If you were to drop dead today what would happen to your home and life savings? Unless you have planned for the inevitable, the probate courts will determine who is to receive everything. If you want to tell the probate court who gets everything, you can state your wishes in your Last Will and Testament.
The court will see to it that everything is split equally between your children, just as you stated in your Will. But that court supervision comes with a price tag and will take months, if not years, to complete. After all, the courts are very busy and someone has to pay the judge's salary.
Studies have shown that probate will cost 4 to 10% of the value of your property and will take 6 months to 2 years from start to finish. The Probate Court will oversee the distribution of assets that were solely in your name.
If you chose to avoid the time and expense of probate, you may select a different plan which uses a Living Trust. The concept of a Living Trust is to create a legal entity, the Trust, to own your assets.
Once the Trust is created, you simply transfer your home, your bank accounts, and your investments into the name of the Trust. As Trustee of the Trust, you still maintain complete control of everything. The only difference is that you, as a man, woman, husband or wife, do not own the assets; the Trust owns the assets.
So when you die, there is no need for probate because nothing is solely in your name, everything is in the name of your Trust. After your death, the Trust contains your instructions to the Successor Trustee to divide and distribute all of your assets, all without Probate Court supervision.
Again, the main concept of a Living Trust is to transfer ownership of all your assets into the Trust. But sometimes some assets just seem to “slip through the cracks”. They don’t find their way into your Trust and you continue to own an asset solely in your name. If that happens, probate becomes necessary with regard to that item.
Let me describe some examples.
I recall preparing a Trust for a woman with three minor children. We transferred all of her assets, home, car, and investments into her Trust. She was protecting her children from the time and expense of Probate. She was the favorite niece of an uncle who had died very suddenly and she was named a recipient of a substantial sum in her uncle’s Will.
During the probating of the uncle’s estate, she died. It was mandatory for the uncle’s estate to pay these substantial sums to her. In order to receive these funds, it was necessary to probate her estate.
As part of the overall estate planning process, we prepare a Last Will and Testament, known as a “Pour-Over” Will. This Will names the Trust as the sole beneficiary. In essence, the assets in her estate “POUR” into her Trust and are administered by her Successor Trustee for the benefit of her minor children.
I recall another situation where I prepared a Trust for a couple who had a child that was receiving SSI benefits. Once again, they thought that they transferred everything into the name of their Trust. After both died, their children found an old stock certificate buried in the back of their safe.
It turned out that this stock was very valuable and, you guessed it, probate was necessary to receive the value of this stock. Their Pour-Over Will allowed the funds to be administered by their Successor Trustee for the benefit of the Supplemental Needs child. The stock certificate slipped through the cracks, but thankfully the Pour-Over Will saved the day.
For most families, the main reason to create a Living Trust is to avoid the time and expense of probate. Avoiding probate is not the sole reason to create a trust.
Families with the following type of beneficiaries can also benefit from a Living Trust:
- Minor Children
- Special Needs Children
- Beneficiaries Who Cannot Manage Funds
- Beneficiaries That Need Protection From Aggressive Creditors
Minor Children
I have yet to prepare a trust for a family that felt that their children were financially responsible at age 18. The law says you are an adult at 18 years of age. Imagine your child is handed a check for his or her share of your estate at age 18. Without a trust that's exactly what happens
I can recall a situation where a boy lost his father at age 15.
This young man was the sole beneficiary of his father's life insurance. Because he was 15, the life insurance had to be paid to his court-appointed conservator. The conservator was required to turn the funds over to the young man on his 18th birthday. He subsequently received the money on his 18th birthday and proceeded to buy himself a flashy red convertible.
What can you expect from an 18 year old? Now I am not saying that all 18 year olds are financially immature. I know many who have substantial savings accounts from their babysitting, lawn cutting, or part-time jobs. But the majority of young adults are not financially astute enough to know how to manage and invest substantial sums of money.
A living trust allows you to select the appropriate age that you feel your child should receive your Estate. In most cases, a family will defer payment to a child at age 25 or even 30. The trust will generally allow the Trustee to use the child's funds to pay for necessary expenses for the child’s health education and welfare until they reach the age designated in your Trust.
Special Needs
Many families have children or grandchildren that are receiving Medicaid or SSI benefits. This type of assistance is “Need Based” and imposes limits on the amount of assets that a recipient may possess.
If a special needs child or grandchild were to receive portions of your estate in cash, they would be disqualified from receiving Medicaid or SSI. However, a Living Trust can have “Special Needs” provisions that allow the Trustee to provide for many of the recipient's needs, without being disqualified from government benefits.
The Trustee is able to pay for items such as clothes, furniture, vacations, medical, or other such expenses, and that child will remain eligible for Medicaid or SSI.
Spendthrift
How many times have you given your child a gift of cash only to find out later that the money burned a hole in his pocket? Rather than putting the funds to good use, he spent the money the next day on some frivolous trinket. His credit cards are maxed out; he has no money in the bank, his house and car are falling apart, yet he bought a new 75 inch flat screen TV.
Some kids will just never learn the value of a dollar, can't hold on to it, and can't manage it. These individuals may be referred to as a “Spendthrift”.
A trust can meter or defer payments to the child at intervals that you predetermine, or at such time as the Trustee determines that he is financially mature enough to handle his own funds. If the child never achieves that financial ability, the Trustee may manage his funds for the rest of his life. In any event, that trust allows you to provide for that spendthrift child.
Creditor Protection
While a living trust does not prevent creditors from claiming or attaching the assets of the Grantor of the trust, it does prevent creditors of a beneficiary from claiming a share of the trust. Imagine that your daughter has fallen on hard times and has been unable to pay her many credit cards.
She has substantial debt and numerous judgments against her. However, you pass away and your daughter is to receive her share of your estate. However, once the creditors become aware that she is a beneficiary of your Probate estate, they can lay claim to her share
A properly drafted Living Trust prevents creditors from recovering a beneficiary's share until the funds are in the hands of the beneficiary. A trustee does not have to pay a beneficiary's creditor.
Generally, a Trustee may only pay the Beneficiary. Your daughter may then elect to leave her share in the trust until such time as her creditor problem is resolved.
To answer the question, WHY DO I NEED A WILL IF I HAVE A TRUST?
The entire concept of avoiding Probate is accomplished by transferring the asset from the name of the person to the name of the Trust. However, many times after the preparation of a Living Trust, assets can and will “slip through the cracks” and remain in the name of the person.
If the person has beneficiaries who are minors, special needs, spendthrifts, or who need protection from aggressive creditors, the Pour-Over Will allows that the asset that has slipped through the cracks, to be transferred to your Trust and managed by the Successor Trustee for the benefit of your beneficiaries.
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