While 33 percent of U.S. adults have a will, the number is lower for Black Americans — 27.5 percent — which means Black Americans may be missing out on the No. 1 wealth transfer, and without a plan in place, probate costs could eat up to 8 percent of the value of an estate.
Even fewer Americans have trusts — legal entities that are generally more complex than wills and hold assets on behalf of your beneficiaries instead of those assets going directly to them. Of the estate plans made in 2021, 75.12 percent were wills and 18.78 percent were trusts according to LegalZoom, an online tech company that helps people create legal documents.
By not having wills, Black Americans are missing out on the largest wealth transfer in history, according to Brickson Diamond, co-founder of the nonprofit Black House Foundation.
However, trusts are growing in popularity because they are flexible and can address a variety of objectives, according to Merrill Lynch Wealth Management.
Contrary to popular belief, trust funds are not just for wealthy families. Plenty of parents set up trust funds for their children.
“The misconception that age is a factor, that you’re supposed to be old to do estate planning, or you’re supposed to be wealthy to do estate planning is just wrong,” said Portia Wood, a Los Angeles-based estate attorney who focuses on Black families.
In a CNN interview, Wood suggested finding a culturally competent attorney who understands the specific issues facing Black Americans.
Due to the racial wealth-inequality gap in the U.S., the median wealth of Black families ($24,100) is less than 15 percent of white families ($188,200), according to the Federal Reserve’s 2019 Survey of Consumer Finances.
Having an estate attorney set up a trust for you could cost at least $1,000. Other costs may include paying filing fees for changing the name on a title, deed, registration, or license and management costs to file an annual tax return for the trust.
The main benefits of trust funds include:
Certain types of trusts offer advantages like decreasing the value of your estate, potentially allowing you to qualify for income-restricted programs like Medicaid. After death, a trust usually allows your loved ones to avoid the probate process, where a probate court determines who will get your things. A strong will can make probate smoother, but a trust can offer more of a guarantee that your exact wishes are followed, which may make the costs worth it.
Probate is a matter of public record. By avoiding it, your privacy and legacy may get some protection and your beneficiaries may get the assets faster than if the assets were transferred through a will.
The two types of trust funds include irrevocable (they cannot be changed) and revocable (or living) trusts, which allow the parent control over but which are subject to seizure in legal circumstances.
An irrevocable trust may not be considered part of the taxable estate, so fewer taxes may be due upon your death, according to financial services corporation Fidelity.
Not all trust funds are for children of wealthy parents. Regardless of wealth, parents can set up trust funds for college savings, to protect children with special needs, put away money for a family business, continue support after receiving a terminal illness diagnosis, establish a line of inheritance or future-proofing.
On the downside, the adage that money doesn’t buy happiness may apply more precisely to trust fund babies than any other group of beneficiaries. Forbes reported that “a wealth of research suggests that children born into wealthy families are more likely to suffer from anxiety and depression, as well as cope with eating disorders and substance abuse. The psychological costs of material wealth are manifold.”
Investing money in a trust isn’t that different from investing any other type of money and the inherent challenges are similar, The Balance reported. The key is to stay in compliance with restrictions on trust instruments.
Growing the assets in a trust depends on the specifics of what you want for your beneficiaries. For example, you might want the trust to retain all its dividend, interest, or rental income for many years, especially when a beneficiary child is a minor, and you don’t want payouts to begin until later in life. If so, you will want to invest the money held in trust in a way that minimizes taxes, because trust funds are subject to compressed tax rates.
To invest money held in trust, you’ll need the trust instrument and documents proving the creation of the trust, and possibly a tax identification number. You could open a trust fund account at a brokerage firm or directly with a mutual fund company such as Vanguard. Smaller trusts will probably hold investments such as index funds or other mutual funds, according to The Balance.
These are some of the basic types of trusts according to Fidelity.com:
“Marital or ‘A’ trust
Designed to provide benefits to a surviving spouse; generally included in the taxable estate of the surviving spouse
Bypass or ‘B’ trust
Also known as credit shelter trust, established to bypass the surviving spouse’s estate in order to make full use of any federal estate tax exemption for each spouse
Testamentary trust
Outlined in a will and created through the will after the death, with funds subject to probate and transfer taxes; often continues to be subject to probate court supervision thereafter
Irrevocable life insurance trust (ILIT)
Irrevocable trust designed to exclude life insurance proceeds from the deceased’s taxable estate while providing liquidity to the estate and/or the trusts’ beneficiaries
Charitable lead trust
Allows certain benefits to go to a charity and the remainder to your beneficiaries
Charitable remainder trust
Allows you to receive an income stream for a defined period of time and stipulate that any remainder go to a charity
Generation-skipping trust
Using the generation-skipping tax exemption, permits trust assets to be distributed to grandchildren or later generations without incurring either a generation-skipping tax or estate taxes on the subsequent death of your children
Qualified Terminable Interest Property (QTIP) trust
Used to provide income for a surviving spouse. Upon the spouse’s death, the assets then go to additional beneficiaries named by the deceased. Often used in second marriage situations, as well as to maximize estate and generation-skipping tax or estate tax planning flexibility
Grantor Retained Annuity Trust (GRAT)
Irrevocable trust funded by gifts by its grantor; designed to shift future appreciation on quickly appreciating assets to the next generation during the grantor’s lifetime.”