Money IQ: Are Trusts Just for the Wealthy?

Money IQ
By Dan Monte
Are Trusts Just for the Wealthy?

As an attorney who has practiced primarily in the areas of trusts and estates for the past 20 years, I frequently hear people say that they are simply not wealthy enough to have a trust.

There is a very common misconception that somehow the use of trusts in estate planning is only for the wealthy. The intended purpose of this short article is to dispel this misconception.

As each one of us has a unique personality, each one of us has a unique set of circumstances which will dictate the form of our estate plan.

Contrary to common belief, it is not the amount of assets we possess which determines the necessity of a trust; rather it is our unique set of circumstances.

Below, I will briefly explain a few of the reasons why a trust may be an important tool in your estate plan. As a preliminary comment, a trust is merely a tool through which one holds title to assets for the benefit of one or more other persons.

Trusts can be very simple in many situations, but can also be quite complex. The complexity is more a function of your situation, rather than the nature of trusts themselves.

Real Property in Another State. Many people own a second home, a farm, or mineral interests in states outside of New Mexico. Assuming that this out-of-state property is owned just in your name at your death, there will likely be a probate in that state to clear title in favor of your heirs. As a result, you can end up with a probate in New Mexico and a probate in this other state. This can be a time consuming and expensive process. To avoid this situation, the use of a revocable trust (a.k.a. “living trust” and “inter-vivos trust”) may be appropriate. If you create a revocable trust during your lifetime and transfer ownership of this out-of-state property into the trust, there will be no need to open a probate in that state after your death.

Creditor Protection. Many people have individuals they want to name as beneficiaries of their estate, but have concerns with their ability to manage assets. These concerns may be attributable to financial immaturity, drug or alcohol addiction, or a spouse who may have undue influence over the intended beneficiary. Another reason for concern may be an individual who has substantial debt or is likely to be divorced in the near future. In these situations, a trust may be the perfect tool to protect assets from the beneficiary’s creditors, his or her own destructive ways, or his or her financial immaturity. In a typical situation, the gift to this intended beneficiary would be held in trust by a third party who, by the terms of the trust, would have the discretion to make distributions to the beneficiary. Properly drafted and administered, a trust of this type will protect the trust assets from the beneficiary’s creditors and, hopefully, from him or herself.

Beneficiaries with Special Needs. Many people have children or other loved ones with special needs. These needs may simply be a function of youthfulness, or, in many situations, may be attributable to physical or mental impairment. With a properly drafted trust, you, as the one who creates the trust, can set aside a portion of your estate and provide instructions about how the assets are to be used for the benefit of your beneficiary. Many people will set aside a portion of their estate in a trust for the benefit of a child until he or she attains an age that they feel is appropriate for the child to receive the assets outright. Until the child attains that age, the trustee would typically have the discretion to use trust assets for the health and education of the beneficiary. Many people have children or other loved ones with physical or mental impairments which prevent them from being able to work and support themselves. In these situations, the use of a trust may be an appropriate tool through which a third-party trustee can hold assets in trust and make distributions to or for the beneficiary’s benefit, all in accordance with the instructions you provide in the trust instrument.

These are only a few of many real-life examples where trusts provide good estate planning solutions. It is always advisable to discuss your situation with an estate planning attorney to determine the best solution for you. Make certain that you share as many details as possible with your attorney and always share any concerns you have or the special needs of any beneficiary.

Editor’s note: Dan Monte joined LANB in January 2005, he is the Senior Vice President and Trust Manager.

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