Q: I have lots of questions about trusts. Can someone explain if I need a trust and how I should be dealing with my financial planning?
A: We’ve asked Barry Kohler, SVP and Director of Androscoggin Trust and Wealth Management, to share few thoughts and some advice on senior financial planning and trusts.
Barry, in your career of helping individuals and families with estate planning questions, do you always recommend living trusts?
No, not always. But first, let’s take a step back and talk about trusts in general. The term “trust” is about as descriptive as the term “motor vehicle.” If Sheila left in a motor vehicle, you have no idea if it was a sports car, a van, a pickup truck, or an 18-wheeler.
The same is true with trusts. A trust can be created during one’s life (a living trust) or upon death (a testamentary trust). A trust created during one’s lifetime can be revocable or irrevocable. It can be funded or unfunded (sometimes called a dry trust). Either a living trust or a testamentary trust can be tax neutral, help save taxes, or if not done correctly, cause tax problems.
Usually, when someone talks about a living trust they mean a Revocable Living Trust (RLT). Almost always, the trust-maker (also called the settler or grantor) is the initial trustee. A successor trustee is almost always named to take over in the event of the initial trustee’s disability.
A common misunderstanding is that a living trust will avoid probate. However, this is only true IF the trust is funded during the lifetime of the trust-maker. In other words, assets that have legal title (car, real estate, etc.) are transferred (re-titled) into the name of the trust, making the trust the owner.
Learning More About Trusts
Living Trusts are used in a variety of planning scenarios, so there is no good general rule. As with many issues, there are pros and cons. One benefit of an RLT is that it allows for better disability planning than a Power of Attorney. On the other hand, a drawback of an RLT is that it is almost always more expense than a Will and Power of Attorney type plan. The economic benefits of an RLT are almost always greatest for clients who own property in more than one state-or whose primary residence is in a high cost probate state. Maine is a low cost probate state. Florida is a high cost probate state.
Would a Will serve the same purpose?
Either a Will or an RLT can serve as the key document to direct the distribution of what you leave when you pass, but which is “best” is not a simple choice. An RLT that is funded allows for a speedy and private distribution to beneficiaries. On the other hand, there is more work (and cost) for an RLT-based plan than for a Will and Power of Attorney plan. . . at least until the time probate is necessary.
The greater initial cost typically comes from the time involved in tracking down all assets with titles or beneficiary designations and funding the assets. But in a Will-based plan, the same process needs to happen, but you are not around to help. The Executor (now called a Personal Representative) must do the after-death equivalent to see that assets transfer properly to the beneficiaries.
What if I have a fairly simple estate plan established?
At AndroscogginTrust, the planning process is the key to our relationship with you and your family. We will discuss every aspect of your financial life to help you make the right decisions about how to best manage your assets during your lifetime, and how to see that they get to the people you wish, in the way you wish, when you wish, and do so at the least possible cost and expense. Lifetime and post-mortem (after death) planning work best when coordinated.
One common reason assets intended to pass at death do not end up where they were intended to go is due to beneficiary designations. Regardless of what the Will or RLT says, if the asset (like a bank account) is owned jointly, or if it has a beneficiary designation (like a retirement account) as a matter of law, it passes to the surviving joint owner or named beneficiary. This is a prime example of the critical importance of coordinating lifetime planning (and beneficiary designations) with estate planning.
Barry, who should be the trustee of a living trust?
As we said, initially it is almost always the person who creates the trust, or sometimes the trust-maker and his or her spouse. The more difficult question is who takes over in the event of the initial trustee’s disability or death. The successor trustee can be a family member, in many cases a professional trustee might be of more help in accomplishing the goals of the trust and avoiding family conflict.
There are many considerations in naming trustees. The most important is someone who you believe will honor your wishes and intentions, carrying out faithfully the responsibilities of trustee or successor trustee.
We can help you think through your choices (RLT vs. Will, successor trustee, etc.) and are happy to offer suggestions about the best way for you to accomplish your goals. Then, working collaboratively with your attorney (and tax advisor if necessary), we can help assure the written documents will actually do what you wish.
You can contact Barry Kohler and learn more about trusts at Androscoggin Trust and Wealth Management.