Despite what you may think, you may never need a will. Your last will and testament only transfers assets through probate that have no automatic beneficiary the moment you die. Instead, many people attempt to avoid probate by naming beneficiaries directly on their accounts. However, while this does minimize costs and delays associated with probate, it often does nothing to protect these assets. A living trust could do that.
However, if you do not have the time or funds to create a living trust, there is an alternative: Have the assets pass by a “testamentary trust” created by your will.
Certain Accounts Avoid Probate by Naming Beneficiaries
While wills have been transferring property for hundreds of years, there are now many types of accounts that completely avoid probate: Jointly owned accounts and real estate, retirement plans, life insurance policies, Transfer on Death [“TOD”] and In Trust For [“ITF”] accounts all transfer outright to your beneficiary at the time of your death. The beneficiary to these accounts merely needs to provide the financial company with a death certificate, so no lengthy probate is necessary. These types of accounts are often called “Testamentary Substitutes” (since they transfer funds in an alternative way from your last will and testament).
The Problem With Testamentary Substitutes
Some people should not, or cannot, receive money outright:
- 1. Minors. A child cannot receive property without an adult named as a financial guardian or conservator by a court, meaning the legal expenses you minimized by avoiding probate now have to be spent on a different legal process.
- 2. Disabled individuals. People with disabilities who are receiving Medicaid or some other government program could be disqualified from these programs if they acquire too much money in their own names.
- 3. Spendthrifts. Funds transferred to people with creditor issues are often not protected when they receive money outright.
- 4. Substance abusers. Clearly, people who are addicted to drugs should not receive funds directly, lest their habits consume the gifts.
- 5. People in rocky marriages. Finally, beneficiaries who may be nearing divorce can sometimes make rash decisions with testamentary substitutes they receive outright.
Solution: A ‘Testamentary Trust’ Using a Will
The best suggestion is to utilize a trust created by your will, often called a “testamentary trust.” Unlike a living trust, which is a separate document immediately effective the moment you sign it, a testamentary trust goes into effect only once your will is admitted to probate. In addition, while a living trust does avoid probate, you also have to change the title to any property you want passed by the trust to the trust as owner or beneficiary: deeds, investment and bank accounts, co-op shares, life insurance and retirement plan beneficiary forms, and other property that is not left to the living trust do not pass by the trust, meaning the assets are transferred by your will anyway. People with multiple accounts and properties often forget to change all of their property to the living trust due to time, expense and the sheer volume of work required on their part.
A testamentary trust can offer all of the same provisions as a living trust, such as avoiding transferring funds to a beneficiary with substance-abuse issues, maximizing creditor protection, and giving guideline ages or life events when a beneficiary may receive trust funds.
A will can also give the executor the ability to create a supplemental needs trust that can protect beneficiaries who become disabled, thereby allowing the beneficiary to receive government benefits and still have indirect access to the funds.
Transferring accounts by your will instead of outright can also allow the executor to create a Uniform Gifts to Minors Act (UTMA) account for a minor beneficiary who is receiving a smaller sum that does not justify the creation of a testamentary trust.
Perhaps the greatest benefit of using a will is to allow a set percentage of total funds to be received by your choice of beneficiaries while also taking advantage of certain tax efficiencies. Remember that testamentary substitutes may change in value at a different rate than your probate assets: Your IRA (a testamentary substitute) may decrease as you age due to required minimum distributions, but your house (which may pass by probate) will likely increase in value; if you leave your currently equally valued IRA and house to two beneficiaries with the hope of them receiving equal benefits, one beneficiary will almost certainly get short-changed over the course of time.
Leaving testamentary substitutes by your will also makes it easy to figure out who the contingent beneficiaries are: If you have one beneficiary on an IRA account who has died, you may need to change several forms, but if the trust in your will is the beneficiary of the account you have probably created a number of contingent beneficiaries, since a will’s beneficiary designations — written in plain English and elastic in nature — are more flexible and dynamic than a beneficiary designation form, which only names specific people instead of including specific circumstances.
How to Designate the Testamentary Trust, and How Not to
Correctly naming your testamentary trust on your beneficiary form is incredibly important. Remember that some forms are more testamentary-trust friendly than others, since some actually ask whether you are leaving funds to a trust created by your will, while others don’t look like they allow it. You should have your beneficiary form state:
“To the Trustee of the Trust Created for my Children by Article V of My Will Dated 01/23/2015.”
Do NOT name the beneficiary as your “Estate,” particularly for retirement plans, as the funds will have to be distributed over the span of five years, thus negating the ability to “stretch” your IRA distributions.
Using a testamentary trust is often more desirable than leaving assets directly to a person: Minor children, disabled family members, spendthrifts, substance abusers and people in shaky marriages are sometimes hurt more by receiving the money than they would by not receiving it at all. When you do not have the time, money or patience for creating and funding a living trust, naming a testamentary trust as the beneficiary of testamentary substitutes may be a feasible alternative.
Daniel A. Timins is an estate planning and elder law attorney, as well as a Certified Financial Planner®. He specializes in Estate Planning, Surrogate’s Court proceedings, Real Estate Law, Commercial Law and Medicaid Planning. He is a graduate of Pace Law School.
IRS Won’t Process New Employee Retention Credit (ERC) Claims
Tax Credits Due to an alarming amount of fraud, the IRS has stopped processing new employee retention tax credit claims.
By Kelley R. Taylor Published
What To Take On A Plane For A More Luxurious Trip
Air travel isn't exactly relaxing. However, with these flying hacks, you can make the plane ride a better experience than ever.
By Becca van Sambeck Published
A Virtual Financial Adviser Could Be the Right Fit for You
Most of us are comfortable with videoconferencing these days, and that could make working with a financial adviser more convenient. No traffic, no parking, no limitations because of location…
By Aaron Cirksena Published
Five Questions (and Answers) for Long-Term Investors
Inflation issues, the climate transition, the U.S. credit downgrade, AI hype and the outlooks in Europe and China are weighing on investors.
By Daniel Kern, CFA®, CFP® Published
Four Reasons You Don’t Need a (Revocable) Trust
Sometimes a basic will, setting up TOD and POD designations and choosing beneficiaries for retirement accounts, life insurance and annuities will do the trick.
By Evan T. Beach, CFP®, AWMA® Published
Four Reasons Retirees Need a (Revocable) Trust
Just because an estate attorney or ad recommends a revocable trust doesn’t mean you actually need one. However, maybe one of the following situations applies to you.
By Evan T. Beach, CFP®, AWMA® Published
Investing in Fine Wine: Six Trends Affecting the Market
Prices and demand are rising due to climate change, the rise of boutique vineyards, shifting tastes and other pressures.
By Valerie Wong Fountain, CFA Published
That Cash in Your Emergency Fund Doesn’t Have to Be Idle
While it’s important to have cash on hand in retirement, low-risk, low-yield investments can give your emergency fund something to do until you need it.
By Rich Guerrini Published
Financial Planning by Life Stage Focuses on You, Not Your Age
Age-based financial planning makes sense for many people, but everyone’s life is different, so life-stage-based planning could work better for you.
By Jamie P. Hopkins, Esq., CFP, RICP Published
Employee Refuses to Wear a Motorcycle Helmet: Can He Be Fired?
A refusal to wear personal protective equipment on the job is indeed grounds for termination, but this issue goes beyond that.
By H. Dennis Beaver, Esq. Published