Wouldn’t it be frustrating to get a nice big expensive box from your mom and dad and open it up to find there is nothing inside? You would probably wonder what they were thinking when they took the time to acquire such a nice box and then forget to put anything in it. And now they are not around anymore to explain it to you. After further investigation, you find that because they did not put anything in the box, a bunch of their money is now going to lawyers. You don’t know what to think. Should you be angry? Sad?
The situation being described here can be used to point out what I (Mark) consider one the biggest and most common mistakes when setting up a revocable living trust. Many folks opt to use a living trust as a way to pass on assets to heirs in what they think will be a cost- and time-efficient manner. It can work very well if you take all the necessary steps, but if you don’t, it can end up being a big waste of time and money. The big mistake is the failure to “fund” the trust.
First, let’s talk generally about what one of the most common goals is when setting up a revocable living trust. This is typically the avoidance of probate. What is probate and why would anyone want to avoid it? The simplest way I can describe it is, to get things that were in your name while you were alive, into the names of the people that you intended to leave them to after your death. Obviously, you are not around to sign any paperwork transferring the assets to your loved ones. What usually happens at this point is the probate process takes over. If you have signed a last will and testament, the local probate court oversees the process to make sure your wishes are carried out. Your will is filed with the court, which then appoints an executor who is responsible for administering your estate. There are a series of steps that the executor takes, such as notification to the heirs, and inventory of all date of death assets and at the end a final accounting and distribution of the assets. Probate sounds like a nice orderly process, right? That is because it is. Probate is not necessarily a bad thing. Its intent is good. It is a process to get done what needs to get done. As a lawyer, it requires expertise to know what steps need to be taken in what order, etc. So why do people want to avoid it? The answer is mainly cost savings.
The probate court has a schedule that lawyers can use as a guideline on what to charge for their services to help administer an estate. It is typically a percentage of the value of the probate asset. There is also a percentage that is charged for nonprobate assets that is typically lower. Nonprobate assets can directly pass to the heir either by a living trust or perhaps a beneficiary designation such as on retirement accounts, annuities or life insurance. Back in 1965, a guy by the name of Norman Dacey wrote a book on how to save money by avoiding probate. Ever since then it has become popular to use a living trust as a mechanism to transfer assets. The most common mistake is paying a lot of money to set up a trust and then not following through and transferring assets into it. This is critical in order to avoid probate. The trust is like a box, and whatever you put in the box avoids probate.
What should you do?
1.) Everyone should do an assessment of his or her current estate plan, whether it is a will or a trust. If you don’t have anything in place, you should get it done right away.
2.) This is also a good time to review all of your beneficiary designations to make sure they are correct and up to date. I can remember when a lady came to my office to have me review her plan. I informed her that she had made the big mistake of not putting things in the box. I felt bad because it reduced her to tears. She said, “You mean that if I would have died, my assets would have gone through probate?” Yep.
As always The Retirement Guys wish you a happy retirement. Oh, and one more thing — don’t leave your family an empty box.
Securities and Investment Advisory Services are offered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. does not provide tax or legal advice. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is at 1700 Woodlands Drive, Suite 100, Maumee, OH 43537. 419-842-0550
