The trend has already begun, but I suspect that in the coming decades you will see traditional wills diminish as part of an estate planning tool and be replaced with a living trust. Although the set-up costs are higher for a living trust, the advantages are so much greater that the value proposition is clearly worth it.
When you create a will, you are creating a plan for your assets that will be executed after you die. A traditional will has no legal effect while you are alive, and comes into operation to distribute your assets at the moment of your death. Annuities, life insurance, and other retirement plans operate through a direct-to-beneficiary format dodges the will/probate process unless these accounts name the creator’s estate as the beneficiary.
The downsides of using a traditional will to process your estate have come under harsher scrutiny recently. Courts have jacked up probate fees, making it possible for an estate to be on the hook for tens of thousands of dollars in fees. The move towards putting court documents online make it easier for nosy individuals to look up the particulars about your estate that goes through probate—this information has always been public, but the access has become so frictionless that snooping around has gotten easier than ever. Also, courts have been willing to pursue legal remedies that take into consideration “overall fairness” rather than the traditional obsessive focus on the specific words in the will instrument, and this has led to an increased frequency in the number of wills that get challenged.
A revocable living trust is a way to protect your family in a way that captures the upside of using a traditional will while eliminating the drawbacks. When you create a living trust, you are shifting your asset from your name as an individual to a trust as legal entity. You are permitted to name yourself as the life beneficiary and trustee so that you can enjoy the same control, use, and benefit of your assets as you enjoyed when it was only in your name. Because the assets are held in trust, it does not “die” with you. Instead, it automatically shifts from distributing assets to you as the life beneficiary to your wife and kids as the remainder beneficiary (presuming your written instructions name them as the recipients of your living trust).
There are no probate expenses to pay because the trust continues its operation and self-executes a switch from the life beneficiary to the remainder beneficiaries when you die.
There are no time delays. Remember, the typical probate proceeding lasts around 14 months in the United States. If you regularly provide money to someone in your family or would like them to have it immediately upon your death, your beneficiaries get frozen out for about twelve months in a typical probate process (some states let you show need to get some funds earlier).
Also, a revocable living trust is a private instrument that won’t open your estate up to the public and this allows you to keep your personal information private from those individuals with chismoso tendencies.
A revocable living trust also permits you to be more specific about how you would want to distribute your estate. If your kids are not good with money, or you want them to become more industrious after you’re gone, it is possible to create a living trust that provides annual distributions equal to their annual income. To realize the same ambition with a traditional will, you would need to create a post-death trust that would be created through the probate process that must overcome the same appurtenant drawbacks mentioned above just so you could end up in the same place that a living trust would take you.
A lot of people think that living trusts, or really trust funds in general, are something that must exclusively be the domain of the Rockefellers. That’s not true at all. My view is that the expenses of trust administration can be justified for an initial capital amount as low as $250,000. You might have to pay $2,000-$4,000 each year for the trust to operate, but it is a way to pass on $7,000-$9,000 in annual income to your kids that can turn into $56,000 annual distributions at the end of a thirty-year period assuming you can get 6% growth net of fees, taxes, and income distributions along the way. That’s real life-changing money from a seemingly moderate sum.
Originally posted 2017-01-07 21:01:43.