Utilizing Trusts in Estate Planning
Introduction
As a Christian pastor or ministry leader, your life is dedicated to serving others, fulfilling God’s calling, and building the Kingdom. But amidst this important work, it’s easy to put off planning for the future—especially when it comes to securing your financial legacy and ensuring that your estate is managed according to your instructions and values. At Servant Solutions, we believe in supporting you in your financial journey, not just for today, but for tomorrow and beyond. One important area of financial planning is estate planning, and a potential tool to utilize in this process is the trust.
This white paper aims to explain what trusts are, the different types of trusts available, why they are beneficial in estate planning, and how to set one up. We’ll also compare trusts with other estate planning tools, like wills, and provide guidance on how to work with an estate planning attorney.
What is a Trust?
A trust is a legal arrangement where a person (called the "trustor" or "grantor") transfers ownership of assets to a trustee. The trustee holds and manages the assets for the benefit of the trust’s beneficiaries. This arrangement allows for specific instructions on how assets should be used and distributed, both during the trustor’s lifetime and after their death.
In essence, a trust separates the legal ownership of owning assets from the right to benefit from them, providing greater control over the distribution of your estate. Trusts can offer flexibility, protect your assets, and even help minimize tax burdens.
Important Tax Consideration: It’s essential to understand that the act of transferring assets into a trust does not automatically remove the tax liability for the creator. For example, any income generated by a revocable trust is taxable to the trust’s creator (who is often also referred to as a settlor, trustor, or grantor) during the trust creator’s lifetime. This is because the trust’s creator retains full control over the terms of the trust and the assets contained within it. Thus, the creator will remain responsible for paying taxes on income generated by the trust's assets, as the trust is considered "transparent" for tax purposes.
Why Should I Utilize a Trust?
While many people rely solely on a will for estate planning, trusts can offer several advantages that wills alone cannot. Here are some compelling reasons why you might consider incorporating a trust into your estate plan:
1. Avoiding Probate
Probate is the legal process that validates a will and distributes the deceased’s assets. This process can be time-consuming, costly, and public. A revocable living trust allows you to transfer assets into the trust while you are still alive, so upon your death, those assets bypass probate. The result? Faster, private, and more efficient distribution of assets.
For example, imagine that you want to leave a portion of your estate to a ministry or Christian charity. If your assets are placed in a trust, the distribution can happen without the delays of probate, ensuring your desired gifts are received without unnecessary legal hurdles.
Trusts also provide greater privacy than a will. While a will becomes a public record once it is filed for probate, a trust remains private, which can be particularly important for families or ministries who want to keep the details of their estate distribution confidential.
2. Minimizing Estate Taxes
In some cases, trusts can be structured to help minimize estate taxes. Certain trusts—such as irrevocable life insurance trusts (ILITs)—allow you to remove life insurance proceeds from your taxable estate, potentially reducing your estate tax burden. This can be beneficial if your estate exceeds the federal estate tax exemption limit.
3. Asset Protection / Managing Assets for Minor Children or Beneficiaries
Certain types of trusts offer asset protection for beneficiaries. For example, if a beneficiary is facing financial difficulties, such as bankruptcy or lawsuits, the assets in a properly structured trust may be protected from creditors.
Consider a situation where you want to leave an inheritance to your child, but they are not yet financially responsible. A spendthrift trust can be created to provide for your child’s needs while protecting the assets from being squandered or seized by creditors.
If you want to ensure that your children or other beneficiaries receive assets in a structured way over time (rather than a lump sum), a trust can set specific terms for distributions, protecting your beneficiaries from making poor financial decisions. For example, a discretionary trust can allow the trustee to distribute funds according to the beneficiary’s needs or age, safeguarding against mismanagement.
4. Providing for Loved Ones with Special Needs
If you have a loved one with special needs, setting up a special needs trust can ensure they continue to receive support without jeopardizing their eligibility for government benefits. This ensures their care is ongoing while maintaining access to necessary programs.
5. Charitable Giving
Ministers and Christians often feel called to leave a portion of their estate to charitable causes. A charitable remainder trust (CRT) allows you to donate assets to charity while retaining income from those assets during your lifetime. Upon your death, the remaining funds go to the designated charity.
Why Not Just Create a Will Instead?
While a will is an essential part of estate planning, there are several limitations to relying solely on a will:
Probate Requirements: Unlike trusts, wills must go through probate, which can be a time-consuming and expensive process. In addition, the probate process is public, meaning the distribution of your estate is a matter of public record.
Lack of Control and Flexibility: A will doesn’t provide the same level of control over asset distribution that a trust does. For example, with a will, beneficiaries will typically receive assets in one lump sum. However, a trust can structure ongoing distributions, which is often important when dealing with minor children or family members who may not be financially responsible.
No Asset Protection: A will does not offer the asset protection benefits that certain types of trusts do, such as protection from creditors or lawsuits. For individuals with significant assets or vulnerable beneficiaries, a trust may be the better option for safeguarding wealth.
No Provision for Incapacity: A will only goes into effect upon your death. However, a trust can include provisions that dictate how your assets will be handled in the event of your incapacity, allowing for more seamless management of your estate if you are unable to make decisions yourself.
Which Trust Best Aligns with Your Goals and Needs?
While there are numerous types of trusts available, it’s essential to select one that aligns with your unique goals and personal circumstances. That said, certain types of trusts are particularly suitable for most individuals, including pastors or ministry employees. These include:
Revocable Living Trust: This is one of the most popular types of trusts because it allows the trustor to maintain control of the assets during their lifetime. It provides flexibility, as it can be changed or revoked at any time. This type of trust is ideal for those who want to avoid probate and keep things simple while still having the option to make changes as their circumstances evolve.
Irrevocable Trust: Though less flexible, irrevocable trusts are useful for individuals who want to reduce their taxable estate or protect their assets from creditors. It’s an option many individuals might consider if they have considerable assets that they want to shield from estate taxes.
Charitable Remainder Trust: A charitable remainder trust is a great option for people who wish to leave a legacy to a ministry or charity while still receiving income from the assets during their lifetime. It’s a beneficial option for those who wish to support the Kingdom’s work but also need income in retirement.
Are There Any Disadvantages to Trusts?
While trusts offer many advantages, there are some potential drawbacks to consider:
Complexity: Trusts can be more complicated to set up than a simple will. They require more paperwork and legal documentation, and the process of transferring assets into the trust can be time-consuming.
Cost: Establishing and maintaining a trust can be more expensive than simply creating a will. The initial legal fees can be higher, and there may be ongoing administrative costs associated with managing the trust, especially if it is irrevocable.
Ongoing Management: A trust requires ongoing management, especially if it is a revocable living trust. This means keeping track of assets, updating the trust as circumstances change, and ensuring that the trustee fulfills their responsibilities according to your instructions.
Irrevocability: While irrevocable trusts offer advantages, the fact that they cannot be changed after they are set up can be a disadvantage for individuals who might want more flexibility. If you create an irrevocable trust and later wish to make changes, you’ll need to establish a new trust, which can be both time-consuming and costly.
How to Create a Trust
Creating a trust can be a straightforward process, but it requires careful planning and expertise. Here are the key steps:
Identify Your Goals: Determine what you want your trust to accomplish—whether it’s avoiding probate, reducing taxes, providing for loved ones, or supporting charitable causes.
Choose the Type of Trust: Based on your goals, select the type of trust that best suits your needs (e.g., revocable living trust, irrevocable trust, charitable trust).
Work with an Estate Planning Attorney: It’s essential to work with a qualified estate planning attorney who has experience in creating trusts. Look for a professional who understands the unique needs of ministers and Christian families.
Open/Fund the Trust: A trust only works if it is properly funded. Trust accounts can hold many different types of assets such as real estate, bank accounts, life insurance policies, and investments into the name of the trust. If the trust is part of an estate plan, you can designate the trust as one of your beneficiaries. That way, your assets move to the trust account upon your death.
Review Regularly: As your life circumstances change (e.g., marriage, children, retirement), it’s important to review and, if necessary, update your trust.
Conclusion
At Servant Solutions, our mission is to serve those who serve and help provide financial security for the servants of the church. We are dedicated to supporting you with the financial tools and education you need to fulfill your calling with peace of mind. A trust can be a powerful tool in your estate planning process, helping you protect your assets, minimize taxes, and ensure your wishes and legacy is preserved for your loved ones and the causes you care about. If you believe that creating a trust might be beneficial for your estate, we encourage you to contact a qualified family or estate planning attorney.
As a member of Servant Solutions, you have access to free financial planning services and resources to help guide you in beginning the estate planning process. If you hold an account with us at Servant Solutions, we have partnered with our recordkeeper, Principal Financial Group and ARAG to provide free basic estate planning legal documents. With access to ARAG’s free online resources, you and/or your spouse can prepare a will, healthcare POA, HIPAA authorization, durable POA, living will, or medical treatment authorization for minors.
As always, our team at Servant Solutions is here to serve you! Our website contains dozens of do-it-yourself, free resources to help answer your questions about your finances. From worksheets to online tools, we have a resource that will fit you and your unique situation. Visit our Toolbox Series and choose which family of resources applies to your situation. Or we also offer free, personalized financial planning with one of our on-staff financial planning professionals. Reach out to one of our experts today to start our financial roadmap process.
For more information on trusts and other estate planning tools, visit the following resources: