Part 1 of a three-part series on trusts.
If the pandemic taught us anything, it's that our time here may be shorter than we thought. Still, only an estimated 33% of Americans have a will or living trust, according to a recent Caring.com survey.
The remaining two-thirds, meanwhile, don't have a plan to distribute their money or material possessions after they pass away.
If you're part of the latter group, now's the time to develop a plan.
"Americans who have had a serious case of COVID-19 are 66% more likely to have a will than those who have not. "- Caring.com
Even among those who did not get COVID-19, the pandemic prompted many to get their papers in order—but that may not be enough. For instance, you may have a trust, but have your assets been re-titled in the name of the trust? Or, you may have a will, but do you also need a trust? The topic can sound overwhelming, but it's necessary, said Jason M. Ray, a personal trust market manager at BOK Financial®.
"Both options have different benefits to consider when it comes to distributing your assets after death that you may not be aware of," he said.
What is a will?
Simply put, a will is a legal document that states how you would like your assets—both real estate and personal property—distributed after you pass away. It also allows you to designate who will become the guardian of your children or other dependents.
A will allows you to name who will inherit assets that don't otherwise allow you to name a payable-on-death (POD) beneficiary, such as some bank accounts, real estate and other material possessions.
Keep in mind, assets that are distributed through a will must go through probate, which can be a lengthy and costly legal process for settling an estate. And, probate court proceedings are public record, potentially exposing information regarding assets and beneficiaries and leaving loved ones vulnerable to scammers and theft.
Assets that allow you to name a direct, POD beneficiary, such as an IRA investment account, are non-probate assets that do not require designation by will or the probate process.
What is a trust?
A revocable trust is a legal arrangement that allows you, as the grantor, to elect a trusted person or third-party to act as a trustee, either during your life or after you pass away, to manage the process of ensuring your assets are distributed according to your plan.
It's called a "revocable " trust because you maintain the power to change or revoke the terms at any point during your lifetime.
Once you pass away, the trust becomes "irrevocable " and cannot be changed, revoked or amended without court approval or the agreement of all interested parties. Otherwise, it will be administered according to the wishes originally stated in the trust.
4 benefits of a trust
- In a trust, you can provide specific direction as to how your assets are distributed, such as structuring monthly payments or requiring certain monetary assets be used to care for a disabled family member.
- You can plan for incapacity by designating a trustee to oversee your assets if you lose the cognitive ability to manage your own finances.
- Unlike a will, a trust protects beneficiaries from having information shared via public record.
- A trust will help you avoid probate, assuming you take steps to transfer title to all of your assets to the trust.
Common trust terms
Do I need both?
"Nearly every adult needs to have a last will and testament," Ray said. "Adding a trust to your estate plan comes with more benefits, such as being able to plan for incapacity, avoiding probate, having more control from the grave over how and when your assets are transferred, and protection for your children and other beneficiaries (recipients) of your assets."
Keep in mind that creating a trust can be costlier than writing a simple will, as it usually needs to be drafted by an estate attorney who can guide you on how to properly transfer your assets into the trust, he added. The failure to properly transfer assets can result in probate action for those items.
Getting started
Your first step is to consult an estate planning attorney. Many offer complimentary introductory consultations. They can help you review your assets and decide if you should have a will alone, add a revocable living trust to your will or another avenue.
A trust is typically more complicated than a will. It's not required to be drafted by an attorney. However, hiring an attorney is nearly always in your best interest to ensure it is legally enforceable and includes all of your wishes according to legal requirements, Ray suggests.
To see what works best for you, speak with your financial advisor and consider setting up a consultation with an estate planning lawyer to discuss options.
Learn more:
Part 2: 5 reasons to add a trust to your will
Part 3: Creating a plan for incapacity
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