#43 - To Trust or Not to Trust: How to Protect Your Investments and Your Estate

Updated: Feb 13

-What is a trust and what is a will?

-What is the difference between a trust and a will?

-The reason you should consider a trust and a will

-What happens to my estate if I have a will but don't have a trust?

-What is the cost of creating a trust?

-What are the personal finance benefits of having a trust?


David

Now we are going to get into this week's personal financial topic, which is, the basic rules of why you might need a trust as part of your estate plan.

So here’s the most important question which is . . . how are your beneficiaries going to manage their portion of their inheritance when you pass away? Probably not many of you based on statistics; just 42% of the population has will; let alone a trust. Plus, if you are under 40 typically you are not thinking about your mortality; however, if you have a will it may not be enough to carry out your actions after death.

Cindy This can be a very in depth and super complicated topic, because estate planning and the type of trust you choose can be complex if you have scenarios in your life like more assets or wealth, or require more sophisticated tax planning. Maybe you have blended families, or very intentional thoughts about how to pass down your assets to heirs that may not include family members by law, or want to create tight controls about when an heir inherits their assets, or maybe you own a business, or even have special needs children or grandchildren to think about when you are gone and how they are cared for.

David But for today's discussion, we are covering basic revocable living trusts and the potential need for this in addition to or instead of a basic will. We touched on this way back in Podcast #6, If You Don't Have a Will Your Family May Not Be Protected so let’s first quickly revisit what an estate and estate planning is for the purpose of today's topic:

Cindy An estate is everything comprising your net worth. This includes all land and real estate, possessions, financial securities like investment accounts, cash, and other assets that the individual owns or has a controlling interest in. David Estate planning refers to the management of how these assets will be transferred to beneficiaries when an individual passes away. And further to this, your estate may be subject to tax upon your death.

Cindy David and I would argue that estate planning is the most important financial planning piece of any individual's life, no matter how big your estate is. Because if you have a car, a couch, jewelry, 401(k), a house, David's bow and arrow collection to shoot apples off of my head, a tiny home, a kegerator, any possession that you may have, this makes up your estate.

Can you imagine how long and hard you have worked to build your nest egg and possessions, only to have someone make decisions for you in the court of law for your loved ones when you are gone.

David So why a trust versus a will? What’s the difference?

Cindy In the simplest terms, both transfer an estate to your heirs, but only a trust can skip probate court. So, let's talk about the key differences of a will versus a trust. One of the most important differences is a will becomes active only after one's death. David Unlike a will a trust is active the day you create it, and a grantor, who is the one that creates the trust on behalf of their estate, may list the distribution of assets before their death in it. Basically, the trust is actively managed and the beneficiaries may know what they have coming to them.

Cindy A trust names a fiduciary, or trustee, which manages the trust during a grantor's life, and after death. This can be themselves; like David and I managing our trusts in our lifetime or our successor trustee, who carries out our trust after we pass on. All wills must go through a legal process called probate where an authorized court administrator examines them; this process can be lengthy and potentially very contentious if family members contest the will.

David The good thing is, trusts are not required to go through probate when the grantor dies and they cannot be contested. So here’s the cool thing: If you want to write someone out of your will, this is the way to that. In essence, the trust supersedes the will.

So getting back to a simple basic revocable living trust . . . Cindy Revocable living trusts are used to avoid probate and to protect the privacy of the trust owner and beneficiaries of the trust as well as minimize estate taxes; however, they do have some limitations including the fact that it can be expensive depending on how sophisticated you want to make it.

Establishing a revocable living trust avoids expensive probate proceedings, allowing for assets to be passed to your named beneficiaries much faster. Assets named in trust, bypass the costly courts and typically take precedence over the property designated in your will.

David Trusts are pliable which means that you can make amendments while you are still living. Perhaps you lose a loved one who was a beneficiary or you want to update how someone receives their inheritance, like college needs for grandkids, etc. all of these can be succinctly outlined in a trust.

Cindy Here’s another great advantage that we mentioned at the top of the discussion: trusts keep your information private. On the inverse wills are public record which makes your estate a complete open book. I stress that knowing this information can cause rifts in your family and friends. David

Okay here’s another good one! If you get married, and have a substantial amount of money that maybe you inherited or received by way of some type of settlement and want to protect that outside of your marital assets, you can stipulate this and segregate your identities in the trust.


Cindy we have clients that say hey I have my wealth, you have yours, I have grown kids etc. Now, in our case we blended our families and started fresh with building our life together and raising our children.

David You can have your trust managed by someone else for a lack of better phrase . . . let’s call it an agnostic trustee. So this should be someone who is a third party that has no interest except to carry out what the trust says without bias. This can also be super costly, as no one in a bank or professionally managed trust company will work for free.

Okay let’s talk about some drawbacks to be aware of.

Cindy Establishing a trust will involve legal consultation and this is not on the cheap side. The typical living trust can cost $1,000 - $3,000 and as we talked earlier don’t forget, once you create the trust, as we mentioned, you should monitor it meaning it is actively managed. Hence, it will cost you to update it.

David So here’s the cool thing: If you want to write someone out of your will, this is the way to that. In essence, the trust supersedes the will.

For example, we just finished our trust, and I had to go through the somewhat tedious process to make sure all of our investment accounts were changed to the trust title, and the trust was added to the contingent beneficiaries of our IRA.

Cindy Here’s a major misconception that you should know: In general, trusts don’t protect you against major financial maladies such as bankruptcy or if you get sued or you are trying to conceal money from taxes or the potential ex-spouse. This is why you need an attorney; as we are only touching the very basics.

It is important that you understand the budget and what and where your assets are with your partner.

Okay so that was a lot of information so I think that it's time that we should do the recap.

David #1 A trust in an instrument that is created by the grantor(s) that gives another party, AKA the trustee the right to hold the assets. The trustee has the right to hold title to assets or property on behalf of a third party or beneficiaries, and manages the trust as the fiduciary meaning, they have to carry out the rules of the trust. In addition, the rules of your trust wholly depend on the terms that you decide.

Cindy #2 Most people only associate trusts with wealthier or high net worth; however, trusts are highly flexible ways that can be used for a wide variety of purposes to achieve specific goals for your wealth and beneficiaries throughout and after your lifetime.

David #3 Don’t create a trust without professional guidance from a qualified estate planning attorney as trusts can be very complicated. So to be short and sweet: that’s why you are paying them.

Cindy #4 We do understand that trusts can range from $1,000 - $3,000; however, you can access sites such as LegalZoom and get a basic trust completed for a much lower fee to begin with and if your wishes become more complicated, you can consult with their legal staff.

David #5 So in short, trusts provide protection of your assets that supersede a will when there is discrepancy between the will and trust if you created both. Most attorneys will likely recommend that you have a will and a trust. The will can be backup protection if you fail to cover all of your assets under the trust.

A trust consists of detailed designations on how you wish to hand down your nest egg. Trusts keep your affairs private and trusts carry out your very specific intentions when you pass away.

Cindy As we’ve said earlier, you should consult with a reputable professional, and especially in this case, someone well versed in estate planning. Find a reputable estate planning attorney by doing your research. Or if you have a financial advisor, they often work with reliable and reputable attorneys. Get a referral from a friend, or a professional colleague.

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