We’re going to talk about whether or not you should have a Will, or would it be better to have a Living Trust? And we’ll go through the details of both and compare and come to a conclusion at the end as to which one would be more beneficial for most people in most situations.
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Should you have a Will or a Living Trust, and why does it matter?
Well, we are talking, of course, about the distribution of your assets once you’ve passed away. So why does it matter? Most people I think want to make things as easy as possible for their families. And whether or not you have any documents in place, a Will or a Trust or none will have a huge effect on your family’s experience as they try to administer and distribute your assets after you’re gone.
Usually, the debate about will or living trust comes down to wanting to avoid probate. And most people have heard oh, you should avoid probate at all costs. It’s bad. Nothing good comes from probate. And for the most part, that’s true. But let’s kind of clarify a little bit about what probate actually is.
What’s Probate?
Probate is a court-supervised process for distributing the assets of a decedent. So what does that mean in more easily understandable terms, basically, it means that if you pass away and you own assets, then a court is going to have to approve a transfer of those assets from a deceased person.
So, the probate process is actually just a Judge watching over the process of your assets being gathered, valued, and ultimately distributed to your heirs.
And then the next important point to make is, if you have a will, you will not avoid probate. A lot of people mistakenly think that if you have a will, then your assets will be just distributed the way it says in the will. And that’s actually not accurate. Having a will simply tells the Judge how to distribute your assets.
So if you pass away and you don’t have a will, the Judge is going to look to the laws of the state where you live, to determine who your heirs are and who should receive your things.
If you have a will, the only difference is instead of the Judge looking to the laws to determine who your heirs are, the Judge is going to look at your will and determine who he should or she…he or she should give your things to. So the probate process is exactly the same whether you have no estate planning documents, no will, or whether you do have a will. So please be clear on the fact that if you want to avoid probate, a will is not going to help you do that.
Why do we want to avoid probate?
Is the probate process really bad? Well, yes, but why? Several reasons.
First, being that a probate is a public matter. So if you die and you have a will, that will gets lodged with the court and becomes public information for anybody who chooses to go to the court and look it up. So who you’re leaving your things to, who you’ve chosen to be your executor, all becomes public knowledge. Eventually, as the probate process works its way through the court, there’s going to be an inventory of all of your assets, which becomes public record as well. So nothing’s too secret, if you end up in probate court, a probate process for a fairly simple estate takes on average about 18 months. So it’s long, and for those 18 months that it’s winding its way through the court process, generally speaking, attorneys are being paid.
So 18 months of attorney’s fees, court fees, all this time, your heirs, your family is waiting to have access to your assets. And they won’t until the Judge finally says, here’s an order saying who to distribute to. So long expensive, again, no distribution, your family doesn’t have access to your assets, until the Judge says so. And that’s not until the very end, so things are tied up for those 18 months or more.
If you have a more complicated estate, meaning perhaps you have businesses or multiple real properties that need to be sold. Anything like that that jumps out of the ordinary is going to cause that 18 months to be even longer. And again, those assets are tied up for as long as it takes to work its way through the process. And another important point to make I mentioned real properties that have to be probated, so if you die and you own land, or houses or anything like that, the Judge will have to supervise the sale of that asset if necessary.
But if you own real property in multiple states, there would have to be a probate in each of the states where you own property. So not only is one probate long and expensive and complicated and emotional for your family. Now, if you own property in multiple states that’s multiplied by however many states they’re going to be probating those properties in. So we can sum it up by saying probate is bad. But these are really kind of the reasons why. So basically long expensive control comes away from anyone you’ve chosen and lands in the lap of the Judge and the courts.
What’s the difference between a Will and a Living Trust?
Like I mentioned before, a Will simply tells the Judge who you want your assets to be given to after you die. That’s it.
A living trust is totally different. A living trust is a way to avoid probate, and the way that works is first, the living Trust is created, and second, you transfer ownership of your assets out of your name and into the name of the Trust.
So you’re no longer the owner. And remember, that’s the trigger for probate, dying, and owning assets is the trigger for probate.
Let’s create a scenario with the Living Trust where you don’t own any assets at the time that you pass away.
You create the Living Trust, and you transfer your assets to it. And then while you’re alive and able, meaning you have the mental capacity to manage your assets, while you are alive and able you serve as the trustee of your Trust, there is a long list and any trust agreement of powers that are given to whoever is acting as the trustee of the Trust. So you’ll have those powers, and the reality is that once you transfer ownership of your assets to the Trust, and you act as the trustee, your day to day activities are not going to change. You don’t give up any control over your assets by transferring them to the Trust. You just manage them as you do now, meaning that whatever you can do today as the owner of your asset, you would be able to do once you had a Trust, you would just do it using one of the powers that you had as the trustee of your Trust.
So as long as you’re alive and able, you’re the trustee, and then what happens is in your trust document, you will have named someone to be your successor trustee. And that’s the person that you select to step into your shoes after you’re gone, that person would have all of the same powers that you had while you were the trustee of your Trust.
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What’s the job of the successor trustee?
The successor trustee’s job is two-fold a little bit, he or she would step up, take control of all of your assets, manage them in the short term, it’s called Garner and Protect your assets in the short term. Basically, making sure that nothing suffers from neglect after you’re gone, but then your successor trustee is also the person who ultimately will be responsible for making distributions to your beneficiaries, according to the provisions that you put in your Trust.
The Trust gives you all the control, and that can’t be changed once you’re gone. So when you have assets in your Living Trust, meaning that you’ve funded your Trust, and funding your Trust just simply means transferring the title, the ownership of your assets out of your individual name, and into the name of the Trust. Once you’ve done that, then your trustee steps up, administers, manages everything, and makes distributions according to the provisions.
How can the Trust assets be distributed to the beneficiaries?
There are four different distribution schemes that you can use. Within those different schemes, you can be very creative, but basically, there are four different ways that assets can be distributed through a trust.
The first one is outright, your beneficiaries may be grown, they may be financially responsible and sophisticated, and you’re okay with them receiving a lump-sum distribution of whatever it is they’re entitled to after you’re gone. So that would be an outright distribution. So your trustee would gather everything, the value divided into shares for the people that you’ve named as your beneficiaries, and then make the distribution.
There are scenarios where maybe you have younger beneficiaries, maybe they’re minors, and you don’t want them to receive an outright distribution at the time you pass away. So we can parcel out the distributions at different ages, so basically, if you have minor beneficiaries, your trustee would have the discretion to make support type distributions to them while they’re minors, but then they wouldn’t receive any actual lump-sum distributions until they reach a certain age that you determined.
You could say once my beneficiaries reach age 25, they get their distribution. But some people don’t like to have a lump sum distribution even once the kids have reached a certain age. And in that case, we can parcel it out over time, you can pick percentages and ages at which your beneficiaries will receive their distributions.
So for example, you might say that your beneficiaries would receive one-third of their distribution at age 21, another one-third of their distribution at age 25. And then the remaining balance of their share when they reach age 30, so kind of just protecting younger beneficiaries from receiving a huge distribution and running out and buying a red Ferrari and throwing a big party for all their friends. If you want to rest easy that you’ve protected against that, the parceling out at ages is a good way to do that.
In some scenarios, you may not want to ever give your beneficiaries a lump sum, in which case, instead of tying the distributions to ages, we can tie the distributions to intervals after your passing. So for example, regardless of how old your beneficiaries are, you might say that you want them to receive 25% of their share at the time that you pass away. Another 25%, two years later, another 25% two years later, and then again, two years after that, so meaning that they’re never going to receive one big chunk.
It’s going to be parceled out over time, based on the time that you pass and then the number of years that you choose. So again, within these distribution schemes, you pick percentages, you can pick ages.
Your successor trustee is the person who has to carry out your wishes. So as you’re coming up with your distribution ideas, you do need to keep that in mind. But basically, at ages or at intervals, you can pick the percentages and so forth.
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What’s a legacy Trust or Generational Trust?
Another way that principle can be distributed is actually by it not being distributed. This is what we call a legacy trust or a generational trust.
If you have assets that generate a fair amount of income on a regular basis, you may decide that you don’t ever want those assets to be distributed. You just want your beneficiaries to have the benefit of receiving that income on an ongoing basis.
In such case, what we would do is create a legacy trust, stating that the principal assets will always remain owned by the trust. And your trustee would simply then on a semiannual or annual basis, whatever you decide, would distribute the income, the net operating income generated by your assets to your beneficiaries. And as long as your assets are held in trust and just income is being distributed, this can go on for a great length of time, meaning that you could provide income to your children. And then to your grandchildren, and then to their children, and so on.
What provisions can go into a Living Trust?
You can get creative with these basic schemes for distribution. Living trusts can do other things to protect your beneficiaries as well. So you do get to say who your beneficiaries are, how and when they’re going to receive their distributions, what they’re going to receive. But there are some other provisions that actually are within a living trust that can even protect your beneficiaries further.
- Spendthrift provision
The first provision is called a spendthrift provision. And basically, it just says that until your beneficiary actually receives a distribution of their share, it’s not theirs. And as a result, they are not able to use their anticipated distribution as collateral or anything like that. They can’t encumber it in any way because it’s not theirs yet, not until it’s been distributed to them.
And the flip side of that is, if your beneficiary is in a scenario where they have creditors pursuing them, perhaps they filed bankruptcy, maybe they’re getting divorced, maybe there’s a judgment against them anything like that, where they are obligated to pay money to somebody else. If that’s the case, then again, if the funds have not been distributed, if their distribution has not been made out of the trust to them, those people those creditors don’t have any access to those funds. And there is a discretionary component built-in that allows your trustee, your successor trustee to hold those funds if your beneficiary is in one of those situations. So basically protecting the funds by holding it in the trust, and then once your beneficiary has gotten out of whatever situation they’re in, then the trustee can make the distribution at that time. So it’s protective of your beneficiaries in that way.
- Special needs provision
A special needs provision gives your successor trustee some discretion to make payments to a beneficiary, so as not to disqualify that beneficiary from any federal assistance that they might be receiving. So for instance, if you have a beneficiary who’s receiving disability payments, or Medicaid or any other needs-based government assistance, a large inheritance could disqualify them from receiving those benefits. So there’s language in the trust that allows your trustee to make distributions in a way so that they don’t become disqualified. And it’s just basically parceling it out for special needs rather than in any set time or age or anything like that. So and again, if you just had a Will and the Judge said, this probate is done, make the distributions, there’s no protection for your beneficiaries, they would receive that lump sum and then have to deal with the agencies who are looking at their needs at their asset level.
- Separate property trust requirement
There are other provisions that can be applied to different people based on their specific scenarios. Many individuals are worried about their child’s spouse having access to the inheritance when the time comes. You can write a provision into your trust that would state that prior to receiving any distributions that your beneficiary would be required to create what’s called a separate property trust. And it’s basically just their own Living Trust. But it allows them to keep their inheritance which is always separate property, as long as your beneficiary takes pains to maintain it that way as separate property. So let me say that again, an inheritance is always separate property until your beneficiary does something to make it not, meaning they dump it into a joint checking account with their spouse, it’s no longer separate property if they do that.
Again, you can be as creative with your Living Trust provisions as you want to be.
Final Words on a Will vs a Trust
So basically, what this boils down to in the conversation as to whether a Will or a Living trust is better? Is how much control do you want, by having a Will you give yourself a minimum of control, you basically just get to say, who’s going to receive your assets. So who the Judge is going to give your stuff to, basically, by having a Living Trust, you get to add all of these other provisions in it if you want to.
With a Living Trust you can be specific about all kinds of other things, specific gifts, things that you can add in that are important to you. And your successor trustee would carry out your wishes afterward. So you can protect your beneficiaries, you can carry out your wishes. And the Living Trust is created while you’re alive. So you get to see it in action.
With a Will, you don’t know until you’re gone whether or not it’s going to work and if you’re gone, you don’t know. So you just kind of put your trust in a document and kind of hope that it doesn’t cause your family grief because it’s not written right or there’s it’s ambiguous or whatever.
Whereas with the trust, it’s kind of an ongoing changing document if you want it to be while you’re alive, you know, maybe you have younger beneficiaries now and you’re going to put all of these really strong protections in, but then you live 25, 30, 40 more years and your beneficiaries are grown and they don’t need all of those protections anymore. You can amend your trust and change it. So as long as you’re alive, this trust is up to you, you can make changes, you can make sure that it always represents your wishes and the needs of your beneficiaries at any given time. So I basically can say with a fair amount of certainty that if you own assets, that a living trust is going to be beneficial for you.
A Will we’ll get the job done, but not in any kind of way that’s going to be easy for your family, not in any kind of way that gives you any say, beyond the bare minimum as to what happens with your assets.
Finally, if you want to avoid probate, which we kind of established is desirable and you have assets that would eventually find their way to probate. If you didn’t have a Living Trust, then I urge you to consider creating one.