To Trust or Not to Trust

| July 09, 2021

After careful consideration, you may decide that you wish to establish a plan that provides for the management of your affairs while you are living, avoids probate, and ensures that your assets are distributed according to your wishes after death. There are many ways to accomplish these goals. Always seek competent legal advice.

Many people choose to use beneficiary designations, joint tenancy with rights of survivorship, and TOD/POD arrangements to eliminate the probate problem. These tools are cheap and effective means by which to transfer assets outside of probate, but they do not help with the management of your affairs during your lifetime. To overcome this problem, these methods of probate avoidance can be used in combination with durable powers of attorney (DPOA) and durable powers of attorney for healthcare. Keep in mind that laws vary by state. Still, many people may decide to establish a trust or multiple trusts in conjunction with their basic estate-planning documents.

The grantor (or settlor or trustor) creates a trust and transfers property to the trustee. The trustee has a fiduciary responsibility to administer the trust for the beneficiaries. There are many types of trusts that are intended for different purposes. They may be revocable or irrevocable. They may be intended to benefit a charity, a disabled person, a second spouse, minor children, or those reliant upon government benefits. This is only a partial list.

The most common trust arrangement that we encounter is the revocable living trust or inter vivos trust. Quite simply, and as the name suggests, this arrangement is intended to function while you are living. You can revoke the trust, add and remove assets, and add amendments. The trust may create other trusts upon the death of the grantor. These arrangements owe their popularity to their flexibility. A person who creates a living trust typically serves as their own trustee and uses their own social security number. The naming of successor and/or joint trustees allows for continuity of management during illness. Upon death, assets owned by the trust are managed and distributed outside of probate by the successor trustee(s). Assets in trusts can include our homes, which may also avoid probate in multiple states.

Establishing a trust does not mean that you do not need a will or other key documents. A pour-over will allows for assets that failed to be added to the trust to be dealt with through the probate process. In our experience, this is a very common occurrence. People also inadvertently make their estates the beneficiary of retirement plans, life insurance and annuities. Advance medical directives are also important in the event that you are unable to express your wishes. Durable powers of attorney are still necessary for those assets that are not in a trust. For example, retirement plans such as 401(k) and IRA accounts are (with the exception of beneficiary IRAs in some cases) not owned by a trust, passing via contract instead. Since you have been reading our blog, you also now know that many people, despite establishing trusts, will also have assets in their own name and in TOD/POD accounts. We need a DPOA for these assets. Lastly, many people who own trusts fail to transfer assets into their trusts (fund their trusts or retitle in the name of the trust) thereby undoing all or most of their careful estate planning. In this case, the pour-over will steps in, triggering the probate process.

One great advantage of the living trust is how the process forces people to inventory their assets, review their beneficiary designations, and consider carefully how they wish their lives to unfold. Financial planning is the perfect companion to this process. A financial plan will help you gather all of the information necessary to have a meaningful discussion with your estate-planning attorney. The planning process will help you decide what is right for you and help your attorney give you effective advice. Once your documents are in order, we can assist you in the funding of your trust or the changing of beneficiary designations. Like a family doctor, we help coordinate with other professionals to serve our client’s needs. As always, we are not offering legal advice and do not practice law. Seek competent legal advice always. The material provided is for informational purposes only.