Trusts & Estates

There is a general misconception that a trust is some sophisticated legal document used by just the superrich. Trusts are for people who have assets (real property, savings, mutual funds, IRA or 401k, etc.) or life insurance, and want to efficiently pass those assets to loved ones or charity.

A trust is a written instruction to your trustee for managing and protecting your assets during life and ultimately gifting assets to your beneficiaries in the way you think best. A trust established during life is called a living trust that can be revocable (amendable) or irrevocable (final and not amendable). You can also create a testamentary trust under your will.

A living trust has many benefits:

• Providing for you and protecting your assets during your life.
• Providing the same for your beneficiaries.
• Avoiding probate – costly attorney and executor fees associated with settling your estate.
• Keeping your (and your beneficiaries’) financial affairs private.
• Avoids complicated probate (will) rules of different states.

Here are a few examples as to how having a trust can be beneficial:

Example 1:

If your will names your spouse as sole beneficiary, your children can become disinherited.

Jim and Sara are married and have two children. Both Jim and Sara leave all their assets to each other in their wills (commonly referred to as an ‘I love you will’).

Years later, Jim passes away and Sara inherits all of Jim’s assets. In time, Sara remarries and signs a new ‘I love you will’ leaving everything to her new spouse – her sole beneficiary.

If Sara passes away and her new spouse survives her, all of Jim and Sara’s money now belongs to the new spouse – Jim and Sara’s children have been unintentionally disinherited.

A trust can solve this problem by Jim and Sara each establishing a trust under their wills that pay income (and principal for specific, vital needs) to the surviving spouse for life with the principal passing to the children equally after the surviving spouse’s death or remarriage.

Example 2:

Jim and Sara are married and both have children from previous marriages. Jim and Sara name each other as sole beneficiaries in their wills. Jim later dies and his net estate passes directly to Sara.

Result: If Sara does not revise her will leaving bequests to Jim’s children, Jim has unintentionally disinherited his children.

A simple way for Jim to avoid disinheriting his children is to make specific bequests in his will – direct cash distributions to his children. However, there are disadvantages to direct bequests. What if one or more of Jim’s children is disabled or lacks the financial knowledge (or self-discipline) to manage the assets? Or, what if the inheritance becomes a disincentive for the children pursuing their own career goals and dreams?

Jim may also want to provide for his surviving spouse during her lifetime (or remarriage). Many states have laws protecting spouses from being disinherited. However, each state law is different and allows the surviving spouse access to a different percentage of assets if not already provided for in a will. There are better estate planning options than the simple will.