Four Must Know Truths Regarding Trusts

After many years of helping people create inflation adjusted income plans, determine the right safe/risk ratio in their portfolio, I’ve encountered time and again many do not know how to evaluate if their current trust is right for them or how to decide if they require a trust.

This is why I’ve chosen to create four bedrock principals everyone should know about Trusts.

There are many kinds of trusts, but the most basic is a revocable trust, sometimes known as living trust. A revocable trust is advisable when you have after-tax accounts (not your IRA’s, 401K’s, 403B’s or other pre-tax retirement plans), and you do not want them to go through probate. A revocable trust directs your estate privately, so there is neither a public announcement nor a judge involved in ensuring your estate is settled without debt. A revocable trust can also distribute money over time, if your goal is to spread distribution to your family for many years after you pass away. Many times we see trusts distributed this way when the grandchildren are young. So as you can see, the advantages of using a revocable trust can be great. Revocable trust owners have to be aware that if they become disabled their successor trustee must follow their instructions. In essence, the trust can be revoked or changed by you, but your child who takes over in the event you are disabled doesn’t have that same flexibility.

What to watch out for: The biggest possible misstep with a revocable trust comes when you, as the grantor of the trust, become disabled and your adult child takes over when there is language specific to healthcare and your direction to pay for that care from your trust. In this situation, any protection of your assets from long-term care that your child could have used to protect your hard-earned dollars from a medical spend-down is lost.

Irrevocable trusts can have many strings attached. You need to know what those are before you enter into an agreement that can’t be changed without court involvement. Irrevocable trusts are great for holding life insurance outside of your taxable estate, if you have no intention of getting to your cash value in the future. Some irrevocable trust planning makes sense when certain types of real estate are involved. Experienced Elder Law Attorneys have learned to create hybrid trusts that provide a few of the desirable advantages of an irrevocable trust while offering more flexibility and less problematic strings attached.

You cannot wrap a trust around your IRA. Your IRA is a pre-tax asset, and it is directed at your death by beneficiary designations. It is critical that you keep a copy of your beneficiary designation form together with your legal documents. In the event you die and the custodian cannot find your IRA beneficiary designation, your IRA is paid to your estate and ends up being a probate asset that goes through the full process of probate. This cost and delay of probate can easily be avoided by maintaining a copy of your IRA beneficiary designation form.

In many situations trusts make sense, but if the trusts aren’t funded, the advantages are lost. All too often an individual seeks out the least expensive trust option desiring value for their money but end up getting absolutely nothing for their money. Once you’ve got a trust, you should link it to the accounts you would like governed by the conditions and terms of your trust (may be revocable or irrevocable). For example, if you have a CD at Happy People’s Bank for $100,000, and you want it to be distributed to your family through your revocable trust but the statement comes – and it is your name on the account registration – then none of the benefits of the trust are realized. The CD will go through probate and the instructions you left behind after your death will be ignored. Funding a trust is not hard, however, you need to take the time to make sure all of the institutions that hold your money have a copy of the trust that reflects the proper ownership of your assets to the trust and not to you, in your name individually, or jointly, if married.

Getting the opinion of an advisor who can confirm that the assets you own are in fact properly wired to your trust is very important. Take some time to discuss your trust planning options, then when you decide they’re right for you make every effort to ensure they’re properly attached to your assets so they ultimately go to those you love.

Matt Golab

Matt is an Investment Advisor Representative as well as the Chief Advisor of Aaron Matthews Financial Resources headquartered in Elk Grove, CA.Click Here To Find out More about Matt Golab And His Company Aaron Mathews Financial Resources!

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