Part 2 of a three-part series on trusts. Read the first article in the series.
Think setting up a trust is just for the well-to-do? Think again.
Even if they haven't written one yet, most people realize they need a will to ensure the assets they leave behind are distributed to beneficiaries, such as children or charities, according to their wishes.
But for many people, a will alone is not enough. "A trust gives you more control to specify how your assets will be distributed and managed," said Jason M. Ray, a personal trust market manager at BOK Financial®.
Trusts also avoid the costs and delay of filing the will in probate court while providing more privacy, he added.
Ray outlines five reasons you may want to consider a revocable trust in your estate planning:
- Get your assets to the right people
Just like a will, a revocable trust can help you and your spouse direct assets to the intended people once you pass away. You would typically still have a will to nominate a guardian for minor children and as a backup plan, but "a revocable trust usually becomes the backbone of the plan to transfer assets," Ray said.
- Avoid probate
Probate is a legal process to distribute assets when someone dies. It is the court's system to review the deceased's assets, pay debts and distribute what remains. It can be a lengthy and costly process—averaging six months to several years, depending on the complexity of the estate. Payment for court and legal fees is typically taken from the estate.
"What gets people most concerned about probate are the attorney's fees and the public disclosure of what the decedent owned," said Ray.
It is important to note, however, if you fail to transfer any assets into your trust prior to your death, probate will likely still be required to transfer those assets. And, depending on whether you also have a will, the probate assets may be distributed in a manner other than how you desired under your trust (ultimately based on the language of your state law if no will is in place).
- Create a plan for incapacity
We often think of a will or trust for when we pass away. But what if you have a debilitating illness, get into an accident, or experience aging that impacts your cognitive and physical abilities, and you're left unable to manage your finances, medical needs, and your home?
You can create a power of attorney (POA) to appoint someone (called your "attorney-in-fact") to manage your financial affairs, but Ray said a trust can provide more effective direction to your trustee to make decisions on your behalf in the event of your incapacity.
- Gives the grantor more control
A revocable trust lets you decide not only to whom your assets will go to, but also when they will receive them and how they can use them.
"A trust helps the grantor retain control of their assets with strings from the grave," Ray explained.
For example, if someone in the family is financially irresponsible, you can state in the trust that the assets be given to them in small amounts over time. If a beneficiary is a minor, the assets can go to them at a certain age or under certain conditions, such as upon achieving college graduation. If the beneficiary is a person with a disability, you can state that the assets be distributed for their care.
- Protect your beneficiaries
"When set up correctly, a trust can prevent your beneficiaries' inheritance from being subject to creditors, lawsuits and other potential risks," Ray continued. For example, if your beneficiary is sued or divorced, the trust's assets that remain separate property and are held in trust may be sheltered.
Additionally, because a trust is private, the identities of your beneficiaries are not publicly disclosed, reducing the risk that they can be targets for scammers.
Other concerns regarding trusts
Keep in mind that trusts aren't for everyone. You may not need a trust if you have a small estate or can effectively divide your estate by writing a will and properly titling your assets to transfer automatically upon death. However, having a trust can help you address key concerns about the distribution and management of your estate.
“One of the key elements of estate planning is getting your ducks in a row in relation to the various advisors involved—estate planning attorney, your accountant and your bank.”- Jason Ray, personal trust market manager at BOK Financial
When you name a trustee, it's important they know what assets you have and that they are comfortable administering them. Most corporate trustees have no problem administering trusts with typical asset management of stocks, bonds and mutual funds.
However, corporate trustees can run into challenges with assets requiring more specialization, including things like real estate, minerals or business assets, so make sure they know what they are getting into by having documentation related to all assets and entities in one place.
It is advisable to meet with your named trustee or successor trustees and discuss your trust prior to finalizing your estate plan, Ray suggests. "That organization can be a huge help to your trustee and your beneficiaries down the line."
What's the difference?
|Designation of assets||Designates to whom and how assets will be distributed||Designates to whom assets will be distributed|
|How it plans for incapacity||Designates successor trustee to manage assets||Authority to manage assets does not become effective until death.|
|Private vs. public||Private||Public record|
|Beneficiary protection||Assets can be sheltered||No asset protection for beneficiaries|
|Legal requirements||Properly transferred assets do not require probate||Requires probate to transfer assets|
Once you decide whether you want a will, or a will and trust combo, you, your family and your beneficiaries will have peace of mind that after you pass, your lifetime of assets and legacy will live on the way you intended.
Part 1: Do you need a will or a trust?
Part 3: Creating a plan for incapacity