Clients are aware of trusts, and most understand that they have a use in personal financial planning. Yet we are always surprised about the misinformation about the way trusts work as well as the different types of trusts that are used for different circumstances. We wanted to spend a few minutes providing clarity about the most commonly used trust—a Revocable Trust.
A Revocable Trust is one in which the grantor (or the one who creates the trust) can change the provisions of the trust; the money within the trust is distributed only when the grantor passes away. The primary reason that people want a Revocable Trust is probate avoidance. Probate is a public court process in which a will is examined to determine its authenticity. This involves submitting a lot of paperwork and notifying creditors and beneficiaries. In some states, the probate process can be very expensive.
A nice feature of a Revocable Trust is that it keeps your information private and allows you to avoid the probate process at death. Until you have endured the process of having an estate go through probate you won’t be able to fully appreciate the benefit of avoiding the expensive, time-consuming, and very public process of settling an estate through the state’s court system.
You do have to fund your Revocable Trust, and we are surprised how often we meet new clients who prepared a trust, but didn’t actually take the final step by funding it! The process of funding a Revocable Trust involves taking your bank and investment accounts and having it titled in the name of your trust. Failing to change the names and ownership of your accounts and large assets so could possibly mean going through the probate process, which would reduce the impact of your estate plan.
It’s important to note that different states have different rules, and your estate plan needs to be formed around your state’s rules. Certain states, for example, don’t have portability, which means when a spouse doesn’t use their estate tax exemption, the other spouse can have it ported to them. Other states have special elections you have to go through in order to avoid state estate taxes. To help you understand your state’s rules, contact an estate planning professional.
Another critically important aspect of Revocable Trusts is that there are rules in place for determining what happens with your money if you become incapacitated. If you’re in a state where you’re unable to make good financial decisions, you’ll want to have someone be able to step in and act for you seamlessly, and a Revocable Trust allows you to choose such a person to act on your behalf. Certainly, there are other documents that give a person similar capabilities, like power of attorney, but trusts are more robust than that.
When talking about trusts, the subject of children is also inevitable. How quickly do children who inherit money tend to spend it all? Studies show that a good portion of them spend their inherited money within just a couple of years. People use trusts as vehicles to protect both their kids and their estate by ensuring that there can be rules and restrictions set up about how much and where money from the trust can be spent. In other words, even after death, you can use a trust to dictate how your money is spent in a way that’s faithful to your desires while you were alive. If you want the money to be used for education generations down the line, you can absolutely do that.
In a situation wherein one spouse of a married couple dies, a living trust could potentially come in quite handy for the surviving spouse by helping them manage the money. You could even set up co-trustees to facilitate the management, which is especially helpful if the surviving spouse wasn’t the one who managed the money originally. If the surviving spouse likes to spend money, there are ways to ensure that there is money left over for the children.
This is just a small fraction of the world of trusts as Revocable Trusts are just one of several trust types we will go over. Stay tuned for our next blog post about irrevocable trusts!