The answer to this question will depend largely on the age and experience of your Estate Planning lawyer. During the first 20 years of my career, my top 3 benefits of a Revocable Trust would have been “avoid Probate”, “avoid Probate” and “avoid Probate”. Now, finishing up the second 20 years of my career I would put avoiding probate as number 5 on my list of the top 5 benefits. If you are curious, continue to read what a 38-year career in Estate Planning has taught me. I have often said that I don’t practice Estate Planning, I have been living it. It wasn’t until I had children, saw them get married, saw them get divorced, experienced the death of a loved one, the birth of a grandchild, the successes and failures of my children, etc. that I really began to understand the “true benefits” of an Estate Plan.
The ability to control the timing and the age at which your beneficiary will gain full unfettered control over his or her inheritance. Many of my clients like the idea of “training wheels” for children. Think about this, how long does it take for a winner of the lottery to go entirely through their winnings and are broke again? 2 to 3 years. How long does it take for the average beneficiary of an IRA to cash it in, pay all of the tax, and then blow it all? Less than 2 years. How long does it take for a professional athlete to lose all of their earnings? You get the point. Sure, your children may be good at paying their bills, holding down a job, etc. But this is quite different than having an “inheritance” dropped in their lap. This is “found money” for them. Easy to blow. With a Trust, we can put in “training wheels”. We can add a professional and independent Co-Trustee for a 2-to-3-year period. We can limit distributions for only good causes for the first 3 to 5 years. Maybe distributions only for Health, Education, Starting a Business, etc. Maybe we put in the Trust incentives like “earn a buck and the Trust will distribute another buck”.
2. Asset Protection
with an average inheritance, and without the protection of a Trust that you created for your children, the inheritance can be reached by creditors of your children. It has amazed me how many times we see that a son or daughter of a decedent are already in financial distress when mom or dad died, and the parent didn’t even know it. Many times, the house is on the verge of foreclosure. Or perhaps marriage is failing and headed for divorce. And, it has been educational for me to watch the successes and failures of my own children in business. Even my wife and I have had struggles of ups and downs as we have lived in Arizona our entire lives and have seen real estate rise and fall about every 10 to 15 years. In order for your children to achieve asset protection they must be a beneficiary of a Trust that wasn’t set up by them for themselves. The Trust must be set up by someone else, like you, for them.
3. Unforeseen Events
Ability to cover more “unforeseen events” that are actually quite possible to develop. There are many ways to avoid probate that don’t involve creating Trust. A few examples could be a beneficiary designation of a life insurance policy or a joint tenancy ownership over real estate. Or a Payable on Death feature of a bank account. However, none of these probate avoidance tools offers a contingency plan. What happens if I have an account “payable on death” to my son, but he dies before me, and I fail to name a different beneficiary. Who gets
that account? His wife? Or his children from a prior marriage? Or does it revert back to his surviving siblings? Or, what happens when my wife and I both die together and we hold our home as Joint Tenants? Who gets it. With a Trust I can have one or more contingency plans in the event the order of death of my beneficiaries doesn’t happen the way that I think they will happen.
4. Tax Planning
There are many different provisions I can place inside of a Trust to get beneficial tax treatment. The two biggest taxes a Trust can help eliminate or at least provide savings would be Capital Gains Taxes when my heirs sell a capital asset after my death. Or, the Federal Estate Tax, which is a tax on the value of my Estate when I die. There are many articles on my website that address Tax Planning that are beyond the scope of this article. But suffice it to say that the ability to save on these two taxes is greatly reduced without a Revocable Living Trust.
5. Avoiding Probate
The public perception about Probate is greatly misinterpreted for many reasons. But mostly, it is because the younger lawyers go around teaching and preaching at seminars about the “evils of Probate” when in reality they are more interested in selling financial products than seeing you actually avoid probate. Sure, probate can be a mystery to most people. But, in the grand scheme of things it is the least of your worries when compared to the other 4 benefits that I have mentioned above. Most of the horror stories out there about the time and expense of avoiding probate are really about the horror stories of family members fighting over the Will, creditors coming after the Estate, or the IRS looking to get unpaid taxes paid. The point is that the true horror is not the actual probate, but the failure to properly plan for all of the other factors and contingencies that can happen in an Estate.
My experience has been that many people are in search of the reasons why they “don’t want to pay for a Trust” rather than the benefits that a Trust can provide. In most cases a very good Trust can be put in place that covers all of the benefits mentioned above for a modest fee of $2,000 to $3,000. Sure, you can go online and put together a document that may avoid probate, but the mistakes you are likely to make will cause your Estate to end up in probate anyway and your children will go through their inheritance very quickly. Without having the experience of a 38-year career veteran Estate Planner, you are not going to have a Trust that will give you all of the benefits that I have mentioned above. To hear someone brag about the fact that “I created my own Trust online” makes me think of a person bragging to a dentist that he was able to pull out his own cavity without the need of a dentist. Sure, he got the tooth out, but who knows about the pain and infection that will be incurred for years to come. Same is true with having no Trust at all or having a Trust prepared by a non-lawyer or perhaps yourself. Don’t be “penny wise and pound foolish”.