Will or Trust

When is a will not enough?

Although everyone should have a will, an estate plan that consists of only a will probably is inadequate.

Reality: Even the most comprehensive will, drawn up by the most experienced estate planning attorney, can leave you and your loved ones exposed to undesirable consequences.

• Protect adult heirs from creditors and financial predators. If you use a will to leave assets outright to children or grandchildren who already have come of age, those assets will be vulnerable. Your former assets could wind up in the hands of a child's ex-spouse in case of a divorce. If your heirs lose a lawsuit, the plaintiff could be awarded the wealth that you accumulated.
• Keep young heirs from making expensive mistakes. If you die when your children or grandchildren are minors, assets left to them in your will are going to become theirs outright after they become adults, which might be age 18, depending on state law. At that point there will be nothing to stop them from blowing through their inheritances in a few years.
• Protect you and your assets if you become incapacitated. Nothing you can put in a will authorizes someone else to manage your affairs while you are alive. If illness, injury or old age renders you incapacitated, you may squander your wealth and wind up impoverished before actions are taken.
• Keep your assets from going through probate. That's the system of administering the transfer of assets you owned at death to the heirs named in your will. This process can take a year or more to complete. Legal fees can run as high as 10% of the estate, thus, 10% of our assets might go to lawyers.

If a will won't work to address the above risks, what is the alternative? Consider creating a trust while you are alive. Most of your assets can be held in trust rather than in your own name. Some of the advantages are:

• Incapacity protection. The person or corporation names as the trustee will be responsible for managing the trust assets if you can't. If you name yourself as the trustee (where permitted under state law), you also can name a co-trustee or successor trustee who can take over if you become incompetent.
• Probate avoidance. Once assets are transferred to a trust they no longer are technically "your" assets. So, at your death, they won't go through probate. Instead, they will pass directly to the heirs you have names in the trust document.
• Heir protection. A trust you create during your lifetime can remain in existence after your death. Such a trust can protect young heirs from their own youthful money mistakes. A trustee can be give the discretion to distribute assets from the trust prudently.
• Creditor protection. Certain specialized trusts can protect an inheritance from your heirs' divorcing spouses or creditors. These trusts may be know as SAFE (Safeguard Assets for your Family Exclusively) trusts, family protection trusts, generation skipping trusts or spendthrift trusts. With these trusts, the language in the trust document is designed to keep the assets in the trust and out of the reach of claimants.

A trust you create during your lifetime can be revocable or irrevocable.

• Revocable trusts are more popular. Often, you can be the initial trustee. As trustee, you retain control of the assets you transfer into the trust. You can sell stocks, receive dividends, etc., just as before. If you change your mind, you can revoke the trust and reclaim the assets.
• Irrevocable trusts generally don't have the same money-back opportunity, but they do have advantages. If assets are transferred to an irrevocable trust and you truly relinquish control, they may be out of the reach of your future creditors. (You can't make such moved to thwart current creditors.) In addition, assets in an irrevocable trust may not be subject to estate tax at your death. Some irrevocable trusts protect assets from being used to pay for nursing home care.

A revocable trust you create during your lifetime becomes irrevocable at your death.

• Strategy: Create a revocable trust and transfer assets to the trust. You can make such transfers by using forms from the financial institutions holding your assets. In the trust documents, state that the trust will continue after your death. Your spouse, children, grandchildren and other loved ones can be trust beneficiaries.
• Result: The assets will pass to your heirs in trust rather than outright. A beneficiary of this irrevocable trust can be his/her own trustee with the power to manage the inheritance and to take income and principal as needed. He can take money for home mortgage payments and rentals, medical care, clothing, food, education, a new car, travel, etc. If the proper language as been used to create a SAFE type trust, the assets won't be lost to con artists, careless spending, legal judgments, divorce settlements or other treats.

Although trusts are used extensively by the wealthy, you do not need to be super-rich to enjoy the advantages of a trust.

• What to expect: Depending on where you live, you might pay from $3,000 to $6,000 for a SAFE-type specialized trust. For such a fee, ask the attorney to draft a "pour-over" will as well. This document will state that any assets held outright at your death, and thus passing to heirs according to the terms of a will, shall go into the trust you have created.

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