block for most estate plans. 

Lauray: A living trust is a lot like a "regular" account in that you still have control over your assets. You can buy, sell, and trade assets as you normally would. You're able to move assets into and out of the trust at your discretion. The key difference is that you can put additional controls and designees in place to help protect your assets should you pass away or become incapacitated.

Brad: I'd call them trade-offs. For example, a trust can be more expensive and complicated to draft than a will. Sitting down with an estate-planning attorney can be very expensive, particularly if you don't know what you want or need from the trust.

You could end up paying thousands of dollars just to talk through your situation, not including the additional fees to actually draft the documents. However, incurring additional costs on the front end could save your heirs a significant amount of money on the back end by avoiding the probate process.

Lauray: There are ways to bypass some of the costs associated with trusts, particularly through the planning process. Understanding these trade-offs and determining your needs and goals will serve you well once you're ready to engage an estate-planning attorney.

George: It's not a disadvantage so much as a misconception that can keep people from setting up a trust, but people often mistakenly assume you need to have a lot of money to justify creating a trust. That's not true. A trust is a tool in the estate planner's toolbox—nothing more, nothing less. If someone is concerned about incapacity or wants their assets to transfer to beneficiaries in a particular manner, a trust is a useful tool to make that happen. 

Another thing to keep in mind is that as useful as trusts are, there are certain things the trust's creator can do to help the process. Letting people know the trust exists as well as the thinking behind its creation are important to cultivating stewardship around the bequest.

Brad: Schwab doesn't provide tax or legal advice. However, we can educate clients about the estate-planning process and provide insights and considerations to help them have a successful meeting with their estate-planning attorney.

Working through the details ahead of time could potentially save significant time and money in the long run. Schwab can also set up trust accounts for clients and help coordinate between other accounts—depending on the client's overall investment goals and preferences.

Lauray: As a senior wealth consultant, I leverage my 25+ years of experience serving affluent families to help solve some of their unique wealth management needs, deal with family dynamics, and generally serve as a thought partner to help grow and protect their wealth at any stage of life.

When needed, I can also connect them to other professionals at Schwab, including the corporate trustee services available through Charles Schwab Trust Company (CSTC) and Schwab Wealth Trust Services™. For example, administering a trust—dealing with income distributions, tax preparation, accounting, etc.—can be a real pain point for some families. Bringing in a corporate trustee, whether as a sole trustee, co-trustee, or successor trustee, to manage these responsibilities can lift some of that burden. Depending on your family's needs, you can have a team of dedicated professionals assigned to your trust to provide investment-management and administration services.

George: Our team of wealth strategists and trust services consultants can help you optimize your plans. We serve as subject matter experts that clients and their financial consultants can turn to when assessing their plans. We also work with clients and their attorneys regarding the appointment of Schwab as a current or successor trustee.