You can’t take your wealth with you when you go, but with careful estate planning you can have a say in how it’s distributed when you’re gone. The trick is finding an approach that works for you and your goals.
Basic estate planning usually starts with a will, which deals not only with your property but also with important decisions such as 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 basically a fiduciary arrangement that specifies how your assets will be distributed at the time of your passing, usually without the involvement of a probate court. Unlike a will, a trust isn’t subject to public scrutiny and 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.
One caveat is that drawing up a trust can be expensive, especially for more complex estates. Some attorneys might offer a basic trust package for a flat fee, but 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. So, it makes sense to do some planning beforehand. Knowing what assets you’d like to put in a trust and how you’d like them to be distributed can help simplify the process.
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: Jason Largey, a Schwab Wealth Strategist from Denver; Lauray Kennedy, a Schwab Financial Consultant from Houston; and Travis Loseke, a Schwab Financial Consultant from Orlando.
Q: Why would someone consider a trust?
Travis: The true appeal of a trust is the ability to control how your assets are managed both during and after your lifetime. This feature tends to be particularly appealing for people with special circumstances, such as caring for a child or family member with special needs, or managing succession planning for a closely held business. A trust even allows you to specify certain conditions that must be met in order for a transfer of assets to be completed.
Jason: In a word: specificity. That is, 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.
Q: Why not just create a will instead?
Lauray: Wills have two big shortcomings: Assets may have to go through probate—the lengthy and often expensive legal process of validating a will and settling an estate—and, as a result of the probate process, they become public documents that could be scrutinized or contested. A trust can help in both of these circumstances because any assets held in a trust can typically be managed by the successor trustee in a more private manner than a typical probate proceeding.
Jason: Many people draft wills with trust provisions, otherwise known as “testamentary trusts.” These work in much the same way as other trusts, except that by their very nature they may have to go through the probate process. This means the probate court could choose to distribute the deceased’s assets in a way that differs from her or his original intentions. 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.
Q: Do certain types of trusts make sense for most people?
Travis: Revocable living trusts tend to be the most flexible option. With this type of trust, you transfer ownership of some or all of your property into the name of the trust, but you maintain the same level of control over the assets as you had before. In essence, you give up nothing and you also gain the assurance of knowing that your wishes can be carried out if something happens to you.
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 just as you normally would, and 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 that can help protect your assets should you pass away or become incapacitated.
Q: Are there any disadvantages to trusts?
Jason: I wouldn’t call them disadvantages necessarily, but maybe trade-offs. For example, a trust is 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, plus 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 also ways to bypass some of these costs, 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.
Q: How can Schwab help clients with their estate planning and trust needs?
Travis: We help clients think through things they might not have considered. For example, if a client came to me thinking he needed a trust, I would get him to take a step back and consider what he’s trying to achieve with his estate plan in general, and how a trust would support that plan. It’s not about discussing the merits of a particular account or strategy; it’s about understanding clients’ needs and helping them think through the best path forward.
Lauray: As a Financial Consultant, it is my job to help clients think through their estate planning needs at the highest level: What does their estate look like? Who will inherit their assets? What are they trying to accomplish? Depending on their answers to these essential questions, it might make sense to refer them to a Wealth Strategist, who can help them work through their needs in more detail. When you manage your wealth at Schwab, you get more than the expertise of one person—you get a team.
Jason: Schwab doesn’t provide tax or legal advice. However, I can review trust and estate documents, and arm clients with the information they may want to consider to help them have a successful meeting with their estate-planning attorney. Because trusts can be very expensive to draft, working through the details ahead of time with a Wealth Strategist like me could potentially save clients 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.
Revocable vs. irrevocable trusts
A revocable trust is a trust that can be changed at any time and in any way, up to and including total revocation, during the owner’s lifetime. By contrast, an irrevocable trust is one that cannot be changed or revoked after the agreement has been signed. A revocable trust becomes irrevocable upon the death of the original trust owner. The benefit of an irrevocable trust is that it removes assets in the trust from the trustee’s estate, thereby potentially reducing the estate’s value and its associated estate tax liability. Assets held in a revocable trust, on the other hand, are considered part of the original owner’s estate.