A lot of people work hard, live prudently and save diligently to build-up wealth but they often pay little or no attention to preserving this wealth for their survivors and heir and don’t fully think through the consequences of accidental disablement, incapacity or premature death. When they do plan ahead, they often do so in a manner that proves inefficient, time consuming, painful and expensive for their heirs.
It’s absolutely imperative that you prepare for any eventuality with the right paperwork beforehand.
The bottom-line is this – you can be incapacitated or killed anytime – no one knows what the future holds, so it’s absolutely imperative that you prepare for any eventuality with the right paperwork beforehand. That means with notarized, legally valid documents such as a Revocable Living Trust, a Pour-Over Will, an Advance Healthcare Directive, should someone else need to make medical decisions on your behalf, Power of Attorney so someone can manage your finances should you become incapacitated, etc.
A Will Has Several Drawbacks
A lot of people make a Will and think they’re covered. The truth is, Wills don’t really hold up well in court. Wills are public documents that anyone – even those unrelated to you – can read after you die (so there’s no privacy), they are easy to contest, they only kick-in after you die and don’t really help if you become incapacitated. More importantly, Wills are subject to something called Probate that automatically kicks in if the market value of all your assets – stocks, bonds, mutual funds, brokerage, bank accounts, real estate, motor vehicles, etc. – exceed a certain threshold… which is $75,000 in the state of Florida and as low as $15,000 in Kentucky and Virginia.
Probate Also Has Disadvantages
Probate is an expensive, messy and long-drawn process where a judge oversees and rules on the distribution of your assets, sometimes against your Will or what your family wants. Probate typically costs 4-10% or more of an Estate’s Gross Value (before debts are paid) – so your heirs get that much less of your assets. Probate usually takes one to two years to settle, and your assets are frozen for this period, so no one can get to them, not even your loved ones who may need the money or may want to, say, sell your shares before the market crashes… but cannot because your shares are locked up in Probate. Probate files are also open to the public so business competitors, unscrupulous solicitors and scheming relatives can try and claim a piece of your assets.
Wills are often not ideal… and most Americans are probably better off with something called a Revocable Living Trust – where you place all your assets in a Trust that you control at all times through your death, and beyond by specifying how you’d want your assets distributed after you’re gone.
While a Revocable Living Trust is a great option for most of us, I want you to also be aware of its pros and cons before you jump in. I am going to highlight points made in an article published by Julie Garber in About.com.
Pros and Cons of a Revocable Living Trust
Pros of Using a Revocable Living Trust:
#1 You Avoid Probate – This is probably the biggest advantage of using a Revocable Living Trust. Why subject your loved ones and your property to the restrictive rules of probate when you can easily avoid it with the use of a fully funded Revocable Living Trust. This Living Trust is especially great if you own real estate in more than one state because without a trust, your heirs will be faced with two or more probate proceedings. A Revocable Living Trust also gives your heirs almost immediate access to cash while it could take many months if you get stuck in Probate.
#2 You Avoid Guardianship or Conservatorship – With a Revocable Living Trust, your heirs and your property avoid the restrictive rules of guardianship or conservatorship, and can take over control of your trust assets per your directions, without interference by a judge. Moreover, while Probate only lasts for a fixed period of time (usually a year or two at the most), guardianship can last for five, ten, or even twenty years – making life much easier and less expensive for everyone involved.
#3 Keep Things Private – As I mentioned earlier, Probate is a public proceeding – so anyone can go to the courthouse, look at your Probate file and even make copies – no questions asked. In some jurisdictions, you can even look them up online. Contrast this with a Revocable Living Trust which doesn’t have to be filed in court and won’t become a public record for everyone to see or take advantage of.
#4 It Forces You to Get Organized – It still amazes me how many people don’t really know what they own or how their property is titled. When you set up a Revocable Living Trust, you’ll be required to fund your assets into it, and this, in turn, will force you to find account statements, stock certificates, corporate minutes, car and boat titles, and deeds to real estate. And this will continue to benefit you in the long run because once you’ve taken the time to get organized and fund your trust, you’ll stay organized and it will be easy for you to understand how your property is titled – in the name of your Revocable Living Trust.
Okay – so the pros sound great.
Cons of Using a Revocable Living Trust:
#1 Up Front Costs – In general, a Revocable Living Trust could cost you a bit more time and money to set up than simply writing a Last Will and Testament. But in the long run, the overall time and money spent on the trust will be lower because your heirs will avoid costly court-supervised guardianship if you become disabled and a costly court-supervised probate proceeding after you die. Aside from this, a trust avoids the emotional costs associated with guardianship and probate – and keeps heirs from fighting over your assets.
#2 Funding a Trust is a Pain – Once your trust has been signed, you’ll need to contact your banks, investment and insurance companies, and transfer agents to change account and stock ownership and update beneficiaries; issue new stock certificates or assign partnership or LLC interests for closely held businesses; retitle cars and boats; and sign and record new deeds for real estate. For many people, this is the major drawback to using a Revocable Living Trust – if it’s not fully funded, then it’s really not worth any of the money spent on it. The type of assets that you own and what will need to be done to get them funded into a Revocable Living Trust should be carefully considered before you decide to use a trust. This is where experienced Estate attorneys come in handy because many law firms offer fairly reasonable packages where they do everything for you and save you the headache while making sure you do the all-important – funding your Trust with all relevant assets. See, if you DIY, things could slip through the cracks and you may not do all the title transfer leg work that you must… so look for reasonable Estate planning seminars and services in your area – they are offered all the time.
#3 You’ll Still Need a Last Will and Testament… except this one’s different, it protects you and fills in for your laziness. So the right attorney will make sure you supplement your Trust with a special type of Will, called a Pour Over Will, to “catch” your unfunded assets and “pour” them into your trust. The not-so-nice part is that your Pour Over Will must be probated, which is why funding your trust is so important.
#4 There’s a Longer Time Limit for Contesting a Trust vs. Contesting a Will – Most states have specific statutes that dictate who can challenge a Last Will and Testament and allow 30-90 days to challenge it. Contrast this with contesting a trust, which leaves the door open for a little longer. But, fortunately, quite a few states have closed this gap by limiting the time frame for challenging a trust. For example, in 2007, Florida enacted a statute that limits the time to challenge the terms of a Revocable Living Trust after the Trustmaker dies to six months. While the open window is longer than a Will, challenging a trust is not that straightforward.
There you have it. In my opinion, the pros far outweigh the cons.
While there are many DIY kits available online and in bookstores, I encourage you to attend a free online or in-person seminar and consider involving a firm that specializes in estate planning to make sure you do it right. A law firm may run you up to about $1,500 or so to prepare your trust, significantly more than the hundred dollars you may spend on a DIY kit, but this is not a place to be pennywise and risk self-preparing a document that doesn’t hold up in court.