My Estate Plan - A Will vs A Trust
Just the idea of having a trust seems complicated…but is it? The truth is that not having a trust in certain situations creates significantly more complications than having one. Then again, that’s not always the case. So, let’s break it down and look under the hood.
If you die with a Will most likely you will have assets that pass through the terms of that Will. You might think, wouldn’t all my assets pass through the terms of my Will? No, not necessarily. Your Will acts more like a vacuum cleaner. You probably have what is called contract property that has titling or beneficiary designations that supersede the terms of your Will.
For example, you may have an IRA that names specific beneficiaries. Or you may have a bank account with a Payable on Death “POD” designation. In either of these cases, it doesn’t matter what you Will says about your IRA or that bank account. Each will pass via the beneficiary designations.
Another example would be an account titled Joint Tenant with Rights of Survivorship (JTWOS). This could be an account owned with a spouse, business partner, child, etc. It doesn’t matter what your Will says about this account when you die, it will pass to the “Survivor(s).”
After the heavy lifting of contract property is out of the way, your Will picks up the pieces. These pieces will need to be itemized and will go through probate. This is a process that can be very simple and take hardly any time or money. It can also be very cumbersome, take years, and be very expensive.
The question is: where would your estate fall?
A common misconception is this: Our lives are pretty simple. We don’t have a lot. I can’t imagine it would take much.
Have you every heard the phrase, It’s all relative?
I certainly think this applies. We work with a lot of farm and ranch families, good ole boys and humble business owners. They all say this or a variation, and it couldn’t be further from the truth!
In case you have a hard time believing this, I have an exercise for you:
Start making a list of everything you own:
Your cash.
Your personal possessions that are of value - livestock, equipment, guns, jewelry, art, etc.
Your bank accounts and CDs - EACH one.
Your investment accounts - EACH one.
Your credit cards - EACH one.
Every online account (examples: Amazon, emails, PayPal, etc.)
Each annuity.
Each life insurance policy.
Gold or other precious metals.
Your business.
Your properties - Bonus Challenge: FIND ALL OF YOUR DEEDs.
Your minerals.
Your home(s).
Safety deposit box.
Anything else?
But wait! You aren’t done yet.
How are each of these assets titled?
Do you know for certain what would happen to each asset when you die?
This is a taste of the homework your executor will have when you die. First, they have to find everything. Then they have to find the documentation on everything. Then they have to learn how things are titled, what goes through probate and what doesn’t. Then they can start the real process of being the executor, which means working with an attorney, potentially going to court, paying any creditors, and then the FUN PART… as if it hasn’t been fun already.
The fun part is closing down accounts and retitling everything—TWICE! First, everything that goes through probate is first retitled to the estate. The second retitling is to whom it is actually supposed to be distributed—i.e. spouse, trust, kids, etc.
To add pain to misery, there are also states like Wyoming, which place a pretty hefty charge on a probated estate. The attorney and the state get paid a significant amount.
The bottom line is that simple is not always simple.
If the thought of the process described seems like it could be stressful to your spouse or heirs if something happened to you, then you probably need to be asking how to avoid probate.
In some cases, avoiding probate can be achieved by simply making sure that you have your assets set up to pass as contract property like we talked about earlier—beneficiary designations, payable on death designations, etc. Be aware, though, that this isn’t foolproof and it doesn’t always help accomplish your wishes in a “what if” situation - but it can be done.
And this brings us to a living trust. Trusts get a bad rep and rightfully so. They are misused A LOT! However, a living trust, if used correctly, can alleviate a lot of heartache for a grieving family. Here is the long and short of it:
Your living trust, in essence, becomes your Will and your Will simply states to put everything in your trust in case you forgot to do so. It will state how you want your assets to pass when you die. This is helpful because anything titled in the name of the trust when you die avoids probate. This means that laundry list of finding assets, documents, retitling, etc. becomes minuscule.
It also means, though, that you are going to do the heavy lifting when you set up your estate plan if you want it done right. You are going to do the exercise discussed earlier and retitle everything now so that your family doesn’t have to later.
Now there are some things to think about. If you set up a living trust and use it properly, EVERYTHING you own or buy should be titled to the trust. It will be just like an “individual account” or “joint account” if you are married. If you don’t adhere to this, then you really are not changing anything.
A good trust document will make this seamless so that there is no difference from you purchasing or financing an item and the trust. A bad trust can make this difficult.
Nothing changes in regard to your taxes, asset protection or privacy, despite common perception.
Another thing is cost. Interestingly, a living trust does not cost significantly more than a Will-based estate plan. And, in most cases where it is warranted, setting up a living trust proves significantly less expensive than the administration to probate and implement the probate of that same estate.
Indeed, the primary benefit is to put everything in one place for your executor/trustee and heirs in an effort to administer your estate as efficiently and timely as possible. In other words, you do this because you love your family… and you don’t want them throwing rocks on your grave!
We are in an ever-increasing complex world. Even in Texas, where we say it is a friendly state to die, it is not always the friendliest. My advice to you is to get help. Have someone take a holistic view of your situation to determine what is best for you… and your heirs.