Lessons from the Pros

Education Resource

Customizing Your Estate Plan Using Trusts

Think of creating your estate plan like ordering your pizza. Your pizza will automatically come with the basics: crust, sauce and cheese. But, if you really want to make the best of your dining experience, you need to customize the pie.

Like your pizza, a simple Will contains the basic mandates that ensure that the assets you’ve worked your whole life to collect will be distributed as you direct, and not according to some court order. This is the plain cheese of estate planning in that it gets the job done, but you’re missing out on so much flavor. Therefore, in order to get your estate plan to the same greatness as a pizza done just the way you like it, we implement different types of trusts.

For those who choose the Will based estate plan, you can bake provisions into your Will that create a Testamentary Trust. Or for those who use a Trust based estate plan, the plain cheese Will merely directs assets to be “poured over” into the Living Trust, and the Living Trust holds all of the tailored provisions to fit your specific goals and situation. In either format, using trusts is where you really get the most benefit of your customization.

Testamentary Trusts

A testamentary trust is a trust that is contained within a Will and provides for children or others after the maker’s death. The maker can designate that the inheritance will continue in trust or allow the trust to expire at some designated point in time such as when the child turns 25, graduates college or gets married. Because a person’s Will is not official until the maker dies, a testamentary trust does not arise until after death. A popular argument in favor of Will based estate plans is that because a person can take advantage of the benefits of leaving assets to their heirs in trust, he/she can avoid the hassle and expense of forming and maintaining a living trust during their lifetime. However, a testamentary trust does not avoid probate and the associated legal fees.

Living Trusts

It may be easiest to think of a living trust as a Will on steroids. Its purpose is similar to a Will in that the living trust contains provisions for distribution of assets upon death, but a living trust avoids many of the negatives associated with a Will and gains some added benefits.

A living trust is formed during the lifetime of the Grantor and defines the roles of ownership (Grantor), control (Trustee) and beneficial interest (Beneficiaries), usually among three different people, although that does not need to be the case in order for a living trust to be valid.

Control is a very important element of ownership, and people naturally intend to maintain full control over all of their property as long as they can. Therefore, in a living trust the Grantor typically names himself (and possibly the spouse) as the Trustee(s) and as the initial beneficiaries. Provided the trust document designates successor beneficiaries, the law allows this type of arrangement.

As the Trustee, the Grantor can still spend his money however he chooses. If a Grantor wants to gamble away his very last dollar in Vegas, the living trust allows it without any additional consequence. Therefore, a logical next question is “Why bother? If the Grantor is the Trustee and Beneficiary, what is the purpose of creating a trust”? The three most compelling benefits of forming a living trust are:

  1. incapacity planning
  2. spousal planning
  3. probate avoidance

Incapacity Planning

Incapacity is most often thought of as a condition due to age or illness where a person is unable to manage their own affairs. Unfortunately, incapacity is not always so predictable. Facebook is rife with stories of trauma and tragedy affecting the young and unsuspecting and leaving them disabled. Because of life’s curve balls, the incapacity planning is one of the best benefits that a living trust provides.

Often times, when a person is incapacitated, their agent, acting under a durable power of attorney, may be able step into their shoes and manage their assets (i.e. write checks, deal with the IRS, etc.). Unfortunately, the viability of using a durable power of attorney is rapidly declining. If the power of attorney is unacceptable, the family’s only option is to seek a declaration of guardianship from the Court. The living trust avoids reliance on the power of attorney or a Guardianship proceeding by providing for specific successor Trustees who will step into the Grantor’s shoes and make decisions over trust property when/if the Grantor is not able to so. In addition, while a bank or institution has no real incentive to accept a durable power of attorney, the law is different when it comes to successor trustees. Every State’s Trust Code provides for the authority of successor trustees, and banks are much more comfortable accepting a successor Trustee.

Spousal Protection

Spousal Protection is most clear in the case of second marriages, but is applicable to any couple. As discussed, a Will is not official until the maker dies, Therefore, if a husband leaves everything to his wife under his Will, it will be the wife’s Will that will distribute the assets of the couple. The wife may change her Will as many times as she likes … including leaving everything to a second spouse, new step children, a con man, or any other beneficiary that she may choose. A living trust can instead contain provisions that provide for the surviving spouse during their lifetime, and also ensure that upon the death of the survivor, the assets are distributed to heirs that the couple mutually agreed upon.

Probate Avoidance

For the heirs, the biggest benefit of the living trust is probate avoidance. Forming a trust is similar to forming an entity, like a corporation or a limited liability company. The trust, like a company, cannot die. Therefore, even though the Grantor has passed on, probate is not triggered. The trust document identifies the successor Trustee, whose job it is to take control of the trust assets and hold or distribute them in accordance with the terms of the trust document. Therefore, the administration of a trust after a Grantor dies is immensely simpler than when a decedent dies leaving only a Will.

Funding a Trust

The main objection to trust based estate planning is that if the living trust is not “funded”, it will not provide the incapacity, spousal planning and probate avoidance benefits …. and clients almost never “fund” their trusts. Funding means that you retitle all of the Grantor’s accounts or other property into the name of the trust. So the Bank of America account that used to be in Tom’s name alone, is now in the name of the Tom Revocable Living trust. Making changes to the title of your bank accounts is actually a pretty simple process, but the thought of dealing with the institution is definitely intimidating. A good estate planning lawyer should help you navigate your financial statement and assist you in updating accounts so that your living trust has the most beneficial use.

Access Free Financial EducationThe truth is that the critics are correct – it is foolish to go through the time and expense of creating a trust and then not fund it. Any account that is forgotten, left in joint names and/or left in your individual name is subject to probate. Therefore, every living trust based estate plan should also include a “pour over” will. We referred to this type of Will as the “plain cheese” of Wills earlier because it is short and catches any asset that was not titled in the name of the living trust, pouring them over to the trust at death. If you are in a situation where you must probate a pour-over will, the Will is entered into the Court’s record but the living trust document is not. Therefore, the details of the estate account remain private despite the probate process. It should be noted that this privacy is not possible when using a Testamentary Trust because the entire Will, including the Testamentary Trust provisions, must be tendered to the Court.


DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.

Join over 170,000 Lessons from the Pros readers. Get new articles delivered to your inbox weekly.