Do I Need a Will or a Trust?

Transcript:

Hey guys Mike Frontera here back with another retirement Theory video. So today we're going to be talking about a question I get all the time. A client will call me up and say, I visited with my attorney and he or she suggests I should set up a trust. Do I need that? Or another thing, I’ll be meeting with a client and I'll ask them whether they've had their will updated recently or not. Very often, the answer is either no or I don't have a will, is that bad? 

Before I answer that, a quick caveat, you should always seek the advice of legal counsel in any and all legal matters*. Now maybe you’ve spoken with an attorney recently or maybe you haven’t, and you just want to know some of the basics of why you might want a will—or perhaps do you need to go a step further and set up a trust. And by the way, when I say trust in this context, I'm really talking about a revocable trust or sometimes it's called a living trust, ok? This is different than a trust one might set up in order to, say, hide assets to qualify for Medicaid.

Alright, so before we get into a trust versus a will let's take a minute to examine what happens when you don't have either one.  For those of us who pass away without having drafted a will of our own there is good news. the state has already drafted one for you.  When you die without a will  it is said that you die intestate. When this happens your estate will be distributed in whatever fashion your state has determined by law.  You might take a few moments if you don't have a will to look up your state intestacy laws and see what might happen in that case. You may find that your intentions do not necessarily match those that your state has for you. So, assuming you would like additional control over the distribution of your assets then in virtually all cases a will is a good idea. 

As you probably already know, a will is just a document that spells out who gets what when you die. And when that time comes your local probate court appoints a representative for the estate known as an executor or executrix. With a will of course, you can name who you’d like to serve that role.

So basically probate as you also probably know is simply the process of proving who gets what within the will. Probate isn't always, but can be, a pain.  and it can be expensive too, especially if you have more complicated assets such as a business or things that might not be easy to value like artwork, expensive jewelry or real estate. And when heirs cannot agree on those values or who gets what and the will isn't crystal clear, the process can become extremely cumbersome. Once you throw in court fees, executor fees, and attorney's fees it can become extremely expensive too. Needless to say the whole thing can get pretty hairy.

So, often then when you visit an Elder Law attorney they may recommend that you set up a trust. Again, we’re talking about a living or revocable trust.

So what can a trust do that a will can't?  

Well let's first figure out what it is. 

Really I think the best way to think of a trust is the picture it like an empty box, where you get to set the rules for anything that goes inside that box. Those rules dictate not only what happens to the assets in the box after death but also in the case where you become medically incapacitated. This is already one major difference between a trust and a will in that it can provide for direction in cases other than death. 

OK, now with a trust you have someone called a trustee, whose job it is to carry out the rules that you have put on that box.  In the case of a revocable trust YOU typically start out as the trustee.  you are also able to change the rules for that box while you’re living. That’s why it’s often referred to as a revocable or living trust. Once you pass away however those rules can  longer be changed.

One of things that people like most about a trust like this is that unlike a will, the terms of a living trust do not need to go through the probate process.

Not only can this save time and legal fees down the road but it’s private. A will that goes through probate is a public document so having a trust set up can afford you and your family some additional privacy.  Also keep in mind if you have property in multiple states,  your estate would need to be probated in each one of those states.  if all of those properties where instead transferred to that box, that trust, You could skip all of that.

Another advantage to setting up a trust is the additional control you have on the distribution of your assets. Maybe you want to hold off on having your 22 year old son receive all of your assets at once and would like to time out the distributions that go to him over a number of years. Or maybe you can direct your trustee to dole out certain amount of money either based on attaining up a certain age or perhaps even achieving certain goals that are important for you. Like graduating from college or getting a job.

Now remember, a trust can provide you with a lot of control and that is great, but keep in mind  that the trust only dictates what happens to stuff inside that trust box. If it’s not in the box, the trust doesn’t control it. So you’d need to be careful not just to put existing assets in the name of the trust, but also future assets that you obtain to be named to the trust. This is one of the reasons that a trust like this is often drafted in conjunction with a will.  The will can act as a sort of catch-all for things that didn't get placed in the trust before death. they called it a pour-over will as it basically pours over any non trust assets into the trust at death. 

So it seems like a trust is a more powerful estate planning document than a will and in most cases it is. But is it necessary for your situation?

If your primary concern is avoiding probate there are actually a lot of things that you can do without either a will or trust. Just the titling of many of your accounts and real property can avoid probate on its own.  Any joint account for example that provides for rights of a survivor simply pass to the other surviving joint tenant at death. Keep in mind this would not avoid probate in the case where both joint account holders pass away at the same time. However this too may be able to be resolved by adding what is called a transfer on death registration to the account or property. That transfer on death registration can basically allow for beneficiaries to be added to that asset. Well, let me hedge a little bit there to let you know that a number of states actually do not allow for this kind of registration on real property.

For bank accounts and investment or brokerage accounts though you should be able to use that transfer on death or payable on death registration to name beneficiaries on those accounts.

This  can be a great way to move assets outside of your probate estate. You may want to ask your bank if they can add a transfer on death or payable on death registration to your accounts.

Speaking of beneficiaries a huge part of most people's assets are their retirement accounts. Assuming you have beneficiaries set up on those accounts those too will pass outside of your probate estate and go directly to whoever you have listed as beneficiary. Same for  life insurance policies. So you can see that in a lot of cases once you pulled out real estate, retirement accounts, investments and bank accounts a lot of times there's not a heck of a lot left that would go either to a will or trust. And if you do not have the desire to further control the disbursement of assets after you're gone it can make the case for setting up a trust somewhat less attractive.

Keep in mind some of the down sides of setting up a living trust. 

One of the primary ones is just the cost to set them up. They typically cost far more than setting up a will. And not only that, they can be a bit of a pain to get assets into the trust.  you may have to change the deeds on real estate, retitle investment accounts, and again, you need to remember to title anything new that you acquire during life to the trust. You also need to be exceedingly careful with retirement accounts if you list your trust as beneficiary. Depending on how they’re drafted, a trust can cause adverse tax consequences on those retirement accounts to your heirs. In any event, a revocable trust carries with it a number of pros and cons. And it’s important that you weigh those out before having one drafted for you.

One final thought. Whatever you do, be sure to communicate your intentions clearly with your family or whoever it is you're looking to leave assets to. Most conflicts arise when one beneficiary expects one thing and another expects something different. Sometimes the legal document that you've put in place will solve that expectation and sometimes it won’t.  Not only can the ensuing time & expense be wasteful, but the emotional toll it can put on a family can often be the worst part.

So! Do you have questions for me? Let me know. Come visit me at www.retirementtheory.com or send me an email at mikefrontera@retirementtheory.com. Did you click subscribe on this video or follow me on Facebook? I think that you should. You’ll continue to see videos like these on everything retirement planning.

Once again, thank you for joining me, take care of yourselves, and we’ll see you next time!

*Cambridge Investment Research, Inc. does not provide legal advice