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Should I Set Up a Financial Trust?

Written by Jimmy Mengel
Posted April 15, 2013

For better or worse, the only certainty in life is that none of us know when it's going to end.

And if your final wishes aren't explicitly spelled out when you shuffle off this mortal coil, it could spell disaster for your family and friends when they try to sort through what you've left behind.

When you've spent a lifetime building your assets, it's only natural that you'd want to see them doled out exactly the way you want.

The last thing you want to do is leave your family scrambling — or worse, feuding — about who deserves what and why.  

But that's exactly what could happen to nearly half of American adults today.

According to a recent survey, only 35% of Americans have a will that specifically divides their assets up. That number jumps to 48% when those polled were asked if they had a financial power in place if they were to become incapacitated.

If you are one of these individuals, don't feel too bad. You're actually in pretty good company...

Did you know that Abraham Lincoln (a lawyer, mind you) died without any kind of will or trust? Same goes for Pablo Picasso, Jimi Hendrix, and Sonny Bono, who all died intestate. These folks were quite wealthy when they passed on, and their fortunes took an incredibly long time to unpack and distribute. 

The primary fear cited by those without a will or trust is that legal costs are prohibitive.

But this fear is not nearly as scary as the alternative — which is turning all of your assets over to the state. The state would then decide how best to allocate your personal property, a lengthy and tedious process that's likely to turn into a nightmare scenario — for a number of reasons...

Your assets could be tied up in probate for months, even years, and the process can devour up to 7% of your fortune.

A financial trust attorney I spoke with recalled one particularly frustrating scenario in which a widow passed away without anyone named in her will. Since she had neither children nor parents, the attorneys attempted to find her next of kin... without success.

In the state of Maryland (where this incident took place), if no person exists to claim an inheritance, the assets are given to the local board of education. This widow's assets were dished out to the local school board, and the issue seemed settled. But a problem arose when the woman's out-of-state cousins came forward a few months later to claim their rightful inheritance.

Meanwhile, as this long and complicated debacle was playing out, the attorneys' fees kept growing, wiping out a significant chunk of estate.

Another risk is that your assets may be dividend in a way that you did not intend or wish. If you don't have a legal plan in place, the state will divide your assets up based on the immediate family. While laws vary from state to state, you can expect your assets to be divided equally among your spouse and children (or your parents, should you pass before them).

So let's say you have a son and a daughter. The son has three children and is living paycheck to paycheck, while your daughter is single and financially secure... If given the choice, you might have opted to bequeath more to your son to help send your grandchildren to college or pay off his mortgage.

If you are unmarried without children, the situation can get even dicier, the worst-case scenario being your fortune ends up going to an estranged family member.

The estate attorney I spoke with recalled another incident in which a man passed away intestate, so the state allocated half of his assets to his wife and the other half to his parents.

Since a home is often the most valuable asset one owns, this creates an obvious problem. His wife ended up having to sell the home they had shared in order to provide her in-laws with their appropriate share of her deceased husband's estate. You can imagine the heartache and anger that would cause during an already sad time...

These types of horror stories can be easily avoided by setting up a financial trust — or, at the very least, setting up a clearly defined will.

There are clear differences between the two. So even if you already have a will, you may want to set up a financial trust to avoid some postmortem headaches for your heirs.

Now the main question: Should you choose to write a simple will, or should you take the next step and set up a financial trust?

Trusts 

When you hear financial trust, your first thought may be of some elderly tycoon behind a giant mahogany desk, chomping an expensive cigar as he parses out his railroad empire and divides up his vast real estate holdings.

However, financial trusts are not just for the super-wealthy.

In fact, if you meet the following requirements, you can securely allocate your assets with lower taxes, more protection, and avoid the hassle of probate court.

According to Mike Janko, executive director of the National Association of Financial and Estate Planning you may want to seek a trust if you meet one of the following requirements:

  • You have a net worth of $100,000 

  • Your assets are weighted toward real estate or a business  

  • You have a disabled heir that you do not want to be disqualified from government disability assistance   

Benefits: 

  • Assets are handed over immediately in case of death, and your heirs or window(er) avoids probate court, which can drag on for months or years.

  • Reduction of estates taxes, or the dreaded "death tax"

  • Unlike with wills, your estate will not be a matter of public record. (Note: If you value your privacy and don't want all of your dirty laundry aired in a court after you are gone, then you should look into setting up a financial trust.)

  • You can set conditions on your assets, such as setting aside a sum only to be used on education. You can also choose to stagger payments so your beneficiaries do not get receive an inheritance in one lump sum.

  • If you have underage children who cannot yet manage money, you can name a guardian to disperse their inheritance once they come of age.

Setting up a living trust with an estate attorney can run you at least $1,500. But considering the tax advantages and flexibility with how you can bequeath your assets, it is a small price to pay. Plus, can you put a price on sparing your family the burden of taking care of your business for you?

We understand this is not the most optimistic topic. But a scarier thought is not talking about it at all, leaving your loved ones to muddle through the legality and complexity of your estate when they are already grieving your loss.

Do yourself and your family a favor and secure your final wishes in a legal document. You can do this quickly and cheaply by creating a will for around $200.

But if you are serious about where you want your money to go — and you meet any of the above criteria — you should really think about opening a financial trust.

At the very least, you'll sleep better knowing that your family and friends won't have to pick up the pieces.

Godspeed,

Jimmy's Sig

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