Estate planning for the protection and ultimate distribution of your assets can be a complicated process fraught with sensitive subjects. Solid estate plans often include living or testamentary trusts that include comprehensive guidance for people / beneficiary planning in addition to the various tax, legal and technical aspects. It is vital that loved ones are provided for in the manner you intend – a plan that is attentive to particular beneficiary conditions, assets, objectives, disabilities, elder care needs, divorce, second marriages, etc. Often children from multiple marriages and blended families of all types can make estate planning more difficult. To avoid assets ending up in unintended hands, certain strategies, employing both a well-drafted will and a trust (or several trusts) can avoid common pitfalls.
What is a trust?
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.
How Establishing a Trust Can Help
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.
It is important to define your estate planning goals and organize your financial information. Below are some key questions clients should ask both themselves and their advisors:
- How you want your assets distributed – to family, charity, friends, etc.?
- Who will settle your estate – are there concerns regarding a family member’s ability to settle your estate?
- Do you have concerns about family asset management capabilities?
- Do you have a business that should continue as a going concern after you are gone?
- Are there estate, inheritance or income tax issues with your estate?
- Have you inventoried your assets; how are they titled (joint name, single name, etc.)?
- Who are your advisors, attorneys, trustees, trust protectors, investment advisors?
- Are your estate planning documents in one place, accessible to trusted advisors or family members?