Myths vs. Reality: What a Trust Actually Does

May 1, 2026

A survey by SmartAsset shows that over 60% of Americans with estates exceeding $500,000 opt for a living trust instead of a will. A key reason is that trusts avoid probate, which can reduce delays and eliminate fees that typically range from 3% to 7% of an estate’s value.

Simply put, an estate planning trust is a structure that holds assets, such as property, cash, and investments, in the care of a trustee and directs how they are managed and distributed. A trustee oversees those assets on behalf of beneficiaries, following the terms set by the person who created the trust. “People think trusts are about wealth,” said Terry Ruhe, senior vice president at U.S. Bank. “They’re really about control—who gets what, when, and under what conditions.”

Myth: All trusts are the same
Reality: The structure determines how assets are treated, taxed, and distributed.

Trusts can vary, so choose one that best suits your beneficiaries’ needs and assets.

The revocable living trust is the most common selection because it is flexible and administratively efficient. Such trusts allow changes at any time, and you retain full control. Because you retain control over a revocable trust, the IRS treats its assets as if you still own them. Income is reported on your personal return, and assets remain part of your taxable estate. If you are looking for tax advantages, this type of trust does not offer any.

Irrevocable trusts are used for specific outcomes such as estate tax reduction or asset protection. Irrevocable trusts require giving up control of the assets placed into them. In return, they may reduce estate taxes and provide a level of protection from creditors. Irrevocable trusts can reduce estate taxes, but only when structured correctly and used in the right context. For many estates, the federal estate tax is not triggered, which makes this benefit irrelevant. “Trusts don’t eliminate taxes by default,” Ruhe said. “They have to be designed with that objective in mind.” Changing the terms of this trust at any time is a complex legal process.

A special needs trust allows a beneficiary to receive support without losing eligibility for public benefits. Charitable trusts direct assets for philanthropic purposes. Generation-skipping trusts are used to transfer wealth across multiple generations with tax considerations. “The structure should match the objective,” Ruhe said. “Not the other way around.”

Myth: Trusts are only for the wealthy
Reality: The most common trust is used for administrative efficiency rather than wealth preservation.

Even a modest estate that includes a home, a few accounts, or dependents can benefit from avoiding probate. “Trusts are not just for large estates,” Ruhe said. “They are often used to simplify administration and provide continuity.”

If you have minor children, a trust allows you to control when and how assets are distributed instead of transferring them outright at age 18. If you want someone to step in and manage finances in case of incapacity, a trust allows that transition without court involvement. If you own property in more than one state, your estate may be subject to multiple probate proceedings.

Myth: A will does the same thing
Reality: A will directs assets after death. A trust governs assets before and after.

A will must go through probate, while a trust does not. A trust can manage assets during incapacity and control how distributions are made over time. A will cannot do either without court involvement. Most plans include both documents. The trust handles the assets. The will addresses anything left outside it.

Myth: Trusts are too expensive
Reality: Costs are tied to complexity, and the alternative has its own costs.

A basic revocable trust often costs between $1,000-$4,000. More complex trusts can exceed $10,000, particularly when tax planning is involved. The comparison most people overlook is probate. Court costs, attorney fees, and delays can be significant, especially when real estate is involved. Even in simpler jurisdictions, probate still requires time and administration.

Myth: Creating trust is complicated
Reality: The process is structured. The follow-through is where problems occur.

A trust is created through drafting and signing. After that, assets must be transferred into it. This includes retitling accounts and updating property ownership. Assets left outside the trust may still go through probate, even when a trust exists. Download a checklist to see what is involved in setting up a trust.

“On its most basic level, estate planning allows anyone to have the ability to determine and communicate to the rest of the world how they want their assets to be handled upon their passing,” says Christina Rosas, a member of Bond, Schoeneck & King in Melville.

Myth: Trusts only matter after death
Reality: Much of their value shows up during life.

A trust allows for immediate management of assets if the grantor becomes incapacitated. This avoids court-appointed guardianship and allows for continuity in financial decisions.

Myth: Once it’s set up, it runs itself
Reality: A trust still requires administration.

The trustee is responsible for gathering and safeguarding assets, paying expenses, maintaining records, and making distributions in accordance with the document. They may need to oversee investments, document distributions, and, in the case of irrevocable trusts, file separate tax returns. Trusts should be reviewed every 3–5 years, or sooner if there is a major life change such as a marriage, divorce, birth, death, relocation to another state, or a significant change in assets. Laws change as well, which can affect how a trust functions. Annual check-ins include confirming that assets remain properly titled in the trust, beneficiary designations remain aligned, and the named trustee remains appropriate.

Myth: Setting up a trust is enough
Reality: A trust works only if assets are aligned with it and kept current.

If accounts, property, or beneficiary designations are not coordinated with the trust, those assets may bypass it entirely. This is one of the most common issues. Many trusts are only partially funded, which results in a mix of probate and non-probate administration.

Over time, trusts should be reviewed as assets and circumstances change. The document can be updated, but only if someone revisits it. What matters is not whether a trust exists, but whether it is aligned with the assets, structured for the right purpose, and carried through in practice.

Keep your records safe

InsureYouKnow.org is a safe place to store all the information in case you need to access it remotely – or from the comforts of your own home. The documents are password-protected and use Amazon Cloud encryption to secure each password-protected account. Your password is not known to the site. Only you or someone you share the password with can access your account.

Death (of a Spouse) and Taxes

November 16, 2021

In a “normal” year, about 1.5 million Americans become widows and widowers, but the COVID-19 pandemic has significantly increased that annual statistic. According to a recent article in The Wall Street Journal, the National Center for Family and Marriage Research at Bowling Green State University estimates that about 380,000 of the more than 700,000 people in the United States who have died from COVID-19 were married.

Under “normal” circumstances, it may be difficult to comply with tax requirements and deadlines; filing as a widow(er) presents additional challenges. This is a complex topic with the following issues to consider.

Filing the First Year

The IRS stipulates that the year that your spouse dies:

• You can still file a joint return if you didn’t remarry and the executor approves the joint return.
• If either spouse was a nonresident alien at any time during the year, the surviving spouse can’t file a joint return.
• If you do file jointly, include all your income and deductions for the full year, but only your spouse’s income and deductions until the date of death.
• If the deceased spouse owes any taxes that the estate can’t pay, you as the surviving spouse may be liable for the amounts owed.

Filing in the Next Two Years

For two tax years after the year your spouse died, you can file as a qualifying widow(er). This filing status gives you a higher standard deduction and lower tax rate than filing as a single person. You must meet these requirements:

• You haven’t remarried.
• You must have a dependent (not a foster) child who lived with you all year, and you must have paid more than half the maintenance costs of your home.
• You must have been able to file jointly in the year of your spouse’s death, even if you didn’t.

Notifying the IRS
If you are a widow(er) who qualifies to file a joint return, take the following steps:

• Across the top of your IRS Form 1040 tax return for the year of death—above the area where you enter your address, write “Deceased,” your spouse’s name, and the date of death.
• When you’re a surviving spouse filing a joint return and a personal representative hasn’t been appointed, you should sign the return and write “filing as surviving spouse” in the signature area below your signature.
• When you’re a surviving spouse filing a joint return and a personal representative has been appointed, you and the personal representative should sign the return.
• A decedent taxpayer’s tax return can be filed electronically. Follow the specific directions provided by your preparation software for proper signature and notation requirements.
• The deadline to file a final return is the tax filing deadline of the year following the taxpayer’s death.
• If you are a surviving spouse filing a joint return alone, you should sign the return and write “filing as surviving spouse” in the space for your deceased spouse’s signature.
• If a refund is due, there’s one more step. You also should complete and file with the final return a copy of Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer. Although the IRS says you don’t have to file Form 1310 if you are a surviving spouse filing a joint return, you probably should file the form to prevent possible delays.

Other forms and documents you may need include:

• W-2s, 1099s and other tax forms for the year of death, reporting income or expenses paid before the person died.
• Death certificate to prove the date of death in the tax year being reported.
• Form 56 filed by a trustee, executor, administrator, or other person to let the IRS know who is responsible for the person’s estate.
• Form 1041, “U.S. Income Tax Return for Estates and Trusts” reports receipt of more than $600 in annual gross income (such as dividends, interest, proceeds from the sale of assets) after the person died.
• IRS Publication 559, “Survivors, Executors and Administrators” provides more information about legal requirements.

Note: You can’t file a final joint return with your deceased spouse if you as the surviving spouse remarried before the end of the year of death. The filing status of the decedent in this instance is married filing separately.

Filing an Estate-tax Return

The current estate- and gift-tax exemption is $11.7 million per individual, so not many estates owe tax—only about 1,900 did for 2020, according to the Tax Policy Center. Executors don’t need to file a return if the decedent’s estate is below the exemption.

They may want to file one, however, because then the surviving spouse can have the partner’s unused exemption and add it to their own in many cases.

Estate taxes are normally due nine months after the date of death. But the IRS allows executors to claim the unused exemption for the spouse up to two years after the date of death, in many cases.

Selling a Home and Resulting Exemptions

Survivors who sell a home may take up to $500,000 of home-sale profit tax-free if they haven’t remarried and sell within two years of the partner’s date of death. If they sell later, the exemption drops to $250,000, the standard amount for single filers.

Dealing with Retirement Accounts

Surviving spouses can roll over inherited retirement accounts such as 401(k)s and IRAs into their own names, and financial advisers routinely recommend this move.

A new widow(er) should carefully consider options. It’s possible to divide retirement accounts such as IRAs, and to roll over some but not all assets into the survivor’s name. This would leave the remainder in an inherited IRA available for penalty-free payouts to younger spouses.

Either way, heirs of retirement accounts should be sure to name new heirs of their own.

Heirs of these accounts who will face higher taxes as single filers may also want to convert assets to Roth IRAs, which can have tax-free withdrawals—especially if they can convert while still eligible for joint-filing rates and brackets.

Cashing U.S. Savings Bonds

There’s a special rule for U.S. Savings Bonds, from which income generally accrues tax-free until the bonds are cashed in. When the bond owner dies, the accrued interest may be treated as income in respect of a decedent.

In that case, the new owner of the bonds becomes responsible for the tax on the interest accrued during the life of the decedent. (The tax isn’t due, however, until the new owner cashes in the bonds.)

Alternatively, the interest accrued up to the date of death can be reported on the decedent’s final income tax return. That could be a tax-saving choice if he or she is in a lower tax bracket than the beneficiary. If that method is chosen, the person who gets the bonds only includes in income the interest earned after the date of death.

Reporting Deductions

All deductible expenses paid before death can be written off on the final return. In addition, medical bills paid within one year after death may be treated as having been paid by the decedent at the time the expenses were incurred. That means the cost of a final illness can be deducted on the final return even if the bills were not paid until after death.

If deductions are not itemized on the final return, the full standard deduction may be claimed, regardless of when during the year the taxpayer died. Even if the death occurred on January 1, the full standard deduction is available.

Inheriting Property and Money

For deaths that occurred in years other than 2010, the tax basis of any property a taxpayer owns at the time of his or her death is “stepped up” to its date-of-death value. Since the basis is the amount from which any gain or loss will be figured when the new owner ultimately sells the property, this means that the tax on any appreciation that occurred during the taxpayer’s life is essentially forgiven.

The person who inherits the property—a house, say, or stocks and bonds— would owe tax only on appreciation after the time of death. It’s important that you pinpoint date-of-death value as soon as possible—the executor should be able to help—to avoid hassles later on when you sell it. If assets have lost value during the original owner’s life, the tax basis is stepped down to date-of-death value.

Money you inherit is generally not subject to federal income tax. If you inherit a $100,000 certificate of deposit, for example, the $100,000 is not taxable. Only interest on it from the time you become the owner is taxed. If you receive interest that accrued but was not paid prior to the owner’s death, however, it is considered income in respect of a decedent and is taxable on your return.

InsureYouKnow.org

The death of a spouse not only presents emotional distress resulting from the loss of a loved one, but it also forces a widow(er) to deal with income tax issues never before faced. By keeping at insureyouknow.org, copies of a spouse’s death certificate, medical bills, income records, property assessments, and wills, you’ll be able to access required documents when you file your income tax return following the death of a spouse.