You keep on hearing about trusts. Should you have one or should you not? The most common misconception that we hear on a fairly regular basis is “I don’t have enough assets to have a trust.” I heard it again this past week, twice.
You seem to get a lot of advice from a lot of different people. It could come from you morning coffee clutch. Or the advice may come from advisors. I have heard “My accountant or attorney or financial advisor said that I do not need a trust unless I have at least $1 million in assets,” or “My accountant or attorney or financial advisor said I only need a trust if I have a taxable estate,” ($5.45 million in 2016).
What all these different pieces of advice usually have in common is that the person giving the advice does not fully understand trusts and is not an estate planning specialist. What should determine whether you have a trust or not, are the instructions you want for you and your loved ones and the goals and objectives you want to accomplish.
Who do you want to benefit? What protections do you want for your beneficiaries? In our practice, it is rare that the value of one’s assets determines whether that person chooses a trust as part of his or her estate plan.
For example, we had a client who had a home worth $40,000 and less than $20,000 in other assets. She had two daughters, one with whom she was very close, and the other from whom she was estranged and had not seen in over a decade. Her goal was to leave her entire estate to the “good daughter,” with nothing going to the “bad daughter.”
She chose a trust-based estate plan because with a trust, after her death, the bad daughter did not have to be notified of or given any information about the trust. If she had chosen a will-based estate plan, the distributions would have gone through probate. In probate, the bad daughter would have to be notified of the probate proceedings and given an opportunity to object.
She made the wise decision not to use beneficiary designations, joint ownership or a transfer-on-death (Ladybird) deed. She did not want to risk her beneficiary or joint owner getting sued, becoming incapacitated, getting greedy, getting mad at her or dying in the wrong order.
On the other hand, we’ve had a few clients with over $1 million in assets who wanted will-based estate plans with financial and health care powers of attorney, instead of trusts. They did not care about the time, money or effort it would cost their beneficiaries after the clients’ deaths.
I did a survey not too long ago of probate attorneys in Michigan and across the country. The most quoted probate death administration costs that I found were 5%-10% of the gross value of the assets going through probate. For a $1 million probate estate, you can expect probate death administration costs of $50,000-$100,000.
On the other hand, with fully-funded trust-based estate plans, you can expect substantially lower costs. We have found that with most of our clients in our full updating program, that overall costs, including upfront costs for drafting and implementation of the plan, annual updating fees, costs for disability administration and costs for death administration all combined, is less than 5% of the gross value of the assets in the trust.
Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. The proper funding of your trust is critical in making your estate plan work and having the results you plan.
Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.
There are lots of protections that you can put in your trust for the benefit of you during your lifetime or for the protection of your loved ones after you are gone. Many people have trusts for the protections of privacy and avoiding probate. You can be much more assured in avoiding probate with a fully-funded trust-based estate plan both during your lifetime and after death, than you can with joint ownership, beneficiary designations or a will-based plan.
Some choose a trust for charitable planning, or to protect their beneficiaries from divorces, creditors or remarriage. Others have trusts because they have beneficiaries who are on governmental assistance, have an addiction, have poor money management skills, are minors or are not motivated to find a job. Still others have trusts to protect the family homestead or cottage, provide financial resources for beneficiaries’ higher education or for pets.
Another reason for having a trust that you may not think about is what happens upon your mental disability. Trusts can have enormous benefits over financial powers of attorney when you are mentally incapacitated. Over the last dozen or so years, we have been seeing financial institutions and financial services firms more closely scrutinizing financial powers of attorney.
Although there is no legal basis to do so, we have seen financial companies refuse to honor a power of attorney because it was too old, it was not on their form or the maker of the power of attorney is mentally disabled. If a financial company wrongfully dishonors a financial power of attorney, about your only recourse is to go to probate court for a protective order or to start a conservatorship.
On the other hand, with trusts, we regularly see financial companies honor the successor trustee’s instructions immediately upon presentment of a certificate of trust. We rarely see a financial company send trust documents to their legal department for a lengthy review process like we see with financial powers of attorney.
So if you want to be in control of your property while you’re alive and well and provide for you and loved ones in event of your mental disability, and give what you have to whom you want when you want the way you want at the lowest overall predictable cost, you may want to consider a fully funded trust based estate plan.
By: Matthew M. Wallace, CPA, JD
Published edited January 31st, 2016 in The Times Herald, Port Huron, Michigan as: You Don’t Need $1 Million for a Trust