The 9 Steps to Financial Freedom (12 page)

Everything went fine for about four years, but as Sarah’s
health continued to weaken, she decided she wanted Annie to step in as the new trustee of the trust. This meant that Annie would be the one who could decide what was to happen with the money in the accounts, write checks against them, and generally oversee everything. They came back to my office, and it was an easy process to change the name of the trustee from Sarah to Annie. Janet then wrote all the institutions that held Sarah’s money informing them that Annie was the new trustee.

About two weeks later Peter called to say that he was coming to visit Sarah; this was a first, and it made Annie very nervous. Still, she agreed to join her brother at her mother’s condo for dinner the night he was due to arrive. When she got to Sarah’s condo, however, the locks had been changed. After meeting with the super and calling a locksmith, Annie gained entry and found her mother gone, her suitcase gone, her checkbook gone—and the pills she needed to take every day still on the night table. Five days later the authorities found her in a hospital in Florida. She had collapsed from dehydration and starvation.

Annie and William, in a panic, flew to Florida to bring Sarah home, and her story emerged slowly. Peter had taken his mother to the bank and tried to close out her account—but wasn’t able to, since Annie was now the trustee of her mother’s trust. He was able, however, to clean out her safety-deposit box of quite a lot of cash that Sarah liked to keep there just in case. Then he flew her to Florida, made her sign another power of attorney form he’d drawn up. That was all Sarah would say about the last time she saw her son. As Annie and William were bringing her home, Sarah died.

After Sarah’s death Peter was notified how much he was to get under the trust. He was furious. He claimed that his mother had promised to transfer the deed to the house over to him
while she was in Florida. He claimed a lot of other things as well. He threatened to sue. But we sent his attorney a copy of the trust and a copy of the video, and that was that. Even though Peter was actually living in the house, the trust made Sarah’s wishes crystal clear. Her trust overrode Peter’s claims and threats. The trust protected what Sarah wanted to have happen to her money. Had Sarah had a will, not a trust, the probate fee on $3 million would have been $82,000.

One footnote to this story: Because there was a lot of money at stake here, and because Sarah and Annie were afraid that others might find out how much money they had, their privacy was a big concern to both of them. So there was yet another reason why they were better off with the money in a trust rather than in a will. Wills are public documents, and after someone has died and his or her will has been probated, anyone can go down to the courthouse and look up all the assets you owned and what they are worth. With trusts, only the people entitled to the assets will know what they are and what they are worth.

If you want to do it yourself, and if you’re very good about taking care of paperwork, there are books in your bookstore that will show you how—$20, give or take. Computer programs for setting up trusts are available for less than $40. If you decide to do it yourself, though, I urge you to have a qualified attorney look it over to make sure you did it correctly.

If you decide to work with a qualified estate attorney, depending on the size of the estate and how expensive the attorney is, you should be able to get a simple revocable living trust drawn up for between $500 and $3,000. If you decide you want your attorney to fund the trust—that is, to transfer
your assets into it—it may cost you more. Once the trust is set up, making simple changes to it should cost about $100. Obviously these fees will vary, depending on where you live and how complex your requirements are.

The language of trusts may seem daunting, but it isn’t. Here’s a rundown of the terms you need to know:

Revocable Living Trust

Trust:
It’s called a trust because you are entrusting this entity with your assets, for your benefit while you are alive and to carry out your wishes when you can no longer do so for yourself.

Living:
It’s called living because the trust will be set up while you are alive and will also live on after your death to carry out your wishes.

Revocable:
Whoever is in charge of the trust—and it will usually be you—can change it at any time, so it is called revocable.

Components of a Trust: Trustor, Trustee, Beneficiary

Trustor, or settlor:
The person who creates the trust and who owns the property that will be put into the trust. In the case history just presented, Sarah was her own trustor.

Trustee:
The person who controls the assets in the trust. Most often the trustor is also the trustee. When you set up a trust, you do not have to give up your power over your assets. Most people continue taking care of everything just as they did before the trust existed. The only difference will be your title. If you and a spouse hold property as joint tenants or in community property, you do the same in the trust, and you can both be trustees. In fact, you can have as many trustees as you want, though having more than two is not usually recommended. Keep in mind that the trustee will have the say over most of
what happens in the trust, so choose your trustees carefully, even if you are still going to be a trustee yourself.
^*

Co-trustee:
Another person who has the authority to manage and invest the assets of the trust, although all trustees must agree to financial or investment changes. Parents often choose to make their children co-trustees, upon the deterioration or disability of the parents. Couples usually set up their trusts so that they’re both co-trustees and therefore both must agree to any changes.

Successor trustee:
This is the person who steps in to make decisions about the assets in the trust if and only if the trustee or co-trustees cannot or do not want to act in the decision-making process. Annie was Sarah’s successor trustee and became her trustee once Sarah no longer wanted the burden of decision making.

Current beneficiaries:
The person or persons for whom all of this is being held in trust. Sarah was the current beneficiary of her own trust.

Remainder beneficiaries:
The person or persons who will inherit everything in the trust after the current beneficiary (who is usually the trustor as well) dies. In our case history Annie was a remainder beneficiary. Sarah had wanted William to inherit some assets outright, so he was a remainder beneficiary as well. Peter, to whom Sarah had left the $10,000, was another remainder beneficiary.

What good is an empty suitcase when you leave to go on vacation? Not much. Nor is an empty trust much good. By itself, the
document establishing the trust means nothing until the trust assumes ownership of the things you intend to put into it.

In other words, once the trust has been set up your assets must be transferred into it. This means that if John and Jane Doe owned a house together in their own names, after they established their trust they would have a new deed issued that would list the owner as
John and Jane Doe, trustees for the John and Jane Doe Revocable Living Trust
. The Does would also change the titles on their stock portfolio, their insurance policies, bank accounts, and so on. Doing this is simply a matter of paperwork.

Computer programs and books about trusts provide sample letters to show you how to fund your trust. If you have a lawyer draw up your trust, he or she will have form letters available to show you. Or the lawyer can handle changing the titles for you; even if the fee is higher than that for simply drawing up the trust, it might be well worth it—different institutions have different requirements for making the change.

Failing to transfer assets into your trust can be costly. Let’s say, for example, that you were lucky enough to have a certificate of deposit at the bank worth $100,000. Put that CD into your trust, and though there might be estate taxes for your beneficiaries to pay, there would be no probate. Forget to put it into the trust? That mistake would cost your beneficiaries up to $5,000. All assets that have a title on them—such as your bank account (both checking and savings), brokerage account, certificates of deposit, Treasury instruments, and all accounts that have your name on them—need to be transferred into the name of the trust. Every institution has a form that it uses to make this transfer easier for them. Make sure, if your lawyer is not doing this for you, that you contact each place, get the correct paperwork, and fill it out immediately to make the transfer.

Okay, you’re thinking, this all makes great sense. But I’m only thirty-nine, and I did a will when we had children. The will says to whom the kids would go if something happened. My best friend, Joe, would be the guardian; we’ve already talked about it. Plus I don’t really have that many assets yet, though I have a nice-size life insurance policy, just in case. That trust sounds like a good idea for when I’m older.

Not true. Particularly when you have children, the earlier you set up your revocable living trust the better, even if you don’t have a lot of money. If your children are very young, and if anything were to happen to you, they could be at greater risk than you might imagine. Say you’re killed in an automobile accident. It happens every day. Even if you have a will, your will does not have the power to assure that Joe, your best friend in this world, will be the legal guardian of your children. A will can only express your wishes. The court has the final decision when it comes to who is appointed legal guardian of your children. With a living trust, you can specify who handles the money position for assets in your trust.

This is true in a trust as well—there is no guarantee that the person you name to be your children’s legal guardian will be the one appointed by the court. But with a trust, you can at least exercise control over their financial future. With only a simple will, the judge not only can appoint a guardian but can take charge of the funds you want your children to have (for private schools, camps, music lessons, prom dresses) until the children are eighteen years old. For instance, if your children are underage and all you leave them is a life-insurance policy, a guardianship for the insurance money is created upon your death, naming the executor or someone else as the guardian for this money. Each year the guardian has to go back to court to
account for the money spent on behalf of the children during the past year. When each child reaches eighteen, regardless of his or her ability to handle the money, each one’s share will be legally signed over, lock, stock, and barrel. And by the time he or she gets it, there will not be as much as there could have been, because every year there have been guardian fees and fees to a lawyer to do the guardianship reporting.

If you die with a trust, the courts still have the final say over guardianship. But you can at least make the important decision of how, when, and for what purposes your children will receive the money you are leaving them. You assign a successor trustee (your chosen guardian, for example)—or two or three, or however many you like—and specify when you want your children to receive their money, how you’d like that money to be used until that time, and, poof, it’s done. The successor trustee(s) takes care of your children’s financial lives on your behalf. No yearly reporting, no fees, nothing.

Think trusts are for old people who are likelier to die? Think again. Trusts are for people who are lucky enough to live among people they love. Trusts are for people who are responsible for those they love.

Think revocable living trusts are only for the rich? Not true, as we have seen. Bypass trusts (
this page
) are for the rich, but that is a different kind of trust. In fact, revocable living trusts are even more important for people with fewer assets than for those with tons of money. Why? Because the less you have, the more probate hurts.

If trusts are so great, why do so many people still think they should have a will drawn up and have their lawyers do it for
them? Why don’t the lawyers, especially in states where probate fees are statutory, recommend establishing trusts?

Guess who gets the probate fees? The attorneys do. If you were an attorney, would you rather make thousands in probate fees or just a few hundred to set up a trust?

More and more people are going the trust route and for all the reasons we’ve seen, I recommend a trust for most people. However, it is also very important to have a will as a backup, covering any assets you have not put into your trust—things such as furniture, personal items, and items of strictly sentimental value. And remember, if you have underage children, you should designate who is to serve as their guardian in your will, so that your wishes will be clear to the court.

If you have not created a will or a trust, or worry that you haven’t done it properly, it might be time to see an attorney who specializes in drawing up these documents. Word of mouth is the age-old way of finding an attorney, so ask your friends, but please make certain you find one well versed in estate planning. If you do have friends, however, who think their attorney walks on water even if he or she doesn’t specialize in trusts, you might want to call and ask that attorney to refer you to someone who does.

Another good place to find names of knowledgeable trust attorneys in your area is through your local university, especially if they have a law school. Call and ask one of the professors who specialize in estate planning whom they would recommend.

The Web is also a good resource; you can search for lawyers at
www.lawyers.com
as well as at
www.aaepa.com
, the website for the American Academy of Estate Planning Attorneys.