There are many commonly held misconceptions when it comes to estate planning. One of them is the notion that a last will is the right asset transfer vehicle for everyone that is not very wealthy.
While it is true that high net worth individuals use certain types of trusts to gain estate tax efficiency, there is another type of trust for “the rest of us.” It is called a revocable living trust, and we will look at three of the benefits here.
If you use a last will as the centerpiece of your estate plan, the executor or personal representative would not be able to distribute the assets independently. The will would be admitted to probate (unless it is a very small estate), and the court would provide supervision during this process.
During probate, the validity of the will would be determined, and final debts would be paid by the executor. Once everything is in order to the court’s satisfaction, the estate would be closed.
That sounds simple enough, but there are some drawbacks. The probate process is not free; there are court costs, and the executor is entitled to payment. In many cases, the executor will bring in an accountant and an attorney, and there are liquidation and appraisal fees.
The other major drawback is the consumption of time. It will typically take nine months to a year for a relatively uncomplicated estate to pass through probate. Complex cases can take considerably longer.
This process opens up a window for disgruntled parties that may want to issue estate contests. Plus, it is a public proceeding, so anyone that has an interest can access records to see how the assets were distributed.
If you use a living trust as the centerpiece of your estate plan as an alternative, all of these drawbacks are avoided. The trustee that you name in the document would be empowered to distribute assets to the beneficiaries in accordance with your wishes outside of probate.
If you establish a revocable living trust, you would be called the “grantor.” As the grantor, you can also act as the trustee and the beneficiary while you are alive and well. This sparks a question: What happens if you become incapacitated late in your life?
This is something to take seriously, because 35 percent of people that are 85 years of age and older have Alzheimer’s disease. The number is 10 percent for all senior citizens.
When you create the trust declaration, you can account for this possibility. It is possible to name a disability trustee to act as the administrator if you ever become unable to handle the duties yourself.
It can be disconcerting to leave a significant, direct inheritance to a loved one that is not a good money manager. Unless you make special provisions, and inheritances would be distributed in lump sums if you use a last will.
A living trust is very effective if you have a spendthrift on your inheritance list. After your death, the trust would become irrevocable. You can leave directions for the trustee to follow with regard to the nature of the distributions that will be made to the spendthrift heir.
One common course of action would be to have the trustee incrementally distribute the earnings from income-producing assets that have been conveyed into the trust. You could structure the trust to allow for larger lump sum distributions when the beneficiary reaches certain age thresholds.
Through the inclusion of a spendthrift provision, you would protect the principal from the beneficiary’s creditors. They would however be able to attach distributions that have become the direct personal property of the beneficiary.
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