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Military Financial Planning 101: A Primer on Trusts for Estate Planning Thumbnail

Military Financial Planning 101: A Primer on Trusts for Estate Planning

Estate Planning

A majority of Americans understand the importance of estate planning, yet an alarming percentage of adults do not have arrangements in place. According to a 2019 survey, 51 percent of people believe having an estate plan is necessary, but only 40 percent have actually implemented one.1 If you're on active duty or retired, there is a pretty good chance you have some sort of estate documents in place. Most likely it includes an I Love You will, leaving everything to your spouse or other family members, a power of attorney and maybe some sort of medical directive. That's a good start. But you might want to consider a trust based estate plan as well. In order to consider that option, you need to understand trusts.  Here are some insights on what trusts are, who they benefit and why you may want to make them an integral part of your estate plan.

What Are Trusts?

Trusts are legal documents you set in place to protect and control all of your assets. While some people may associate trusts with ultra-wealthy families, this stereotype is often untrue. Trusts are for anyone looking for an efficient way to control their assets after death or in the case of incapacitation. Additionally, trusts can help those caring for minors, children with special needs or pets make future arrangements for dependents.

Types of Trusts

If you decide to incorporate a trust into your estate plan, the next decision to make is the type of trust(s) you wish to use. There are four main types of trusts, although these can be broken down further into smaller, more detailed trust types.

The main types of trusts include:

  • Revocable trusts
  • Irrevocable trusts
  • Living trusts
  • Testamentary trusts

Just as they sound, revocable trusts can be altered and amended after creation, while irrevocable trusts can not. And while a living trust is established while the individual is still living, a testamentary trust is created at or after death, based on the individual’s will. In some cases, a trust may be fit into more than one of the types listed. For example a trust can be a "Revocable Living Trust". Trusts can also be classified by who pays the taxes. In the case of a grantor trust, you pay the taxes on the income. In the case of a non-grantor trust, the trust pays taxes on any income that isn't distributed and the beneficiaries pay taxes on the income received from the trust (the calculations are a little more complicated than that).

Top Three Benefits Of Establishing Trusts

As you consider establishing a trust in an effort to control your legacy, don’t forget to weigh the potential benefits of a well-established trust.

Benefit #1: Probate Avoidance

If your loved ones are left with only a will after your passing, the will must be sent through the state’s probate process. This means the contents of the will become public record, and your heirs may be delayed in receiving their inheritance. Additionally, probate can be an expensive and burdensome process to put on your beneficiaries. In establishing a trust, you can help your loved ones avoid the probate process. This can mean more privacy and less delay in fulfilling your final wishes.

Benefit #2: Incapacity Planning

While you can use a Power of Attorney and joint accounts to plan for incapacity, using a trust may be a better option. A successor trustee is in a much more "powerful" position than an Attorney in Fact trying to execute a Power of Attorney. And unlike a joint account, your assets are not at risk due to actions taken by your trustee. In a joint account, your assets could be taken in a lawsuit against your joint account holder.

Benefit #3: Estate Protection

What’s a more obvious reason why someone would want to set up a trust? To control what happens to their things after they die. Simply put, trusts can help you protect your estate. When done right, a trust can determine who gets what and how things are cared for once you’re gone. A properly structured trust can protect your assets in the case where your beneficiary goes through divorce or is sued.  A trust based plan can also slowly distribute your assets to beneficiaries to make sure they don't receive a large amount of money before they are "ready" for it. 

Benefit #4: Tax Efficiency

For some couples, establishing a revocable trust may help in minimizing estate tax burdens. With the recent Tax Cuts and Job Acts, federal estate taxes will only be triggered if an individual’s accumulated assets equal $11.4 million or more, or a combined total of $22.8 million for couples, as of 2019.2 Couples with a high accumulation of wealth and assets may want to work with their legal and financial professionals to create trusts that help shelter the remaining spouse from estate tax burdens after the passing of their loved one.

Disadvantages of Establishing Trusts

While there’s potential to greatly benefit from having trusts as a part of your estate plan, there are a few considerations to make before diving in. Most of the advantages listed above are only effective if a trust has been established correctly. And these are often complex documents, especially when compared to the simplicity of a will.

Any number of small errors could negate the benefits your beneficiaries were intended to receive. Because of this, it is recommended that you seek legal help if you decide to establish a trust. A professional can help you understand your options and work to maximize the benefits. This, however, means that establishing a trust can come with a substantial upfront cost, as well as on-going costs for maintenance, revisions and re-titling of assets.

It is probably time to dust off the will the JAG drew up for you and discuss it with an attorney or financial planner to see if a trust based plan might be best for you. If it is, and when done right, you may be able to avoid costly and slow probate processes and protect your dependents in the event of an unexpected death. 

1 https://www.caring.com/caregivers/estate-planning/2019-wills-survey/

2 https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax

If you liked this article, you might enjoy the following blog posts:

Military Finances 101: Inheritance and Estate Taxes: Do You Know the Difference?


Military Finances 301: Avoid These Blunders When Setting Up a Living Trust


What Military Officers Need to Know About TSP and Estate Planning



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