Most of us middle class types, endangered species though we may be, love our heirs but may not understand that if we spend a few hundred dollars on estate planning, we can save our heirs thousands.
How? One simple method is by using trusts as strategic tools to: (1) provide protection for surviving spouses and children, and (2) avoid unnecessary legal expenses of probate and guardianship proceedings.
As Professor Stanley Johanson stated recently, “Trusts remain the lynchpin of any good estate plan.”
Trusts are not only for the wealthy. They provide useful and flexible, if not essential, estate planning tools for those of us with modest estates.
There are many different types of trusts, but, generally, trusts are either revocable or irrevocable. I shall limit my brief remarks here to revocable trusts.
Revocable trusts do not need to be complex. Indeed, they should be simple agreements. We have a “Settlor,” the person who sets up the trust; a “Trustee,” the person who manages the trust, and the “Beneficiaries,” the people who will benefit from the trust. The Settlor “entrusts” the Trustee with certain assets, which may happen during the Settlor’s life or upon his or her death, and the Trustee then manages those assets for the Beneficiaries according to the terms of the trust.
Let’s explore a couple of common scenarios where trusts may be useful:
Scenario #1: Juan and Sarah are 40-45 years old. They have two children: Leslie (age 10) and Donald (age 6). Their estate is a mix of a house, two cars, two retirement accounts, some term life on each of them, several bank accounts, a brokerage account, and some lake property with a house trailer and a mortgage. Total net value = approximately $450,000. To keep it simple, let’s assume that they accumulated all of that during their marriage, and they live in a community property state. Juan and Sarah have no wills and believe that the best plan is to have simple wills that leave their estates to one another. What’s wrong with that idea?
If Juan dies first and leaves his half of the estate to Sarah, what happens if she remarries and follows this same plan: she and her new husband prepare new wills, leaving everything to one another?
Then, if Sarah dies next, her new husband will inherit what was once Juan’s share of their estate, and the children get cut out – not a good result. Or, Sarah may squander it all or someone may sue her and win, and what were once Juan’s assets now belong to a creditor (or a bankruptcy trustee).
Scenario #2: Juan and Sarah prepare wills and beneficiary designations (all or some), naming their children as beneficiaries. What’s wrong with that idea?
In Texas, minors cannot legally inherit. That means that a life insurance company or retirement plan will not distribute assets left to children until someone initiates a court-ordered guardianship. Guardianship proceedings can be expensive – so expensive, in fact, that estate planners go to great length to create documents to avoid them.
We can avoid results such as these by using simple trust agreements, which should not cost more than a few hundred dollars (depending, of course, on bells and whistles).
It would go something like this: Juan and Sarah’s estate planner would prepare “pour-over wills” and revocable trusts for each of them. When Juan dies, his estate will pour over into his trust. Sarah will be the beneficiary for the remainder of her life, and then the trust will continue for the kids.
This assures that Juan and Sarah’s assets go to their children and not some future tennis pro; it protects the assets of the deceased spouse from future creditors of the surviving spouse; and a trustee will manage the assets for the children without the unnecessary expense of a guardianship proceeding. If Juan and Sarah want to avoid probate, they can. If one of them becomes disabled, their trustees can manage their assets for them, again avoiding a guardianship proceeding.
We can summarize the benefits as follows:
- Control over disposition: Juan and Sarah have some control over their estates and can assure that it all stays in the family.
- Asset protection: General creditors cannot get to the inherited trust assets. If someone sues Sarah because she is in an auto accident, the trust protects the assets.
- Protection from new spouse: If Sarah remarries, the trust will shield her from pressures of a new spouse (who has the best idea for a new business and just needs some start-up money, and then a little more; you get the idea).
- Avoids commingling: It will also avoid the problem of Sarah’s commingling what she inherits from Juan with assets of her next marriage, which can lead to messy situations.
- Professional assistance: If Sarah, Juan, or the children need professional administration or advice, the trust can provide for that.
- Flexibility – stand-by trusts: Revocable trusts also serve the purpose of being “stand-by trusts.” In other words, if Juan becomes disabled, Sarah (or someone) can use a power of attorney to move his assets into trust so that the trustee can manage the assets for Juan’s benefit.
- Probate avoidance: If Sarah or Juan want to avoid probate, they can transfer their assets into their trusts while they are living. I think of this as preempting probate. In some estates, it can be a great idea.
- Guardianship avoidance for minors: As explained above, leaving an inheritance to a trust for your children avoids the expense of a guardianship proceeding.
For a free consultation concerning your estate plan, please contact me at [email protected] and follow me on Facebook at https://www.facebook.com/TomNobleLawOffice.