When I used to hear the word “trust,” I automatically thought of a trust-fund kid who never had to work a day in his/her life. Because of this, I always assumed trusts were something for the rich and famous- and not for me. However, when I entered the financial services field and learned more about trusts, I quickly realized I DID need one! Below are some reasons YOU may need one, too.
One of the biggest reasons you may consider a trust is to avoid probate. Probate sounds like a punishment that we will never have to worry about if we keep our side of the street clean. The truth is, probate can easily affect us all.
What exactly is probate? Probate is the legal assigning of who-gets-what and who handles the distribution of assets after someone dies. Probate is a judicial process, which means it is decided by the court. There are a few reasons why you want to avoid probate:
It is expensive
In California, probate can be costly. The fees are 4% of the first $100,000, 3% of the next $100,000, 2% of the next $800,000, and 1% of the next $9 million. The average household net worth in California is $685k. This means if you died and your estate (your assets left over) went through probate, the fees would be over $21,000!
It is time consuming
The average probate time in California is eight to twelve months! This means the estate (remember, the assets) can be locked up for a year. These assets may be needed to cover funeral expenses, living expenses of survivors, debts, etc. By having to wait through the probate process to distribute the assets, you are potentially freezing those assets from being distributed/used.
It is public
Do you find it interesting that you suddenly receive solicitations in the mail regarding your home purchase shortly after you move in? How did these people know I just bought a house? They have access to public records! When you start a business, purchase a home, etc., these transactions are recorded with the county clerk. For a fee, anyone from the public can request a copy of these records, which is where many of those targeted solicitations come from.
When an estate goes through probate, this record is also public! That means the value of the estate is public, as well as property addresses, etc. This is a gold mine for many solicitors. For example, home buyers who want to purchase the decedent’s home before it gets listed and hopefully make quick money often peruse probate records. You definitely don’t want a solicitor knowing how much your estate is worth, or worse, how much you’re inheriting.
Several of my clients have falsely assumed that having a will is enough to avoid probate. This is not true in California! The probate court has to “prove” the validity of the will before it becomes legally valid. The court also assigns an executor of the will, who is assigned to carry out the wishes of the will. While having a will may shorten the time of probate, it is not enough to avoid probate!
Protect Your Wishes
Many people think of a trust as a document simply stating who gets your assets when you die. If we were to truly think about our mortality, however, we would soon realize something so simplistic would rarely fit our true desires. We never know when our time has come, and therefore the way we wish our assets to be distributed must be protected. An example of this is if you have minor children and you died unexpectedly. How would you want your children to receive the funds? Would they receive it in a lump sum when they turn 18? Would you want them to receive a percentage at certain age milestones? Who do you want managing the assets and ensuring they’re not abused? These details can be spelled out in a trust.
Without diving TOO deeply into estate planning, a trust can also be a powerful tool in protecting from creditors and taxes. The key is whether a trust is revocable or not. This simply means whether you still have any control of the trust. If you set up an irrevocable trust, the assets can be protected against creditors and also may escape estate tax.
Protect Your Family
A trust is robust and encompasses more than just financial affairs. A trust can also dictate things such as guardianship provisions, advance healthcare directive, etc. Let’s go back to my previous scenario of you passing away unexpectedly with minor children. If both parents died unexpectedly, who would get the children? The state usually sides with next of kin, but what if that isn’t what YOU believe is best for the children? What if the next of kin are grandparents and both sets are divorced? You now potentially have four grandparents fighting for custody of the children! A trust can spell out who YOU wish to take care of the children if you were to pass unexpectedly.
A trust can also include an advance healthcare directive. This is an important document that is used to dictate what you wish to happen to take care of your health if you are no longer capable of doing so. You can also stipulate who can make medical decisions on your behalf.
Not only can trusts include powers over medical decisions, they can also include broad powers over financial affairs if you were to become incapacitated. A trust can also include a durable power of attorney that gives a named agent powers over financial affairs, real estate transactions, filing taxes, etc. This is extremely useful in protecting and being able to move with your wishes if you were to become incapacitated.
There are many reasons to get a trust, but these are the most common. Whenever I see a client with minor children or assets over $150,000, a trust becomes a top priority for obvious reasons. The truth is, many of us suffer from optimism bias. Few of us think we’re going to become incapacitated or die anytime soon, but the truth is, we don’t know! Any of us could have something horrific happen to us tomorrow. Much like an insurance policy, our hope is we will never have to use it, but we should be diligent to protect ourselves against some very real “what if” scenarios.
There are many ways to establish a trust, and with the advent of technology, there are many cookie-cutter trusts available online. While these are an extremely affordable option and may be a stopgap early in life, I must also caution against them. A trust is meant to protect your assets and family along with your wishes if something were to happen to you. This means if something were to happen to you, you better have gotten your trust done correctly! You can’t retroactively go back and fix mistakes that you made that you now realize are mistakes because you’ve died or become incapacitated! With these type of stakes, I urge caution.
I am not an estate attorney and am not licensed to give legal advice. If a trust is something that interests you, please speak to a licensed estate attorney! I’m happy to discuss with you what you are looking to accomplish and see if a trust suits your needs. If you need an estate attorney referral, you can contact me here or email me!
*There are two scenarios where probate can be avoided: a small estate affidavit or a trust. A small estate affidavit is a legally signed document by the inheritor of the decedent’s property. This document can be used to transfer ownership of a bank account, life insurance policy or retirement plan, etc. The important thing with small estate affidavits is the entire estate has to be worth $150,000 or less. This means if your net worth is above $150,000 and you die, your beneficiary cannot use a small estate affidavit.