Sunday I decided not to go to church in the morning as I woke up feeling a bit under the weather. Still feeling like I needed to hear the word of God, I tuned in to see Joel Osteen on television. Pastor Joel always starts his sermons with something funny and this day was no exception.
Pastor Joel started with, “I heard about this elderly man, he’d had a serious hearing problem for many years. He went to the doctor and was fitted with state-of-the-art hearing aids where he could hear 100%. He went back a month later for a checkup and the doctor said, wow, your hearing is perfect; your family must be so excited that you can hear again? He said, no…I haven’t told my family yet. I just sit around and listen to the different conversations and I’ve changed my Will three times.”
I got a kick out of this joke… and although Joel’s message didn’t have anything to do with whether or not you should have a Will or a Living Trust to protect your estate… it made me stop and think that very few people have a basic understanding of how to protect and preserve their estate in light of the well-to-do and affluent celebrity deaths.
Not long ago I was saddened to hear of the passing of Robin William. In reading the media reports I learned that He had a very large estate: A Napa Valley mansion with 653 acres, a waterfront home in the San Francisco Bay Area and earning and royalties from his TV shows. I also found out that he also had an extensive and solid estate plan which named his three children as beneficiaries who would receive their inheritance in steps at different ages. The “Robin Williams Trust” was created in 2009 and will probably provide his family with savings on his taxable estate; the assets held in his Trust will avoid probate court and escape the scrutiny and stress of the media.
So, which is better, a Will or a Living Trust?
On the onset I want to say that a Will is an engraved invitation to probate. What is Probate?
Probate is the legal process in which the court (which also means you lose control) makes sure that after you die your Will is valid. If your name is on the title of any asset and your die, the only legal way to take your name off the title and put the new owner (your kids or who you name as your beneficiary) name on the title is probate.
You will go through probate, whether you have a Will or you don’t have a Will. If you don’t have a Will the State has a Will for you…and whenever the government has something for you… as you can imagine, it’s typically not a good thing.
What assets go through probate? There are some exceptions, but generally speaking, CDs, real estate, business interest, stocks, bonds and mutual funds all go through probate. Life insurance and annuities have designated beneficiaries which avoid probate. Your 401k, IRA, 403b accounts also have designated beneficiaries that will avoid the probate process. It’s important to keep in mind that any designated beneficiary form on a life insurance policy or a qualified retirement account (IRA, 403b etc.) trumps any Will or Trust. So basically, “designated beneficiary” forms rule… and Wills and Trusts drool.
Here is something to consider regarding your designated beneficiary forms. There are only two ways to distribute an asset legally… one is “Per Stirpes” and the other is “Per Capita.” You must know the difference between these two and use them appropriately if you do not want to disinherit your grandchildren.
The cost of probate varies by state, but according to AARP, probate is a two billion dollar a year industry. 75 percent of probate fees typically go to attorneys…need I say more!
In my opinion, one of the biggest problems with probate is that it’s public domain or public record and these days just about anybody can have access to the internet. That’s why I know that Natalie Wood had 29 fur coats and Marilyn Monroe’s probate took 26 years and Chief Justice Warren Berger had a $1.8 million estate and had over $400,000 of probate fees and estate taxes.
That’s also why I know that actor James Gandolfini (Tony Soprano) of the TV series The Soprano’s, who passed away in 2013, left only 20% of his estate to his wife who had an unlimited deduction as his spouse. So 80 percent of his $70 million estate was exposed to federal and state estate tax. Published estimates put the Gandolfini tax bite at $30 million in 2013 making Uncle Sam his primary and uninvited beneficiary – Bada-Bing, Bada-Broke!
It’s also why I know that Philip Seymour Hoffman who passed away a year later in 2014, wasn’t married to his significant other, so she did not qualify for the spouse’s right to a tax-free inheritance – at least $12 million of the $35 million estate was lost to taxes, again, making Uncle Sam the primary and uninvited beneficiary. YIKES!
Unfortunately, most people assume that a Living Trust is just for wealthy people, but the benefits that a Living Trust can offer to someone with even minimal wealth are very significant. Regardless of the size of your estate, it’s important that you realize that without planning, Uncle Sam could very well be the largest beneficiary of your estate. All of these financial issues and massive tax bites problems would have been solved with proper estate planning and the use of a Revocable Living Trust.
Estate planning, in its simplest form is the proper use of Life Insurance and Annuities, in conjunction with an Irrevocable or Revocable Living Trust to off-set Uncle Sam’s tax bite and maximize tax-free giving…to ensure your retirement years, the well-being of loved ones and the fulfillment of your charitable desires.
Let me ask you a couple of questions: Do you have car insurance? Do you have homeowners insurance? Why? Your answer would probably be, to keep what you have and protect it from loss.
But what’s the most important asset… YOU…the primary bread winner. You are the money machine. And as an asset you should be insured… especially if you have children.
For example, if you have children you could name the Trust as the primary or contingent beneficiary of the life insurance policy or retirement account and you can dictate in the Trust when the child(ren) will receive their inheritance, such as age 25 or 30 instead of age 18, if something were to happen to you. I understand that Robin Williams did something very similar so his children wouldn’t squander their inheritance. Also the person you name as the trustee will be able to except the funds instead of a court ordered guardian.
Here’s where people miss the boat when it comes to estate planning. People say, “Oh, life insurance, I don’t need life insurance.” That’s right, you don’t need life insurance… what you need when you die is a boat load of money that can be there to solve the problem of your estate or business and take care of your kids and family.
It’s having the ability to TRANSFER THE RISK away from you and your family, and on to the insurance companies. It’s called OPM… its Other People’s Money… it’s pennies on the dollar to protect and preserve your estate.
If there was another product solution that could do it, I would recommend it to you. But stocks, bonds, gold, mutual funds, or commodities can’t provide the right amount of money at exactly the right time. So, life insurance and annuities (OPM – pennies on the dollar) within your estate plan provide the perfect benefits at exactly the right time.
WHAT ABOUT JOINT TENANCY?
Joint Tenancy can be used to transfer assets. It avoids probate. It’s convenient. Joint Tenancy between husband and wife is fine. However, if you put your kids name on the asset and you’re incapacitated, your kids can help with the assets, but one of the biggest disadvantages is that you lose control. Joint Tenancy can also create some real problems in the long run as you also incur your kid’s liability when you put their name on the asset… so be very careful if you do that. I mention this because after 20 years of working with clients in the financial services industry I’ve seen just about everything.
THE FIVE MAIN BENEFITS OF A REVOCABLE LIVING TRUST
A Revocable Living Trust means you have control… Revocable means you can change it or you can cancel it. A Trust doesn’t work if it’s not funded. As long as the Trust has assets, it has life. A Living Trust is like a suitcase that you put all your assets into it. Once the assets are in the suitcase you make a list of instructions, and tape it to the outside of the suitcase, these are the Trust documents so that anybody who has anything to do with all the stuff in the suitcase, have to follow your instructions, so you are in total control. That’s what a Trust is. It’s simply a suitcase that we take and put our assets in, and it gives us certain benefits. The benefits are as follows:
- Avoid Probate
A Revocable Trust gives you complete control. Meaning, the assets are titled in the name of the Trust and your name is no longer on the asset. When you pass away your Trust will dictate (based upon your instructions) how the assets held in the trust will be passed to your beneficiaries. The assets avoid the court probate process because they are held in the Trust and not in your name.
- Privacy
Your Revocable Living Trust is a legal and private document. If you’re concerned about your privacy and you don’t want any of your Will and your personal information on the internet after you pass away, a Revocable Living Trust is the solution.
- Multiple Marriages and Blended Families
With a 50 percent divorce rate sweeping the county, it now seems like everybody has a step mom and step dad. One of the biggest fears that people have is the possibility of a current or second spouse disinherit their children. If you are concerned about this and you want to provide lifetime benefits to the surviving spouse but, after his or her death, still be able to leaving assets to your children, a Revocable Living Trust is the most cost effective solution.
- Planning For Incapacity
I have personally experienced family members who have been incapacitated with Alzheimer’s and catastrophic illness.
A Revocable Living Trust allows the person you mane as a co-trustee or as a successor trustee, to have unrestricted access to the assets held in the Trust, in the event of your incapacity. During your life the Trust holds all of your assets, but allows seamless access to assets when you become incapacitated or too sick to manage your own finances.
It may still be necessary to have a durable power of attorney (POA) for other purposes such as the signing of admission papers to a hospital or nursing home, dealing with insurance companies or managing your retirement accounts. But for practical reasons, a Revocable Living Trust may be the best solution.
- Special Needs
A Revocable Living Trust allows you to provide for loved ones with special care needs. Special health care needs include any physical, developmental, mental, sensory, behavioral, cognitive or emotional impairment or any limiting conditions that require medical management care.
Asset Protection
When I speak with client from around the country and the topic of asset protection comes up, I always mention the fact that Rockefeller said, “Own nothing and control everything.” In this country ownership brings liability and control brings benefits.
Ownership brings liabilities, such as probate, and excess taxation. Control brings benefits. So, it’s important to set up your estate in such a way that you have the most amount of control, thus the most amounts of benefits. If your assets are titled in the name of your Living Trust, you still own the assets, only under a different name. So when you pass away the Trust still has your assets and lives past you.
If you’re like most people, you’re probably going to have additional questions. Obviously, this isn’t everything I can tell you about the benefits of a Revocable Living Trust or how I help my clients to properly structure life insurance and annuities in your estate plan to disinherit Uncle Sam and maximize tax-free giving. But, if you would like more information on this subject and how this type of planning can give you peace of mind… you’re welcome to send me an email.
BTW, Joel Osteen’s message was on “Loving Unconditionally”… Love never fails, God’s mercy is everlasting.
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If you have any questions or you would like additional information please feel free to contact me. As always, I will do my best to help you in any way I can or lead you in the right direction.
