New clients sometimes ask: Why should I consider setting up a trust now, if I already have a will? My short answer: Because life happens.
By that, I mean there are six key things that a will cannot do (or cannot do as well) as a trust. The following are those key things, not in any order of importance. The right type of trust for your situation can provide all these benefits, compounding the positive impact your assets can have on your life now and for generations to come.
1. Control
Wills are transactional: they transfer ownership of assets and go into effect when you pass away. After that, the assets are controlled by the new owners and that ownership evolves along with their lives. Also, wills do not actually control how certain key assets transfer (see box below).
TRUST SOLUTION: A trust allows for a more targeted, time-released approach to wealth transfer. Within the trust document, you can specify what assets go to whom, when and how. For instance, say you want a dear old vacation property to stay in the family. You can transfer ownership to a trust, with enough additional assets to provide for property maintenance and upkeep over many generations. You can also add directions on how the property might be used by the family or specify certain requirements before it can be sold.
Trusts are also protective. In case of marriage, divorce, remarriage, etc., ownership of trust assets stays with the beneficiaries you name. Also, assets placed in certain types of trusts may be less accessible to future creditors if transferred to the trust within prevailing guidelines.
2. Privacy
Wills are thought of as very private matters. However, wills must be filed with the court and go through the probate process after you pass away. Anyone can then ask for the court file and view the will (online access makes this easy), hence all the articles about famous people’s wills.
TRUST SOLUTION: Assets in a trust (and the terms of the trust) remain private, even during the probate process. The trustee can continue to carry out the terms of the trust as you have specified with only your beneficiaries knowing what the trust provides. A trust can operate while you are alive or become operative when you pass away, with assets automatically transferring to it at that time.
3. Tax-Efficiency
A will is limited when it comes to tax planning. Starting in 2018, the amount exempted from the federal estate tax doubled and was recently at $13.6 million with inflation adjustments (more than $27 million for a married couple). This higher exclusion will expire by the end of 2025 unless renewed by Congress. Given the politics of today and the fiscal deficit, non-renewal is quite possible. In addition to the federal estate tax, many states levy their own estate tax at much lower asset levels.
TRUST SOLUTION: There are a variety of specialized trusts that can hold greatly appreciated assets (a business, a copyright, investment real estate) and/or assets that are likely to appreciate greatly, so they are out of your estate but can still be used to support you and your spouse during your lifetimes and your heirs and/or charities after you are gone. Or a trust can hold a life insurance policy whose proceeds will cover estate taxes.
4. Expediency
Probate is a legal process for settling your estate that can take more than a year, costing the heirs time, money and potential conflict. Keep in mind that in some states, such as California, probate can take much longer than in others.
TRUST SOLUTION: Assets placed in a trust, regardless of type or location, bypass the probate process. This is especially important if you have property in more than one state. In that case, property, including a business, would have to go through the probate process in that other state. This can create costly delays in how your assets are managed and missed opportunities.
One solution is to transfer ownership of the assets to a revocable trust, whose terms and beneficiaries you can change at any time. After you pass away, the revocable trust becomes irrevocable, allowing the assets to be managed by the trustee according to your wishes.
WILL CAN’T DO
Surprising to many people, certain significant assets do not transfer through a will. Instead, they will go straight to the beneficiary named or the joint owner, regardless of what the will may say. These include:
- IRAs and other types of retirement accounts
- The proceeds of life insurance policies and annuities
- Stock options and other types of equity compensation
- Bank and financial accounts held jointly with someone else
- Real estate held in joint tenancy
Therefore, it’s important to plan separately for these types of assets, including keeping beneficiary and joint account designations up to date as life and circumstances evolve.
5. Backup Plan
As I mentioned earlier, a will applies only upon death. What happens to your assets during your lifetime if you become disabled or incapacitated? A Power of Attorney and healthcare directives (including what is known as a living will) are necessary. But they do not provide guidelines about how your assets are to be managed long term.
TRUST SOLUTION: For assets transferred to a trust, the trustee can step in and manage the assets according to your specifications. This is especially important if you have a business, extensive real estate holdings or other assets that require ongoing oversight and expertise. If you have assets that require specialized expertise to manage, you can appoint co-trustees.
6. Legacy
A will allows for asset transfer upon death to other people and/or organizations. Over time, any intent or purpose behind that one-time transfer is likely to dissipate.
TRUST SOLUTION: By defining and carrying out your intent over time, a trust can create legacy. As you specify the terms of the trust, you are aligning what you know and what you value with your asset base. In that alignment, people tend to gain a strong sense of conviction about what is most important to them. And then, after the trust is set up, there is often a sense of exhilaration combined with relief. Another positive is that discussions and interactions around the terms of the trust can bring a family closer together, and an example of that is a multi-generational trust with a charitable component.
Say you transfer a high-value real estate property to a Charitable Remainder Trust (CRT). The trustee could then sell the building, invest the proceeds and make annual payments to you (and your spouse) for your lifetimes. After that, the trust payments can continue to your heirs and then to a nonprofit you want to support, or go straight to the nonprofit.
What, When and How
The six key benefits of trusts described above can enhance and amplify what is possible with your assets, but only IF the trust(s) is properly structured and administered, as part of an overall wealth plan. There are many questions that should be answered during trust planning: Which type of trust would be best for your situation? What assets should you transfer to the trust and when? How should those assets be managed/invested?
Whether you want to explore trusts in general, or talk about specifics, we are here to help and answer these and many other questions.
Read More about Trusts at LNW HERE.
ACCESS TO DIGITAL ASSETS
Most states have passed the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA). This allows wills, trusts, powers of attorney and other documents to include written instructions that give your designated fiduciaries (the executor of your will, your trustee, etc.) access to your digital assets, such as websites, social media accounts, etc. Without such written permissions, access to digital assets could be denied.
