By Steve Soden
Lets face it: We as humans often procrastinate on a wide range of issues. Webster defines procrastination as “to delay action” and nowhere is it more dangerous than the toll it can take on your long-term financial health.
Recently, in a discussion with a very successful friend about planning for the retirement phase of life, he admitted that he had set up a revocable trust many years ago along with a last will and testament. The problem is that, like so many others, he had never taken the steps to have his assets retitled in the name of the trust. We see this often. Had this not been corrected, his assets could have been subject to probate at his death, exposing the assets and investments to additional probate fees and legal expenses and possibly burdening the clients loved ones with an extended period
of time to settle the estate.
Thanks to 401(k)s, IRAs and other investment vehicles, many individuals have done a good job on the accumulation phase of life through their working years. As difficult as that discipline to accumulate is, it’s often overshadowed by the “distribution” phase of life, when individuals are faced with the task of planning for another 20-plus years of income needs in their post-working years. The distribution phase of life is obviously critical and many investors seek experienced professional help as missteps at this stage are essential to avoid.
We also often see client confusion regarding the differences between Wills and Living Trusts.
Because each document can direct the disposition of an individual’s assets upon death, there can be confusion between a Last Will and Testament (“Will”) and a Revocable Living Trust (“Trust”). However, there are important differences between the two documents.
Wills and Trusts: Some Key Difference
A Will is a legal document where a Testator (the person making the Will) directs how his or her property will be distributed at death. A Will is only effective at death and cannot provide any guidance for management of property upon disability.
In addition, a Will requires Probate (the court-supervised procedure ensuring the disposition of property in accordance with the Will) to be effective. A Will can also name an executor, or “personal representative,” to oversee the administration of the estate, and name guardians of minor children of the Testator.
A Trust is essentially a contract between the Grantor,
who creates the Trust, and the Trustee, who manages the Trust. The Trust is managed for the benefit of the Beneficiary. In most Living Trusts, the Grantor, Trustee and Beneficiary are all the same person. For example, Dr. Jones may create a trust, name himself as the Trustee and Beneficiary, and then transfer assets into the Trust. This way, he stays in full control while he is alive and well. The Trust will name who takes over as Trustee if the original Trustee cannot serve, and will contain instructions on how assets are to be managed and distributed upon disability and death.
A Trust is often used as a way to avoid probate, maintain privacy, and provide for more complicated distribution patterns and estate-tax planning. A Trust can also incorporate disability planning. However, because a Trust is typically more complicated than a Will, it is usually more expensive. A Will is often used where a simple distribution pattern is desired, or when contentious beneficiaries make court supervision beneficial. An experienced estate attorney can offer guidance and perspective through the creation process.
In either case, titling of assets is critical. A Will only controls assets owned in the Testator’s individual name, and a Trust only controls assets that are titled in the Trust. Assets owned as joint tenants with right of survivorship pass to the surviving joint owner, regardless of what the Will or Trust says. Beneficiary designations on financial and retirement accounts, insurance policies, and other assets also take precedence over Wills and Trusts. Beneficiary designations can change over time with circumstances and should be reviewed periodically.
You can’t overstate the importance of making sure Wills and Trusts are current, beneficiaries are correct, assets are properly registered in the name of the trust, your financial plan is accurate and investment reviews are done at reasonable intervals. It is so easy to put things like this on the back burner and forget about them—but the results of procrastination can be life-altering over time.