Nobody wants to think about dying, but being prepared for a disaster is important in every instance, and dying with your assets disorganized could be just that: a disaster.
Millions of Americans die each year without any type of estate plan in place, and this forces their families into the court system, where they experience huge expenses with probate and significant time delays when they would rather be mourning.
In fact, more than 50 percent of Americans don’t even have a will or any type of estate plan whatsoever. So is a ‘Will’ the simple answer for everyone, certainly not. Many need to take a little extra time and money to implement a revocable living trust (RLT) as part of a coordinated estate plan. It could your family thousands of dollars later and tons of time.
Truth be told, there are a number of reasons for an RLT, and far too many to explain in one article of this length. Yet, I will do my best to endeavor and explain 5 of the main reasons to implement an estate plan with a living trust:
- You have provisions you may want to implement for minor children or children that act like minors;
- You have children with special needs and worry about their care when you’re gone;
- You wish for your family avoids probate because you own a personal residence, businesses, or rental properties; or
- You have pets and want to plan for their care;
- You want a structure to handle your finances if you aren’t able to.
Creative Provisions for Children
Many parents and grandparents don’t realize how creative they can be in distributing their assets upon their passing. Once they discover this flexibility, they generally take a 2 pronged approach. One, they want to provide a ‘carrot’ for those children or grandchildren who are willing to work for OR earn their inheritance. Second, they also want provisions or ‘stick’ that doesn’t allow them to abuse their trust and inheritance and make reckless or lazy decisions. Here are just a few options to consider provisions in a well-drafted estate plan:
- Require your trustee to hold children’s inheritance in trust until they reach the age of 25, 30, or 35. Give it to them in stages, e.g., a third at age 25, a third at age 30, and the final third at age 35.
- Use a joint trust for minor children until the oldest reaches age 18, then split up the trust into individual trusts for each child. This makes it easier for the trustee to manage the trust while the children are minors. Then when different children pursue business, education, marriage, or even world travel, their trust is accounted for separately from the others.
- Consider having the trustee give the guardian of your children a specific amount each month to take care of the living costs of your minor children (room, board, clothing, school supplies, etc.). It could be something like $1,000 a month, adjusted for inflation as of the date of your trust.
- Place restrictions on inheritance if there’s drug or alcohol abuse. An attorney can insert a provision that prevents a distribution to any child with an abuse problem and allow for the trustee to hold their funds in the trust until they have their life under control.
- Give the inheritance in matching funds, distributing $1 for every $1 the child earns.
- Give them a bonus for graduating from certain levels of college or don’t allow full distribution until they obtain a certain level of higher education. However, still distribute funds for school or any secondary education program, skills training course, etc.
- Distribute funds for education. Or use their GPA as a “carrot”: Distribute funds only if children maintain a minimum GPA that you set. You could also tie funds for tuition or books to GPA to help keep the children focused on finishing school, rather than becoming career students.
- Distribute a certain amount of funds for a wedding.
- Distribute funds to start a business upon the presentation of an acceptable business plan to the trustee. Name a board of advisors to approve any small business or investments by the children.
Children with Special Needs
I’ve learned from those dedicated and amazing parents with children who have special needs, that their greatest waking concern is “what will happen to my child if I’m not there to take care of them?”. I can’t imagine this constant fear and stress.
However, a well drafted Living Trust can help dramatically reduce this pressure and concern. Provisions can be drafted for a specific guardianship, trustee for money and a structure and procedure to still access Federal and State aid if needed. There can be back up plans created and implemented so parents can rest assured there will be some safety net for their handicap child if they predecease them.
Avoiding the Dreaded Probate
One of the key reasons for using an RLT is to avoid probate, which means avoiding attorneys, judges, courts, and the state sticking their noses into the family affairs. Probate is essentially the court’s process of determining if the will is valid, then executing its provisions. If there isn’t a will, then the court distributes the assets according to state law.
In order to make sure the trust does its job, it needs to be funded by holding title to AT LEAST four main assets in order to stay out of Probate Court. Even the best and well drafted trust in the world is worthless if it isn’t “funded”. It’s critical that the following assets be titled or owned by the trust, not simply listed in the Trust document somewhere:
- Real estate (typically your personal residence),
- Entities (such as corporations and LLCs for rentals),
- Investment accounts (including retirement accounts with see-through provisions), and
- Life insurance (so that minor children receive it constructively).
A ‘Plan’ for the pets
A revocable living trust is a perfect place to have a plan for your pet: the one that loves you unconditionally and doesn’t ask for money. What will happen to this ‘best friend’ if you pass away?
Believe it or not, every year thousands of pets are euthanized when the pet owner dies themselves and no one wants to take the pet. The reality is, however, if someone was designated in advance AND given a financial incentive to take care of the pet, this disaster could be avoided.
At our law firm, we now ask every client during the drafting process if they own a pet and have a section to deal with such matters. Who would be the guardian of the pet, how much would the receive for the service? Who would be the ‘back up’ in case the primary caregiver wasn’t able to continue? Where do you want your animal buried? These are all important and sensitive topics for a loving pet or animal owner and should address these issues in their revocable living trust.
How is your own health?
A revocable living trust can be an excellent structure for managing your finances if you can’t seem to handle the pressure as you get older. It’s very common for a family to rely on the trust and maybe a trusted advisor or children to manage the trust while mom or dad is still alive.
In fact, you could be perfectly sound mentally or physically, but some scenario occurs where resigning as the trustee makes it a powerful tool to help you manage your affairs.
Don’t think a trust is just for rich or old people either. If you have children, life insurance, or might just get in a car accident and need someone to manage your finances and pay your bills, your back up trustee steps right in to manage what you do have through the trust instrument.
In summary, a quality estate plan with a revocable living trust is becoming more and more common for single AND married individuals, children or no children. Moreover, remember that a quality estate plan includes a number of ancillary documents such as a will, powers of attorney for finances and health care, an advance medical directive or living will, burial instructions, a directive for organ donation, final instructions, etc.
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Mark J. Kohler is a CPA, Attorney, co-host of the Radio Show “Refresh Your Wealth” and author of the new book “The Business Owner’s Guide to Financial Freedom- What Wall Street isn’t Telling You” and, “The Tax and Legal Playbook- Game Changing Solutions For Your Small Business Questions”. He is also a partner at the law firm Kyler Kohler Ostermiller & Sorensen, LLP and the accounting firm K&E CPAs, LLP.