An interesting side bar to my recent blog posts, relative to investment accounts and estate planning has been a very good process for me and I hope it has been a good one for you.
The other day, my wife had asked me what I've been up to and I told her about the research that I've been doing, relative to our investments, inheritance of those assets, and how to best have those assets move through the chain of succession.
I have to admit that the process can be a bit daunting and a lot of people will put it off, because they think they have lots of time left, since they are still young and a host of other reasons to not get more proactive in managing their estates.
Bringing Some Clarity:
When you have different investment accounts (401k/IRA, Roth, and taxable investment accounts) we tend to focus more on how well the accounts are doing in the current marketplace, rather than focusing on what will happen to those accounts, should we pass away.
I decided to take a more in-depth look at estate planning and especially with the notion of trusts and how they can benefit any investor and any estate. While it seems like we've covered this topic, I don't think that all the questions were answered, so I want to take a more pragmatic look at trusts, what they are, how they work, and why you should consider establishing your own.
Now, I am not an estate lawyer and I am no expert when it comes to trusts. While I have a Revocable Living Trust that was created a couple of years ago, I still have questions about how all of this stuff works and have plans to sit down with my estate lawyer in February for a complete review and status update session.
But, in the meantime, I've been scouring the web to learn as much as I can about trusts and how they are supposed to work. That scouring of different web sites has created a whole lot of questions for me to be asking my estate lawyer and getting clarification on every aspect of the estate plan and how to communicate the plan to each of the parties that need to understand it (wife and kids).
What I've Found:
Again, I am not an estate lawyer but I am a curious kind of guy. What I am sharing with you is things that I've found on the web that were interesting enough to use in a series of blogs.
The first installment of this process is actually from the web page of my own estate lawyer, here in Mississippi. I am giving his firm the credit for this narrative and I am making sure that you know it is not my narrative.
Clear on that?
Here's How Kyle Wynn and Associates Explain Trusts:
Most people automatically think that a will is what they need to plan their estate, but that is not always the case. There are drawbacks to the strategy of having "only" a will.
For instance, did you know that in order for your will to really do anything, it has to go through probate, which takes time and costs a lot of money?
And did you realize your will is of no use whatsoever until you die? Would you rather allow your family to AVOID probate? For many people, having an estate planning trust is a much better option.
“The difference between a will and a trust is that a will operates from the moment of death, while a trust operates in the present.” - Black’s Law Dictionary
What is a trust?
A trust is a legal document whereby property, real or otherwise, is held by one party for the benefit of another. Maybe that sounds confusing, but think back to when you purchased your home.
You probably borrowed some of the purchase money by giving the lender a Promissory Note and secured your payment of that debt to the lender by pledging the property you were buying as collateral. In Mississippi, this would have been done by giving your lender a security interest by executing a Deed of Trust.
In this document, you gave legal ownership of the property to a Trustee of the lender, subject to your promise of payments. Most importantly, you reserved the right to use the property. This idea of using property that is legally owned by someone else goes back to the origin of trust law and the 1536 document, the Statute of Uses. But how does all this apply to you?
How Does a Living Trust Work?
Imagine your living trust as a box without a lid on it. Into this box you can place your house, your car, your investments and whatever other property you own.
Since the box doesn’t have a lid on it, you can put in as much as you want and you can take out as much as you want. You can spend it, give it away, invest it, and otherwise use it as you did before you put it in the box.
But why would you want all your property in a box? Because you will not always be able to manage your property.
Without a trust, no one has the legal right to manage your property if you become incompetent or even if you die.
If you pass away and leave a will, the will must be probated in order to give it authority, which takes a great deal of time and money.
If you have a stroke or otherwise become incapacitated, no one can touch your property until you have been ruled incompetent and a conservatorship has been set up, which has all the court costs of probate with the added insult of still requiring probate to distribute your assets once you pass away.
How does a box fix all that?
When you set up your trust, you put instructions in with it. You, the Trustor, create the trust, determine the rules of the trust, and place assets into the trust.
More than one person can be a trustor, of course, like a husband and wife.
So, imagine when you are placing all your things into the box, you also drop in a list of instructions which say, “When I die or otherwise become incapacitated, this is what I want to happen and this is who I want to be in charge.”
With these instructions in the trust document, your wishes are guaranteed.
Does a Living Trust give away your assets before you want it to be done?
Not one penny. When you as the Trustor set up the Living Trust, you name yourself as the Trustee, the person in whom the ownership of an asset is placed.
For the rest of your life, you act as the Trustee in the exact same way you would if you never put one thing into the trust.
In your instructions for the trust, you also name Successor Trustees, often children or trusted loved ones, but it could be anyone you choose. Successor Trustees take over after a point which you stipulate in the trust, be it death or incapacity.
How will the Trust handle my assets after I am no longer in control?
The Successor Trustees have instructions of their own to follow called a distribution. This is a part of your trust that you create which provides for your Beneficiaries, those who will enjoy the income and assets of your trust.
A distribution can be as simple or as complex as you wish, but, no matter the stipulations, your assets pass from the trust to those Beneficiaries without court or outside intervention.
And, yes, Successor Trustees can also be Beneficiaries. Trustors can be Beneficiaries too. A trust is fully customizable to meet your wishes.
Do You Need a Living Trust?
Here are just ten situations in which a Living Trust would provide a significant benefit to the Trustor:
- You want to maintain management and control of your assets during your lifetime and ensure someone of your choice takes over upon your death.
- Your beneficiaries reside outside of the state and would suffer great expense to administer your estate through probate.
- You want to be certain that you choose who manages your affairs, and that you determine the conditions under which they will be managed.
- Your estate's value exceeds the lifetime estate tax exemption, and you want to take full advantage of tax savings that are only possible through expert planning.
- You own real estate in more than one state and want to avoid ancillary probate.
- You want to avoid capital gains taxes associated with gifting a highly appreciated asset.
- You own a business or farm and want to avoid the harmful disruptions in business caused by probate, or you want to plan and provide for a family member who helps run the farm or business while also fairly providing for other family members who do not actively participate.
- You have minor children, minor grandchildren, or special needs descendants for whose care you wish to provide.
- You have children by a previous marriage or a second spouse, and you want to make sure everyone is provided for without the common problem of accidental disinheritance.
These are of course, by no means the only reasons you might benefit from having a Living Trust.
Nearly all but the most modest of estates can be handled much more efficiently and cost-effectively by using a trust to avoid conservatorship and probate.
Summary and Conclusion:
We are going to be looking at trusts in more detail, in coming blog postings. I want to explore this topic with you, as I think it is something to consider, especially when it comes to avoiding probate and the seamless transition of your estate to your heirs.
Hope you will enjoy this series and I'm looking forward to finding out more, myself, so that when I have my review in February, I will not leave any stones unturned.