At What Net Worth do you Need a Trust?
Clients often ask me, “I’ve reached a net worth of ‘X,’ so do I need a trust?” or, “My house is worth ‘X,’ so should I create a trust?” Many people assume that reaching a certain net worth automatically means they need a trust. Conversely, some think that because they haven't hit a specific financial threshold, a trust isn't necessary for them.
This article explores when net worth is relevant to deciding on a trust-based estate plan, why net worth alone is generally a poor indicator, and the specific scenarios—like estate tax planning—where it does matter.
Why Net Worth is a Bad Way to Decide Whether You Need a Trust
In general, deciding whether to use a trust-based estate plan based solely on your net worth is a mistake. Trusts provide planning benefits that are mostly unrelated to net worth and are instead influenced by factors such as:
The type of assets you own (e.g., real estate, investment accounts).
The number of beneficiaries in your estate plan.
The location of your assets (e.g., owning property in multiple states).
A trust could be highly suitable for someone with a modest net worth and entirely unnecessary for someone with significant wealth, depending on their specific situation.
One notable exception applies: tax planning. Both federally and in Minnesota, your net worth becomes relevant when planning for estate taxes.
When net worth is relevant to use a trust.
Estate Tax Planning in Minnesota
In Minnesota, estate tax considerations come into play if:
You are married.
Your projected net worth at the second spouse’s death is likely to exceed $3 million.
To determine whether you fall into this category, it’s important to:
Work with a financial advisor to project your net worth at your expected mortality age.
Use tools from the Social Security Administration or other resources to estimate life expectancy.
If your net worth exceeds $3 million and charitable bequests are insufficient to lower your estate below this threshold, a trust may help mitigate estate taxes.
Some strategies to consider:
A donor-advised fund (DAF) for IRA assets may not reduce your taxable estate below the threshold.
A trust-based plan might be necessary if you are concerned about reducing taxes for your heirs.
Estate Tax Planning Federally
The federal estate tax threshold is much higher than Minnesota’s—currently $13.61 million per person ($27.22 million for married couples at the second spouse’s death). This threshold is scheduled to expire at the end of 2025 but will likely be extended or adjusted. If it expires, the threshold would decrease to approximately $14 million per couple.
For most people, this high federal threshold means estate tax planning isn't a concern, but it is relevant for individuals and families with significant wealth.
Why it is Better to Worth with an Experienced Estate Planning Attorney in Minneapolis
The complexities of estate planning can be overwhelming, and it’s easy to get sold on a trust that you don’t need—or to overlook a trust when it would be beneficial. An experienced estate planning attorney will:
Help you create a plan tailored to your unique situation.
Avoid unnecessary costs and complications.
Ensure that your estate plan is as efficient and effective as possible.
Key Takeaways
Takeaway 1
Trusts are valuable tools, but their usefulness often depends on factors like the type of assets you own, the number of beneficiaries, and the location of your assets—not just your net worth.
Takeaway 2
Trusts are primarily useful for estate tax planning if:
You are married.
Your projected net worth at the second spouse’s death exceeds $3 million in Minnesota.
Your planned charitable bequests at death won’t bring your estate below the threshold.
Takeaway 3
Working with an experienced estate planning attorney ensures that you don’t overspend on an unnecessarily complex plan or miss important opportunities for estate tax planning.
Conclusion
Net worth alone is rarely the deciding factor in determining whether you need a trust. Instead, consider the broader context of your estate, your goals, and the specific challenges you face. With the right guidance, you can create an estate plan that meets your needs, protects your family, and avoids unnecessary expenses or complications.
Comments