You’re planning your estate and will create a trust for a child or other family member. Do you start with a standalone trust for that individual, or simply embed the trust provisions in the rest of your estate plan? Let us try to demystify your choice.
What do we mean by “standalone trust?”
First some definitions for the terms we’re using here. By “standalone trust” we mean a separate trust document for the benefit of an individual. The trust document would be separate from the rest of your estate plan but referenced in your other documents. That standalone trust might be irrevocable from its inception but probably would be revocable (and amendable) by you for your life.
The alternative: you can bake trust provisions into your own (usually revocable) trust or even your will. The former might be called a “sub-trust” because it begins to be effective only on your death. It is a subset of the language in your main trust document.
If the trust for your family member is part of your will, it is a “testamentary” trust. Nothing is in place until after your death. In fact, nothing is in place until your estate goes through the probate process. Wills don’t immediately take effect but require a probate court proceeding.
What kind(s) of trust(s) are we talking about?
Why are you creating a trust for someone after your death, anyway? There are a variety of reasons you might want to address the sub-trust vs. standalone trust question. Most commonly, those include:
- Special needs trusts. If you have a beneficiary who is disabled, you know the importance of special needs planning. To protect the beneficiary from loss of public assistance benefits a special needs trust may be critically important. Even if public benefits are not an issue, you might want someone to manage the money, protect it, and spend it wisely.
- Single purpose trusts. Maybe you want to set up a trust just for education of your beneficiary. Or perhaps you want the trust to encourage sobriety, moral character, or some other single purpose.
- Spendthrift trusts. Your beneficiary might be completely competent, but bad with finances. Maybe you want to protect them from their own financial disabilities.
- Generation-skipping trusts. Are you particularly interested in getting some of your estate to grandchildren and later generations? A generation-skipping trust is designed for that goal
Which do I want?
As with so many things, the “correct” answer depends on a cost/benefit analysis. Creating a standalone trust will almost always make your estate plan at least somewhat more expensive. It will also be at least a little more complicated. Future changes will need to take multiple documents into consideration, as well. The value of creating a standalone trust document needs to outweigh those downsides.
What might be the pluses for creating a separate, standalone trust? They might in individual cases include:
- Having a separate document for trust administration. A trust embedded in your will or your own trust will forever require the subsequent trustee to show the entire document to financial institutions. Plus that invites confusion about which provisions of your larger document apply to the sub-trust, too.
- Particularly if the trust is in your will, that might mean we need to force your estate through the probate process. Most people would rather avoid probate. Perhaps there’s no compelling reason to adopt that common notion in your circumstances, but it can be jarring to hear that.
- If you want to make future changes that affect only a sub-trust (or only your larger estate plan) there is an opportunity to create new confusion by amending or repeating sections of the entire plan.
- If the standalone trust is a separate entity other family member can make contributions. Is your mother considering leaving (or giving) something to your son who receives public benefits? She can have her will or trust make reference to the standalone trust you created. That can make it easier (and cheaper) for her to make the gift.
- A standalone trust will almost certainly cover more eventualities than the sub-trust. There’s no legal reason that has to be true. But creating one or more sub-trusts in your own trust document can make it very lengthy, difficult to navigate and confusing. For that reason, the sub-trust provisions will usually be shortened in the main document.
But you didn’t tell me which one I want!
Exactly. Your mileage may vary. You need to discuss this with us while we are drafting your estate planning documents. And we’ll try to be straightforward about the cost/benefit calculations in your particular circumstances.
Here’s the bottom line: a standalone trust is almost always the “better” answer. But is it enough better to justify the extra cost and complication of additional documents? Perhaps not — particularly if there is a low likelihood of your estate planning documents “maturing” in the next five years or so.
Did we just make a vague allusion to your longevity? We did. It’s not an irrelevant consideration. Of course neither you nor we know what’s really going to happen in the near future. But we can both make some calculated guesses.
