If I Already Have a Will, Do I Also Need a Trust?
Imagine for a minute that you're the parent of two college-aged children and you're in a tragic accident. Setting aside the emotional trauma of the situation, how would your family continue to be cared for financially?
At first, you may say, "I have a will, so they will inherit all my assets". True - a will, or “last will and testament” as it’s officially called, is a critical estate planning document to have. Why? Because it officially conveys your wishes for how your assets should be distributed. This includes everything from your bank and investment accounts to tangible property such as your home and vehicles.
However, despite having a will, here's how this scenario might potentially play out …
Instead of all your assets going directly to your two children, they will first be frozen by the courts due to a process known as probate. Probate is a series of court proceedings where a judge works together with the executor of your will to:
1) Review the property contained within your estate
2) Interpret your will and last wishes
3) Determine how your property should be divided
Depending on several variables, probate can take anywhere from 12 months to several years (source). During this time, no one except the executor will be able to make transactions from your bank accounts, and it will only be for very specific expenses. That’s a long time for your two children to be caught in financial limbo.
The scenario can get even worse. Now suppose your ex-husband alleges that you promised him a portion of your retirement nest egg, and he tries to make a claim during probate. Right or wrong, his allegation would have to be taken seriously by the court and would most likely cause the process to drag out even longer. Furthermore, if the court finds his claim to be legit, then it will reduce how much you had intended your children to inherit.
Wouldn't it be better if there was a way for your assets to side-step the whole probate process and go directly to your heirs without any interference? There is - and it's called a trust.
What Is a Revocable Living Trust?
A trust, specifically a revocable living trust, is a legal entity that’s intended to take possession of your assets after your passing and hold them until they're ready to be distributed.
The way a revocable living trust works is straightforward. Throughout your lifetime, the trust will seem like little more than just a piece of paper. You’ll be the grantor of the trust (the person who initiated it), and you’ll designate it as a beneficiary on your financial accounts and property. This won't affect your rights or entitlement to use these assets for as long as you're alive. Since the trust is revocable, you’re free to change it any time you want - hence why you might also hear people refer to it as a “living trust”.
Once you pass away, the trust becomes irrevocable - meaning that the terms you gave it cannot be changed (source). Your trustees, the people you choose to put in charge of your trust, will initiate the process of moving your property into it. From there, they will have a legal duty to carry out your written instructions as to what, when, and how your property should be dispersed.
What Are the Advantages of a Trust Vs Will?
At first, a trust may not sound all that much different from a will. However, from a legal standpoint, it can offer several critical advantages.
Shields Assets from Probate
As we already said - probate can be a very long and tedious process. Any assets that aren’t properly designated to beneficiaries will become part of your general estate and must go through probate. This can be a problem, especially if you have family members who will be depending on those assets for living expenses, shelter, and transportation.
Because a trust is a private arrangement, it operates outside the probate process altogether (like life insurance). This means that once ready your trustees can immediately begin distributing assets to your beneficiaries according to your wishes.
Privacy
A lot of people don’t know this about wills, but they’re not private. Since probate is a public process, anything that gets reviewed becomes part of its record - including your will!
The same rules do not apply to trusts. Since they bypass probate, they do not become part of public record. No one except you, your trustees, and the law firm who drafted it need to know what it contains.
Protection from Creditors
Since probate is a public process, anyone can show up to the court and make a claim. It doesn’t matter how legitimate the allegation is - from a jolted business partner to a shady contractor who smells an opportunity - the court must entertain each one, assess its merit, and then determine the appropriate course of action.
A trust, on the other hand, can protect your beneficiaries from this threat. Because the trust is private, not only will creditors not know what assets you had, but they won’t know which beneficiaries they went to or how much was transferred.
You Can Set Specific Instructions
Despite what you may have seen in movies, you can’t exactly leave detailed conditions in wills. A typical will might say something simple to the effect of, “Everything is to be split equally among my three surviving children.”
Depending on the complexity of your situation, this can be a problem. For instance, imagine a 19-year-old who just lost their parent and suddenly receives an inheritance for hundreds of thousands of dollars. Like a new lottery winner, there’s a very good chance that the money will be foolishly spent and gone in a short time.
Trusts, on the other hand, can be very specific in how distributions are to be structured. You can stipulate not just how much each beneficiary gets, but also when. That’s incredibly useful if you’d like your beneficiaries to receive payments in installments.
Continuing with the previous example, this 19-year-old may get a small amount now, another lump sum at age 24, and then the remainder at age 29. That would help ensure that the money is better spent as there will be a better chance that it gets used more responsibly as they mature.
Saves Time and Money
The more items that can be transferred to your beneficiaries through a trust, the less that has to pass through probate. That will be a big time saver for everyone involved - from the executor of your will to your loved ones. Fewer court hearings will also be less financially taxing on your estate, leaving more of any assets that did pass through to be available to your heirs.
What Are the Drawbacks of a Trust?
Trusts are extremely powerful. However, there are a few reasons why not everyone thinks to include them in their estate plan.
The first barrier is the cost. Having a trust drafted can cost a few thousand dollars on up. Even though this can make the asset distribution process far more efficient later on, the initial sticker shock is a lot for many people to get over.
Another hurdle is funding the trust. There are countless stories on the internet of people who’ve had revocable living funds created but then either forgot or simply neglected to designate any assets to them. There’s actually a famous case where Michael Jackson made this estate planning mistake (source). The result was that many of the items that should have seamlessly passed through his trust instead found their way into probate, and it took years for the courts to conclude who should get what.
Summary
No one likes to think about their own death. But when it comes to taking care of our loved ones, a little bit of forethought can go a long way.
If you’ve already got a will, then you’re off to a great start. However, a revocable living trust can be another tool to enhance your estate plan and make it even better. While there will be some work involved in bringing it all together, your heirs will be thankful for mitigating the burden that probate and other posthumous financial matters can be.
If you need any guidance on trusts or estate planning in general, feel free to reach out to one of the knowledgeable team members at LA Wealth Management. We’ve helped hundreds of people with these questions and can help customize a plan for your special situation.