Prevention Is the Greatest Cure
Your clients trust you with their financial future and the legacy they want to leave behind. They rely on you to anticipate challenges, foresee trouble, and take preventative measures. When it comes to a client’s financial wellbeing, it is up to the trusted advisor to know what problems are likely to arise and to have solutions ready to help avoid conflict in the family, waste of resources, and other common pitfalls.
One crucial tool to keep assets safe and to ensure they are distributed in the way your client wants is through the use of a revocable living trust.
What Is a Revocable Living Trust?
A revocable living trust (RLT), sometimes called a revocable trust or living trust, is an alternative to a will. It’s a document that instructs a trustee on how to manage the client’s assets during the client’s lifetime and how to manage or distribute the assets upon the client’s incapacity and death. Diverse assets such as life insurance proceeds or policies, real estate holdings (including the client’s personal residence), bank accounts, and investments can be managed with an RLT.
An RLT allows a client to name him or herself as the initial trustee and to name a successor trustee in the event that the client becomes incapacitated or dies. By being named trustee, the client retains full control and also retains the benefit of his or her assets.
In addition to serving as the trustee, the client has the ability to alter the trust as he or she sees fit (hence being called a revocable trust), to add or remove beneficiaries, and use the assets as he or she wishes. Because the assets in an RLT are still under the control of the client, he or she will pay taxes on any income within the trust accordingly.
RLTs Avoid Probate
One major benefit of using an RLT as an estate planning strategy is that it avoids probate. This is accomplished by ensuring that all assets that otherwise would have been in your client’s name at death are funded into the trust. Then, when the client dies, there are no assets in the name of the client and no need for a probate. The terms of the trust will dictate what happens to the assets, not a court or state law.
Probate can be a long and expensive process and can restrict beneficiaries’ access to assets from a few months up to several years. Estates whose assets span more than one state could end up going through probate in each state. Why put beneficiaries through this process when it can be avoided simply by creating an RLT?
Passing financial security on to the next generation is a popular goal for many clients. However, inheritances can be vulnerable to many life events and changes a beneficiary might experience. Assets can be spent too quickly, devalued, lost in a divorce, seized by creditors, or become vulnerable in a lawsuit.
A properly drafted RLT allows clients to put restrictions in place to ensure their hard-earned money continues to benefit the next generation. Whether it is the use of a spendthrift provision or no-contest clause, or merely establishing an age that a beneficiary has to attain before receiving any distribution, the client is in control.
If a client has a traditional will, the terms in the will become public record as soon as the probate is opened. With an RLT, by contrast, assets are distributed privately. Without court supervision, there is no need for the RLT to be filed with the probate court. In turn, the transactions involved in administering the trust are not entered into the public record and cannot be searched, thus providing privacy to both the client and the beneficiaries.
What Could Go Wrong?
Most clients have a clear idea as to how they want their estate to be divided, but without proper estate planning, a lot can go wrong. Lack of foresight in estate planning will always come to bear sooner or later. Let’s take a look at some common shortcuts and their consequences—and how an RLT can help avoid these headaches.
A client’s child is added directly to their bank account. This may seem like a straightforward way of designating a recipient for an asset, but what happens if the child incurs significant debt? The bank account will be seized by creditors, and the child will not see a penny. There is also the added risk that the creditor may decide to take the money as soon as the child is added to the account, despite the fact that the child never made any contributions to the account, and the client is still alive. The creditor will deem the child to be the owner of the account and can use those funds to satisfy the outstanding debt. By contrast, if the bank account is funded into an RLT, it can be protected from the beneficiary’s creditors during the client’s life and after their death.
A client leaves their home to their child through the use of a transfer-on-death (TOD) deed. The client intends for the child to receive a certain share of the estate by deeding them the home upon the client’s death. What happens if the home is sold before the client passes away? Instead of an equal share in the estate, the child will receive nothing. By funding all assets into an RLT and designating shares for each beneficiary to receive, you will not have to worry about individual assets. In this instance, if the home is an asset of the trust and is sold, the proceeds will be deposited into a bank account owned by the trust, so even if the child does not get the house, they can still get the value of the house as part of their share.
A client names a beneficiary directly in their life insurance policy. Again, in this case, there is no protection against the beneficiary’s creditors. And what happens if the policy premiums are not paid? If the policy lapses, there will be no asset for the beneficiary to inherit. This too can be avoided with the care and specificity of an RLT. As mentioned before, having the proceeds payable to the RLT means that the client can stipulate how the funds will be distributed to beneficiary instead of an outright distribution. Also, if the policy lapses, as a beneficiary of the trust, he or she will still receive a share of the overall trust assets.
Honoring the Client’s Wishes
As we have seen, any of these events could disrupt the client’s original intent of dividing assets as desired. An RLT is a much safer and simpler option. Instead of having to worry about how separate assets are titled and making sure beneficiary designations and account owners are updated every time the client changes his or her mind about who is to receive them, an RLT allows for one set of instructions that control everything.
With assets being held in a trust and distributed over a period of time, an RLT encourages the continued management of the estate by qualified financial advisors. If the assets are allowed to be distributed outright, it is highly likely that the beneficiaries will cash out.
Your clients depend on you to help them plan and make sound decisions about their financial health. Working together, we can help develop a comprehensive financial and estate plan that will help build financial stability for today and tomorrow. Do not hesitate to reach out for more information about how we can collaborate to best serve our clients.