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Make Your Trust Do the Work


Can you believe Labor Day Weekend is here already! Kids are back to school, the white gets put away, and the days get shorter. Summer 2022 is coming to an end. We hope you and yours made it through safely and are ready to return to your routine.


As you get back into that routine, however, we ask that you take a moment to review your legacy planning. Hopefully, you have already handled a few key pieces—set up and funded a Trust, signed a Will, created a power of attorney, etc.


But does your plan offer you and your family the greatest possible protection for the circumstances in your life right now? Ask yourself these questions:

  1. Does your plan provide adequate safeguards to prevent disputes and confusion among your family if you become incapacitated or die?

  2. Does your plan designate someone and provide appropriate authority to a person you trust to handle your affairs if you cannot do so?

  3. Does your plan protect your heirs and their inheritances against financial mismanagement, lack of foresight, bankruptcy, divorce, or court interference?

  4. If you have an estate plan, have you had your Trust, Will, and other documents professionally reviewed in the last two years?

If you answered an enthusiastic “yes” to each of these questions, then you are probably doing pretty well on your estate planning. Also, know that you are in rarified air!


On the other hand, if you cannot answer an enthusiastic “yes” to each question, that is okay. Effectively transferring wealth to the next generation can be tricky business. Read on to learn more about how we can incorporate the power of Trusts into your legacy plan.


How does Trust-based planning give you more control and flexibility

Placing your assets in a trust protects you and your family. If you become incapacitated, your successor trustee can step in to fulfill your stated wishes. You also get greater power and flexibility over how your wealth is distributed to your heirs, providing them with long-term protection against court control, divorce, bankruptcy, and financial mismanagement.


To illustrate, let us look at two scenarios:


SCENARIO 1

Through hard work and saving, you have accumulated an estate worth $300,000, which includes a home, a bank account, and a life insurance policy valued at $100,000 each. You want to divide these assets equally among your three children, Alisha, Becky, and Cameron. You name Alisha as a joint tenant on the bank account, Becky as the beneficiary of the life insurance policy, and set up a transfer on death deed for Cameron to receive the house upon your death. But over time, you decide to sell the house and deposit the money in the bank account, and you cancel the life insurance because the premiums were increased. If you pass away at this point, what happens?


Without a Trust:

Becky and Cameron receive nothing because there is no house or life insurance policy. Alisha receives the $200,000 bank account (minus the costs of probate and taxes), and she has sole discretion at that point over whether to share with her siblings. Alisha’s inheritance is also at risk of seizure by a bankruptcy court or a divorcing spouse since she receives it outright, and there is no trust “wrapper” protecting it. This is not an ideal result for anyone in the family.


With a Trust:

By placing all your assets into a Revocable Living Trust and naming the trust as the beneficiary of the life insurance policy, you avoid the piecemeal approach from above. Your Trust essentially becomes the clearinghouse for the management and distribution of all your assets. Even if the life insurance lapses, your successor trustee will divide whatever assets are in the trust amongst your children equally, all without probate costs. In this case, Becky, Cameron, and Alisha would split the $200,000 bank account (minus any taxes and trust administration expenses). Another advantage of the trust is that you can create lifetime trust shares rather than outright distributions, which protects each child’s inheritance against bankruptcy, creditors, divorce, or a spending spree.


SCENARIO 2

After working and saving for 30 years, you have accumulated $500,000 in your retirement account, to be divided equally among your five children. Let us focus on your youngest, an impulsive 23-year-old, Tim, who has not learned how to handle money properly. What happens to Tim’s portion when you pass away?


Without a Trust:

With a plain-old beneficiary designation, Tim can withdraw all the money at any time. Of course, as Tim cashes in the account, the government swoops in and takes about a third of it for taxes. Instead of reinvesting the remaining amount, he spends it, perhaps on a sports car he (or his girlfriend) has always wanted. At this point, his inheritance (a depreciating sports car) is vulnerable to many pitfalls, from physical damage from a crash to a forced sale to pay for debts, divorce settlements, or other situations. Best case scenario: his wealth no longer grows but instead shrinks. It seems that Tim certainly did not receive any long-term benefit from his inheritance.


With a Trust:

It is not only revocable living trusts that you need to have in your estate planning toolkit. By setting up a Standalone Retirement Trust (“SRT”), you can control how Tim receives his portion of the inheritance. The “stretch-out” feature of the SRT allows the account to continue growing tax-deferred over Tim’s expected lifetime while the trustee distributes a minimum amount each year. Although Tim will not benefit from instant gratification, his $100,000 inheritance can result in millions over the years, enabling him to afford multiple sports cars if he wants them. Additionally, this trust protects his inheritance against creditors, ex-spouses, and other risks.


An SRT provides flexibility to customize the distribution of your IRA separately for each beneficiary, so they each receive the maximum benefit or their situation. For example, if you have another adult child facing financial difficulties and possible bankruptcy, you can structure the trust so the trustee can delay payments and protect the inheritance from the bankruptcy court.


These are just two brief examples of how trust-based estate planning gives you greater flexibility and benefits to your family. No matter what type of estate planning circumstance you have, there is probably a trust that can help you achieve your goals. If you are interested in learning more about trust-based planning or would like to discuss your specific needs, call us today at 301.892.2713 or click here to schedule a complimentary Estate Planning Discovery Session. Let us work together to design the plan that is best for you. Happy Labor Day!


"Living with Your Bags Packed!"®


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The information in this blog is for educational purposes only and should not be considered legal advice.

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