A Trust is part of an estate plan
What is a Living Trust?
A Living Trust is a very important part of an estate plan. There are 2 main types:
- Revocable—can be changed
- Irrevocable—cannot be changed
Most of my clients have revocable trusts, which makes a lot of sense. Life has a funny way of throwing curve balls and destroying the best laid plans. If you have a Trust that you can’t change, you may be boxed in to a situation that is contrary to your wishes.
What Does A Revocable Living Trust Include?
- Who gets what when you die. You can basically leave anything you want to anybody. Just know that it is very difficult for the State of Arizona to get any of your assets.
- Who is in charge of the assets, called a trustee. Asking someone to be your trustee is asking a lot. Handling anyone’s assets, other than your own, is a challenge of the first order. You want to be sure to tell the person you are naming as trustee that you are bestowing this honor upon him/her. Being named as someone’s trustee does not fall under the category of “great surprise”. Most of my clients choose relatives or friends as trustees. Some choose private companies that can keep a tighter grip on everyone’s emotions and minimize discord.
Why Is a Revocable Living Trust a Good Idea?
- It is easy to protect your young children. By law, minors cannot receive an inheritance outright. So, what do you do? Let’s assume you want to leave all of your assets equally to your 2 kids, Jason age 8 and Kyle age 6. A Revocable Living Trust can say that the assets get divided between Jason and Kyle. It can say Jason and Kyle do not receive an ATM card to their inheritances until they each reah the age of 25, for example. While the money is held, the trustee (boss of your Revocable Living Trust) will use the children’s inheritances for Jason and Kyle’s educations, health and best interest until age 25.
- It is easy to protect your grandchildren. With a Revocable Living Trust, your grandkids, not your in-laws, will get your assets. Let’s say you have two married children—Karen and Mike. Karen’s spouse is just wonderful, but Mike’s spouse is another story. Karen has 2 minor children and Mike has 1 minor child. You have a $250,000 life insurance policy, naming Karen and Mike as beneficiaries.Mike dies on March 1. You die on March 15. You did not remove Mike’s name as a life insurance beneficiary. The life insurance company will pay $125,000 to Karen. The life insurance company will pay $125,000 to Mike’s spouse. The vast majority of beneficiary designations default to spouses, not to children and not to the other named beneficiaries.What can you do? You name the Revocable Living Trust as beneficiary, instead of Karen and Mike. The Trust states 1) the $250,000 life insurance policy will be split between Karen and Mike, 2) if Karen dies before receiving her $125,000, it will be distributed to her children and 3) if Mike dies before receiving his $125,000, his $125,000 will be distributed to his child. The Revocable Living Trust can go on to say how old a grandchild should be before receiving his/her inheritance outright, i.e. with no strings attached.
- Protect your assets from probate. All assets that interlock with a Revocable Living Trust will avoid probate. Although probate in Arizona is not awful, it is horrible in states like New York, California and Florida, to name a few. Arizona does not have a death or inheritance tax. Many other states do. If you put a Revocable Living Trust as the beneficiary of financial accounts, for example, those accounts will avoid probate. If you transfer your real estate from you to a Revocable Living Trust, the real estate will avoid probate. How do you do this transfer? You do this by creating a new deed for the property. The new deed says that you, as a human, transfer your interest in the property to you, as trustee of your Revocable Living Trust. When the deed is recorded with the County Recorder, the real estate becomes part of the Trust and avoids probate. P.S. The County Assessor and your mortgage lender could care less.
- If you want a Special Needs Trust to protect your adult disabled child’s governmental benefits, a Revocable Living Trust is the best place to house that Special Needs Trust.
Is There Any Downside To a Revocable Living Trust?
- It generally has more pages than a Last Will.
- There is about a couple of hours of work you need to do after you sign a Revocable Living Trust to make sure it works properly.
- Pretax retirement accounts, like 401Ks and IRAs, have better distribution options for humans than for Revocable Living Trusts.
My opinion is that the upside of a Revocable Living Trust outweighs any potential downside. A Revocable Living Trust is simply a more efficient, comprehensive way to handle your affairs. It is the legal version of one stop shopping.