Do I need a Will or a Trust and what’s the Difference?

SITUATION: My dad named me as the Trustee of his Trust. I thought settling everything would be very easy but I found that none of his assets were held in the trust. After a lengthy probate, all of the assets were transferred to the trust and I was able to distribute the appropriate share to everyone named in the trust. I’m thinking about my own estate plan and wonder why I should bother with a trust.

This story is very common as many people created estate plans using boiler plate trust documents from the internet, a financial advisor, or what is common referred to as a trust mill. These documents cannot meet the unique needs of every family. Estate planning should be custom for each household.

  • A Will is essentially a letter to the probate court describing to whom you want your estate distributed.  The only assets subject to the will are those that are held in a single name with no named beneficiary.  The Will has no control over assets such as IRAs, 401ks, Annuities, and life Insurance unless they failed to name a beneficiary.  Joint accounts and pay on death accounts also avoid the direction of the Will.
  • A Trust is an instrument that provides lifetime and post-life financial management with the ascertainable standards defined in the trust. If the only objective is to avoid probate, a trust is not necessary. A trust can also provide protection from the claims of the creditors of heirs, from claims during a divorce of heirs, and to protect a person from themselves.

To answer the question, create a Trust if you want those protections offered by a Trust. If you create a Trust, you need to change the ownership of all assets to the Trust. If all the necessary steps are taken, you can avoid the problems you realized during the settling of your father’s estate.

Do I need to do anything special to reduce taxes on IRAs for my heirs?


SITUATION: My friend recently passed away and left quite a nice IRA to his children. They were told they only had a lump sum option and cashed in 1.2MM that was split between two kids. They later told me that nearly half the money was paid in tax! They are all smart people who ended up with only half of their inheritance. What can I do to avoid this in my estate?

First, we have to agree that the Tax Code is extremely complicated. The additional income from the IRAs is impacted by many hidden tests and phase-outs that drive up the tax liability much higher than the marginal bracket. To make matters even worse, congress changed the meaning of many common words when it comes to the applications to those words in the Tax Code. The heirs may not have known that the IRS’s Definition of a lump sum distribution is, “all of the money must be distributed by the end of the fifth year following the year of death.”

In addition to spreading the distribution over five years, the heirs could have performed a direct transfer of the lump sum to another advisor firm that may offer lifetime distributions to the heirs.

To answer your question, you can create a Trust with conduit privileges that can be named as beneficiary of your retirement plans. This will provide a default plan that will prevent the heirs from making poor decisions based on their urgency to access the money, by what they are told by the custodian, or by ill-informed professional advisors.

I need help getting my family affairs in order; where do I start?


SITUATION: A friend of mine just lost his spouse in an accident. He told me his wife took care of everything including the family finances and he wasn’t terribly involved. I’m watching him trying to gather the details of their family finances while also suffering from the grief of losing a spouse. My wife and I have done little together with our finances. What should we do?

We always applaud a family who can allow each person to utilize their strength within the household. Some are better providers, some are better with maintenance, and some are better with family finance. When it comes to family finance, the person in charge should have a well laid out documentation to allow the other spouse to step in if necessary.

Create procedures for each aspect of your family finances. At least once a quarter, the couple should sit together and review the prior quarter income and expenses and discuss the next quarter. A document should be shared with the details of all assets and liabilities. This should be updated during meetings to show how the family finances are progressing. This will prevent the void created when there absolutely no knowledge family finances. A financial planner who works in a fiduciary capacity is the best person outside of the family to add to this team. This can be the go-to person for advice as well as when family disasters occur.

What are the duties of a trustee or personal representative?


SITUATION: I was really honored when my parents asked me to be the trustee and personal representative. I gladly said yes to their request and now I’m very nervous about exactly to what I agreed to.

These are two different roles in service to a person and their estate; the personal representative and the trustee.

  • The personal representative is the person named in the will who is responsible to settle the estate in probate court.  The PR must make arrangements to open a probate case in court, hire an attorney as necessary, gather the records of assets and liabilities and prepare a distribution plan to be submitted to the court.  Most states require a public notice of the probate case to be printed in the legal paper.  Anyone who wants to make a claim against the estate will have a fixed amount of time such as four months from the posting to file a claim.  After the period of time has passed and assuming there are no issues to be litigated such as family battles and unrealistic creditor claims, the probate case can be closed and the assets distributed.
  • The trustee takes ownership of all of the assets that are registered to the trust in a fiduciary capacity for the benefit of the granter (parents) and the heirs (children). A trust document passes assets by contract and therefore avoids probate. The trustee is typically empowered to make all investment decisions, to acquire assets, sign for loans, and any other array of duties described in the trust. It is typical that the income is paid to the grantor during the grantor’s life.  At death, the trustee is responsible to follow the instructions out laid in the trust which could be immediate distribution of all assets to the heirs or to hold the assets and distribute to the heirs for their lifetime. The trustee can be held liable should they make investment decisions that result in significant loss or if they don’t invest wisely enough to grow the assets for the beneficiaries.