When people begin the estate planning process, they often hear that they “need a trust.” The truth is more nuanced. Trusts can be extremely useful, but the right kind of trust depends entirely on your goals, your assets, and your family circumstances. For most people, “estate planning” means having an attorney draft a last will and testament, financial power of attorney, and advance health care directive drafted for them.
When it comes to trusts, here are several distinct types of trusts. Two of the most common distinctions are revocable versus irrevocable and living versus testamentary. A living trust is created during your lifetime, while a testamentary trust is created under your will and comes into existence only after death. A revocable trust can generally be changed or revoked during your lifetime. An irrevocable trust, by contrast, usually cannot be changed once it is established and funded, except in limited circumstances.
A revocable living trust can be a particularly useful tool in the right case. One of its main advantages is helping avoid ancillary probate if you own real estate in another state. Without a trust, your will may have to be probated in New Jersey and also in the state where the out-of-state property is located. That can create extra expense, delay, and inconvenience for your family.
However, many people are told that they need a revocable living trust simply to avoid probate in New Jersey. In most cases, that is not true. Probate in New Jersey is generally straightforward. In many situations, it can be completed in about 30 minutes, and the filing costs are often minimal—roughly $200. If all of your assets are in New Jersey and your estate plan is otherwise simple, a revocable living trust may not be necessary just to avoid probate.
It is also important to understand what a revocable living trust does not do. A revocable trust does not protect assets from long-term care costs. It also does not eliminate estate tax or New Jersey inheritance tax. In fact, for most families, estate tax is not even an issue, because the federal estate tax exemption is so high (approximately $15,000,000) that many people will never come close to it. As a result, a revocable living trust is often oversold as a one-size-fits-all solution when it is really just one planning option among many.
By contrast, an irrevocable trust may be a very powerful tool when used properly. In the elder law context, a carefully drafted irrevocable trust can potentially help shelter assets from future long-term care costs and Medicaid spend-down requirements. But this area of law is highly technical. A poorly drafted or poorly administered irrevocable trust can fail to achieve the very protection the client was seeking.
That is why trust planning should never be approached with a generic form or a sales pitch. The real question is not whether you “need a trust,” but what problem you are trying to solve. Are you trying to avoid ancillary probate? Protect assets from nursing home costs? Provide for a child with special needs? Preserve control while simplifying administration for your family?
Every family is different. In my opinion, when it comes to Medicaid asset protection and irrevocable trusts, only an attorney with deep elder law experience—and ideally a Certified Elder Law Attorney—should be drafting that kind of plan.
A trust can be a powerful tool, but it’s not always necessary. Knowing when and why to use one helps you make the right choices for your estate and family.
Trusts can be useful in the right circumstances, but they are often presented as a one-size-fits-all solution when they are not. The real question is how each tool fits into the bigger picture and what role it is meant to serve. Looking at that context can lead to a more balanced approach.