How to Trust

Lots of things are verbs these days. Adult used to be a noun but now Adulting is a thing, so it’s a verb. Apparently, the younger generations find this particular verb to be difficult. Who knew?

For many of us, transitioning from a Last Will and Testament (Will) to a Revocable Living Trust (Trust) turns Trust into a verb as well.

Okay, the grammar police can hit the cancel panic button, I know Trust is already both a noun and verb, but, hang with me here. Many families will conclude that a Will by itself is not sufficient for estate planning. A time may come when a Trust, such as a Revocable Living Trust is the best way to take care of your family.

To be successful as an adult, our kids need to learn to Adult. To be successful with estate planning, you may need to learn to Trust.

Estate Planning Ground Ops

Estate planning is not just for wealthy Robber Barons, with top hats, monocles, cigars and a steady flow of wealth extracted from their fellow citizens. If you take no action on your estate plan, your estate plan is to let probate court decide what happens with your money, your stuff, and your kids. This is called the No Plan Estate Plan .

Most of us have gone to see the JAG to get a Will, a Living Will (also called an Advanced Directive), a Healthcare Power of Attorney, and maybe a Financial Power of Attorney (PoA). It’s considered good form to have these in place before soaring off to turn enemies into a fine pink mist.

The Living Will gives your surrogate instructions about things like life-prolonging care and a Health Care PoA allows a surrogate to make healthcare decisions when you’re incapacitated.

We’ll focus on the Will. A Will is a legal document that tells probate court you want your assets to flow, who should be the guardian of your children, and other details like who should take care of your final affairs.

A Will does not necessarily need to be something fancy or expensive, it really just needs to exist and comply with state laws, which usually implies that it’s properly witnessed, signed, and notarized.

The upside of using a Will as the primary estate planning document is that:

• A court shouldn’t have to make decisions that you should make.
• Your heirs and loved ones shouldn’t have to make tough decisions that they may not want to make.
• There is an orderly close out your affairs.

The downsides of a Will include the likely need for probate court, attorneys fees, the public nature of probate court (e.g., lack of privacy), and the delays in probate depending on the jurisdiction.

The language in a Will is also generally less specific than what is included in trust documents. This can be problematic when trying to create very specific outcomes for heirs such as young children. More on this later.

Perhaps the biggest problem with an estate plan based on a Will is that probate will be necessary in any jurisdiction where you own assets.  If you’ve collected properties at each duty station as though you were playing monopoly, you could be set up for probate and its costs and delays in many states. This is likely to have a chunky five-figure cost at a minimum.

Trust 101

There are many kinds of Trust documents. We will focus on a Revocable Living Trust here.  You can think of a Trust as a Will on steroids.

A Revocable Living Trust will convey your intent for your assets but it does not have the downsides of probate’s costs, time delays, multiple jurisdictions, and public access.

A Revocable Living Trust is really a shadow or avatar of you while you’re alive.  It does not have a separate tax ID number, tax filing requirement, or ongoing required maintenance. Much like an LLC, it is an entity that you use to manage your assets.  You can unwind a Revocable Living Trust and move assets into and out of it as desired. It doesn’t bear on your ability to sell a property that you’ve titled to it.

Some families will have a single Trust for both spouses but it can be common to have a separate Trust for each spouse and own property half in each Trust. This is an area where an experienced attorney’s advice is crucial.

A Revocable Living Trust does not really protect your assets like an LLC or liability insurance.  It’s more about streamlining what happens after you pass away or become incapacitated.

Unfortunately, military JAG offices will not prepare a Revocable Living Trust for you. You must pay to have that done elsewhere.

Additionally, Trusts are state-specific and need to be supported by a pour-over Will. You’ll generally find that initiating a Trust also includes a new Will, Living Will, Healthcare Power of Attorney, and Financial Power of Attorney.  These documents should all dovetail together to achieve your intent.

If your estate plans are based on a Will, you punt the major costs of estate planning until after you pass away. When you use a Trust-based estate plan the cost is generally upfront while you’re still alive. However, it is often much less expensive over a lifetime to use a Trust rather than a Will.

You can find online services that will help you establish a Trust for as little as a few hundred dollars. Using a local attorney will probably range from a few thousand up to $10,000 or more on the off chance that you have a very complex set of estate planning needs or happen to live in a very expensive area.

How to Trust

Once you decide that you might need to use a Trust for your estate plans, you have to start Trusting— behaving like a person or family that has a Trust.

Step one – begin with the end in mind. The goal of having a Trust-based estate plan is to smooth things out for your heirs and have a little bit of control from beyond the grave.

This probably looks like deciding at what ages your kids should get your assets. If you have young children, six-figure retirement accounts, seven-figure life insurance, and one or more properties, leaving these assets all at once to an 18-year-old that just reaches the age of majority could be much more of a curse than a blessing.

Authors note:  I’m quite certain that I would have done things that rhymed with Mamborghini and Mas Vegas Ragefest upon receipt of six-plus figures of wealth at age 18.

A common technique is to stipulate that kids receive what they need through college, a tranche of “getting started” or “twenties” money after college, and then the rest between age 25 as late as 35.

If you’re thinking about holding the money in trust much past age 35, you might consider reading the book Die with Zero by Bill Perkins. He makes a really great case that the peak utility of inherited money is before 35.  Holding the money might limit your ability to positively impact your heirs before their lifetime financial story is pretty much etching in stone.

Other end states that you will want to think through prior to establishing a Trust include:

• Which heirs should receive indivisible property such as heirlooms?
• Who will be your trustee(s) and successor trustee(s)?
• Should any discretion be withheld from the trustee(s)?
• When should your kids start to control of the Trust if ever?
• Is the goal to be equal to heirs, or perhaps equitable?

Every family is different. Thinking through the ramifications of these decisions with an experienced, licensed estate attorney can prevent costs, headaches, and heartaches down the road.

!!!CAUTION!!!

Only Attorneys can practice law.  That doesn’t mean you can’t generate your own legal documents and estate plans, and it doesn’t mean you can’t get planning advice from a financial planner, but the interpretation of law and preparation of documents for another person is strictly in the AOR of licensed attorneys.

Step two – choose an attorney or online service.

Online services are not bad, especially for families with low complexity, time poverty, and a willingness to work with an attorney down the road for updates or do-overs.  Most online services are offered through financial professionals rather than direct to consumers, but you can definitely find direct options as well.

If your needs aren’t complex, an online service will have you fill out some questionnaires, review drafts, pay your fee and either print or receive your documents via mail.  Some services will provide great organizational tools like tabbing out the documents with color-coded “sign here” flags to aid the signing process.

When you have your documents in hand you’ll need to:

• Review them (ounce of prevention vs. pound of cure…)
• Arrange a notary and witnesses
• Follow the (hopefully) provided directions for the order of signing, witnessing, and notarizing.
• Commence with “the fun part”… (more below)

Working with an in-person local attorney has a lot of advantages with only two real disadvantages.  A local attorney will be both licensed and experienced in your state.  The attorney will provide you with plenty of Q&A time and education about your estate plans and documents.  Even if it’s not “white glove” you can expect hand-holding.  Estate attorney offices are usually expert at retitling real estate property and often include this as part of their fees.

The two disadvantages of working with a local attorney are the upfront costs and the time commitment. If you’re time-starved such that getting to the JAG office for freebies takes lunar rocket-level prescheduling, it’s not going to be any easier to create time for a couple of trips to the attorney’s office.  You can do an online estate plan in your bunny slippers.  You’ll probably want to get more gussied up for your trip to the attorney’s office.

Unfortunately, a local attorney can’t do much for you about “the fun part.”

The “Fun” Part of Trusting

To be clear, by “fun”, I mean absolutely not fun. Rather, painful and tedious should be substituted for “fun”. Once you have signed Trust documents, you have fancy paper.  But you wanted an estate plan and not fancy paper, so you’ll need to deal with the “last mile” problem.

Whether you get your Trust and other estate documents from an online service or local attorney, you must now begin adjusting beneficiary designations and account/property titles to make your Trust effective.

!!!WARNING!!!

Beneficiary designations and property/account titles supersede your Trust, your Will, and state laws.  You might want your Trust to hold your assets after you die, but magical thinking alone won’t make it so.

!!!CAUTION!!!

When designating beneficiaries on accounts or insurance policies, you should have the option for both Primary and Contingent Beneficiaries.  You’ll also have the option to designate “Per Capita” or “Stirpes” (rhymes with Herpes).

Primary Beneficiaries are usually spouses or other humans than we want to get our assets. Contingent Beneficiaries are the “next in line” persons that should get our assets if the Primary Beneficiary has passed away. With a Trust, it’s common to designate a spouse as the Primary Beneficiary of an account/policy and the Trust as the Contingent Beneficiary.

Per Capita, meaning “by the head” means that if a beneficiary is no longer living, that beneficiary’s children fleet up a generation.

Per Stirpes, meaning “by the root” means that if a beneficiary is no longer living, that beneficiary’s heirs equally divide their parent’s share.

Imagine that Mom and Dad had two children (son and a daughter) who each had two children. Dad died several years ago, as did the son. Now mom just passed away. The estate plan called for assets to be split equally between the son and daughter.

If Per Capita, the Son’s two children each get a third as does the daughter. The grandchildren fleeted up a generation and effectively diluted the amount that the older generation receives.

If Per Stirpes, the Son’s two children each get a quarter and the daughter gets half. The grandchildren don’t fleet up and the daughter is not financially affected in the estate plan by her brother’s death.

Per Stirpes is probably more common, but chair-flying how estate plans will play out is a crucial part of “beginning with the end in mind.”

Here are the most common actions families may need to take after signing their Trust:

1. Re-title real estate in the name of the Trust. The attorney or online service may handle this for you, but you can DIY down at the courthouse or county clerk’s office. Failing to re-title real estate invites probate… potentially in many states.
2. Open new taxable brokerage account(s) in the name of the Trust. Transfer investments out of your prior joint or individual brokerage accounts to your Trust account(s).
   1. It may also be possible to add the Trust as a beneficiary to a taxable account, but it’s going to add work for your heirs after you pass away.
3. List all retirement accounts (TSP, 401(k), IRA, etc.) and update the beneficiaries on each account. The most common practice is to name a spouse as the Primary Beneficiary and the Trust as the Contingent Beneficiary.

!!!WARNING!!!

Because of the SECURE Act, it may not be a good idea to name a Trust as a retirement account beneficiary. Depending on the language of the Trust, it’s possible that the Trust could cause the pre-tax part (e.g., Traditional accounts) to both be taxed at the Trust rates (40% federal over about $15K) and require that the retirement account is emptied 5 years after the owner dies. This can be a massive tip to the tax man.  Wargaming this issue with an attorney and financial planner can help you make the best choices. If retirement accounts aren’t a large part of your estate, leaving them directly to beneficiaries can be a good choice.

4. List all insurance policies, including SGLI, FSGLI, and the abominably-named “Death Gratuity” and all group policies provided by your employer. Update the beneficiaries based on your intent.  Again, common practice is to name the spouse as the Primary and the Trust as the Contingent Beneficiary.
5. Bank accounts are generally a pain, but they’re also a probate risk. Contact your bank to add a Transfer on Death designation, basically a beneficiary designation, to your bank account(s) and name the Trust as the recipient.  Alternatively, you can open bank accounts in the name of your Trust and transfer your cash to the Trust account.

***NOTE***

Transferring assets from your individual or joint accounts should not be a taxable event but talk to your financial planner to check six before committing.

6. Cats & Dogs. Remember that savings bonds, Series I Bonds, and other accounts you may have collected probably also have beneficiary options.  Don’t forget those.
7. Business Interests. If you have an LLC or shares of a corporation or partnership, you’ll likely want those in your Trust. This is probably not DIY territory.
8. Things with wheels and propellers. Every state is different in how it handles motorized things upon death. Frequently, probate isn’t required and it’s not common to title a vehicle to a Trust but talk to your attorney to be sure.
9. College accounts and UTMA/UMGA accounts. Each brokerage is going to have different rules and forms here. Some may allow a Trust to own a 529 account or UTMA, others may not.  You’ll need to research the options to make an informed decision about re-titling in the Trust’s name or using successor ownership (common with 529 plans).

Remember, fun = painful and tedious.

Cleared to Rejoin

If you own real property, have young children, want more control from beyond the grave, or have concerns that can’t be properly handled with a Will-based estate plan, it may be time to both Adult and Trust. A Revocable Living Trust helps avoid probate, mitigate total estate plan costs, maintain privacy, and smooth out the transition of your assets to your heirs.

But if you’re going to Trust, you need to get ready for the “fun” part (which if you skimmed to the end is not actually fun). Make sure to follow through with on the last mile by appropriate titling your property and updating your beneficiaries to make your Trust effective!

Fight’s On!

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