A few years back, I attended an estate planning seminar at a nearby hotel. The firm putting on the show is well known in the area. Many of my clients had documents prepared by this group, so I felt an obligation to see exactly what they were offering. The seminar was good. There were no crazy claims that you see at many of these “free” events. They seemed to know what they were doing.
However, at the end of the day, every single person who engaged the firm got the same basic set of estate planning documents. To me, that’s a red flag. Why would someone who is single in their 30s need the same plan as someone who is widowed, 65 and has a bad relationship with one of their kids? That was the inspiration for this column. While most of our clients do use a revocable trust, it made me think about the folks who really don’t need one. Below, you will find four scenarios where a basic will package will do the trick. (For reasons to have a revocable trust, read my article Four Reasons Retirees Need a (Revocable) Trust.)
1. Probate avoidance is the only goal.
While this is an admirable goal, a trust may not be the only way to avoid probate. Depending on where you live, you can attach beneficiaries to the majority of your assets. The house is typically the toughest. However, in certain jurisdictions, you can add a transfer-on-death (TOD) deed to your home. If I own my home jointly and die before my wife, the home will become hers without probate. In the unlikely case that we die at the same time, the home will pass to the beneficiaries on the TOD deed.
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TOD designations apply to your investment accounts, too. You can attach them to any taxable account, and the assets will “transfer” according to your wishes, outside of the court system. For bank accounts, a similar concept exists, in the form of payable-on-death (POD) designations. Retirement accounts, life insurance and annuity contracts all have beneficiaries attached. That should wipe out most of your probate estate.
2. You have straightforward wishes.
As highlighted above, if you just want to get your assets to your beneficiaries in a direct manner, a trust is likely unnecessary. However, if you want any sort of control over how the assets are distributed beyond your death, you will need a trust. Conversely, let’s say you have two kids who are 50/50 beneficiaries. Both are good with money. You can just name them as direct beneficiaries on your accounts.
This comes with a word of caution: Goals and wishes change. People don’t often think to change beneficiaries with those goals and wishes. You should review beneficiaries once a year to ensure your now ex-spouse won’t inherit your assets.
3. You’re motivated by tax savings or Medicaid eligibility.
This is where it’s important to differentiate revocable, or living trusts, from irrevocable trusts. The former is primarily used for control and efficiency while distributing your assets. The latter is typically used to reduce your taxable estate. This article addresses only revocable trusts, which can be used in conjunction with other tools to reduce taxes. However, a stand-alone revocable trust will do nothing to reduce your taxes, as it is tied to your Social Security number.
4. You’re not great at follow-through.
This may seem like a silly one, but a trust is about as good as a blank piece of paper until it is “funded.” I cannot tell you the number of people I come across who have gone through the hassle and cost of putting together a trust but never followed through on transferring their assets into the trust. That is the only way it will work.
If you plan to use a trust as part of your estate plan, you will have to transfer ownership of the assets into the trust for it to have any effect. For example, there has to be a deed transfer for your home and a change of title for your investment accounts. Step one of creating the trust is an expensive waste of time without step two: funding the trust.
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