Estate Planning: Who Needs a Trust and Who Doesn’t?

Knowing the differences between a revocable trust and an irrevocable trust can help you decide if you need one and, if you do, which kind.

A younger woman helps an older woman with paperwork while sitting together at a table.
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Why is there so much confusion around trusts? In my opinion, it is because they are often used the wrong way and not used for the right reasons.

We had some clients whose attorney tried to get them to do a trust they did not need. Fortunately for them, our client had a reliable guide to step in and tell them they did not need to spend the money to get a trust. So how do you know if you need a trust? Let's dive in.

There are two types of trusts:

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1. Revocable trust

This is the simpler of the two types of trusts. There are some great uses for it, but we see this type of trust misused often because most people do not need it (especially our clients who are in or near retirement). Most of the time, if they do not have a complex situation, basic estate planning documents will suffice, and in turn be more affordable than establishing a trust.

This type of trust could be good in certain circumstances, such as when you:

  • Don't trust your kids. Some may laugh at this, but there are certainly times when this can be the case. With this trust, you can limit how much your children are able to spend each year. We had a client who allowed her kids to take out only $20,000 per year from her estate. We also had a client take a more extreme approach and didn’t allow her children to touch the money until they were 60. At least they will have a great retirement!
  • Want to keep your money in your bloodline in case, for example, a divorce happens.
  • Have minor children (under 18). In this case, a trust can be important to ensure they have detailed plans for using the funds.

2. Irrevocable trust

You should consider using this type of trust if you are looking to protect against long-term care costs and estate taxes. But understand, just like the revocable trust, not every client needs this.

Who does not need this trust? Someone who has:

  • A large net worth and can self-insure against long-term care expenses.
  • No legacy goals of leaving behind assets to kids or a beneficiary.
  • The majority of their wealth in IRAs.

Who might benefit from this trust?

  • Those who may need long-term care protection may need to consider this type of trust. We commonly see irrevocable trusts used in times of Medicaid planning, which is a way to shield your assets from being accessed if you were to need them for long-term care events. The idea is that if you move the assets out of your estate, then they are safe. Keep in mind that you must have moved the assets out for a period of time in order for them not to be counted for Medicaid purposes. Here in Ohio, that is five years, but it could be different depending on the state you are in.
  • This type of trust is also used for estate planning. This is not a concern for many people right now, considering that estate taxes don’t kick in until the value reaches almost $13 million. However, even if you do not have that much wealth, I would still encourage you to start considering planning for estate taxes. Why? Because the estate tax limit will get cut in half in 2026 when the Tax Cuts and Jobs Act expires. The estate tax has been well under $1 million in the past. And remember, our country is more than $30 trillion in debt. Do you think they will find ways to get hardworking and smart people to pay more taxes? The way estate taxes work is that any money you have over the limit could be taxed at a 37% tax rate, leaving almost as much money to Uncle Sam as your beneficiaries. The good news? You can find ways to avoid having Uncle Sam as a beneficiary when it comes to estate taxes. This could involve using a tool like an irrevocable trust.

Remember that most irrevocable trusts do not allow you to retain ownership of the assets you put into it. However, if you structure it the right way, then you could still be able to access it and benefit from using it.

Pro tip: Be aware of listing your trust as an IRA beneficiary.

If you pass away and leave your IRA to a trust, then you would pay "trust rates," which could be as much as 37%. Instead, if you leave your IRA to a person rather than a trust, your beneficiary would pay only federal income tax rates, which for most is 12% to 24%.

In the end, we would advise working with a retirement planning team who works closely with an attorney. Together, they can make sure you get what you need and get it done the right way so that you do not have to pay more taxes and fees than you need to.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger was not compensated in any way.

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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Joe F. Schmitz Jr., CFP®, ChFC®
Founder and CEO, Peak Retirement Planning

As Founder and CEO of Peak Retirement Planning, Inc., Joe Schmitz Jr. has built a comprehensive retirement planning company focused on helping clients grow and preserve their wealth. Under Joe’s leadership, a team of experienced financial advisers use tax-efficient strategies, investment management, income planning and proactive health care planning to help clients feel confident in their financial future — and the legacy they leave behind. Joe has also written a book, titled I HATE TAXES. You can find Joe on YouTube, where he creates educational videos for those in or near retirement. If you would like to talk to Joe’s team, you can schedule a meeting.