When Wills Aren’t Enough: Time for Trusts

Not too long ago, I mentioned how my wife’s grandmother was not doing well, health-wise.  Well, she has since passed on.  She had a long life with a big, loving family, including numerous children, many grandchildren, and more than a few great-grandchildren (including my daughter, Elaine, as one of the newest ones).  Thanks to a husband that earned and invested a great deal of money, she also never had to worry about not having enough money for the rest of her life, and was a multi-millionaire upon her death.

It’s that last point, though, that is causing some tension among people on my wife’s side of the family.  I’m not going to get too far into the issue, partially as it is personal business, partially because it’s outside my understanding of issues of law (even before we take the fact that they are in California while I am in Pennsylvania into account).  Let’s suffice it to say that there are going to be some arguments about how the estate is divided up, even though there were points in the will that attempted to prevent such scuffles.

It can be tough to divide up a pie, financial or otherwise.
It can be tough to divide up a pie, financial or otherwise.

All of this going on has caused me to think about things like death, dying, and how to make sure that when I pass on, my money and the other parts of my estate end up being used by the people I want to do what I want it to do.  I discussed wills not that long ago, in no small part because all this was going on, and I hope it sparked at least some end-of-life planning by my readers.  This time around, we’re going to talk trusts, particularly Revocable Living Trusts.

Revocable Living Trusts, You Say?

The phrase ‘revocable living trust’ has three parts to it, each providing useful information about what is involved with the whole concept.

  • The ‘trust’ part is the most important, but also the trickiest to understand.  It took me a while, at least.  A trust is a legal entity that holds assets for the benefit of one or more third parties (Beneficiaries).  The trust is created and funded by a Grantor and managed by a Trustee; however, it is possible for one person to be Grantor, Trustee, and Beneficiary of a single trust, as most creators of a Revocable Living Trust tend to be before their death.
  • The ‘revocable’ part indicates that the conditions and possessions currently in place on the trust can be changed, or the trust ended entirely.
  • The ‘living’ part indicates that the trust is created while the grantor is still alive, unlike a ‘testamentary’ trust that is created by a will upon someone’s death.

What all this means is that when you’ve created a trust, you can transfer ownership of your stocks, bonds, and any other property to the trust (‘funding the trust’; the trust does no good to you if everything you want to include in your estate remains in your name) and manage the trust as the Original Trustee, passing control of the fund (and effectively, the ownership of all your things) to the next (successor) trustee upon your death or incapacitation.

The Good Points of a Trust

Why go through all this trouble when you can just write out a will to distribute your stuff?  There are some advantages to using a trust, as I’m sure you can guess.  One of the biggest ones is the chance to avoid probate, the legal proceedings that distribute possessions upon someone’s death.  Because the possessions remain held by the trust as control transfers to the successor trustee, it bypasses the probate process and allows the possessions to be distributed more swiftly.  ( Contrary to popular belief, though, setting up a trust will not eliminate estate taxes; it can cut down the expenses paid to settle the estate, but that’s the biggest financial advantage.)

That brings us to the second advantage: it’s easier to keep your privacy using a trust than with a will.  A will is part of the public record, and so everyone will be able to find out who got what from your stuff.  A trust, though, isn’t public, and so your possessions can be distributed with as much (or little) privacy as you desire.

The third and possibly biggest advantage is that the creation of a trust provides a built-in contingency plan should you become mentally incompetent to manage your own personal finances.  If something happens, a ‘Disability Trustee’ can take over running the trust and managing your finances, according to the rules and guidelines you’ve set out ahead of time.

Why I’m Not Going for a Trust (Yet…)

As you can see, there are quite a few advantages of setting up a trust, particularly for those who are very well off and want to avoid probate. For those who want to avoid probate, trusts are a valuable asset.  (That you need to use trusts, a complex legal device, to avoid probate, a complex legal process, is probably a reasonable indictment of the legal system in general, but that’s a different point altogether.)

This is off-set by some of the disadvantages of a trust, particularly for those of us who are young, have few assets, and are unlikely to pass on soon.  The upfront costs to creating a trust are significant, usually $1000 or more.  There are also the difficulties and time-consumption in funding the trust, the transferring of all the desired inherited assets to the possession of the trust, which can take weeks or even months and requires quite a bit of effort doing things like contacting banks and investment firms, getting all the paperwork, etc.  You also still need a will (a ‘pour-over will’) to handle any assets that you haven’t transferred at the time of your death, picked up since then.

The advantages of trusts, primarily the ability to avoid probate, are minimized if you don’t have much that would be caught up in probate, particularly things like businesses that would suffer if it spent too much time in the legal limbo that is probate.  If it doesn’t make much difference to you or your beneficiaries whether your assets spend time in probate, whether because you don’t have much that would be caught up or because your beneficiaries don’t really need your assets, there’s really not much advantage to trusts for you.  You can hold off on creating a trust until you are richer, older, and/or have more beneficiaries for whom you wish to provide.  Given that I am not exactly rich at the moment, I’m holding off on creating a trust until I become older.

That’s my plan, but I should remind you that I am not a legal expert.  You should look into living revocable trusts for yourself, and see if they fit your needs.  You’ll also need to consider the different laws within different states, to say nothing of among different nations.

What do you think of trusts?  What are your plans for when you pass on?  Do you have any assets that would benefit by being put into a trust?

Image Source: Morguefile

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