Lately in the news I have been hearing lots of common myths popping up (courtesy of Gloria Vanderbilt and Sting both declaring that they DO NOT want to leave their Millions to their children.) So I thought I would write a quick post on the top 4 MYTHS I hear when clients come to my office for the first time.
1. Trust funds lead to children who are spoiled and lazy.
Certainly, a large trust fund can lead to spoiled children; but it doesn’t have to! In fact, trusts can help the creator do just the opposite. You can leave money to be available to help your children if they are in trouble, but not to deprive them of their work ethic. This can be accomplished by creating a trust for children that allows them to access a certain amount of money under limited circumstances, such as health, education, or financial emergencies. In fact, you could actually promote better work ethics by setting up a matching trust fund that pays each kid a certain amount based on how much money they earn themselves (complete with exceptions for those who do charitable work, serve in the military, choose to teach children, or any other condition or exception you want).
The best trusts are those used creatively.You could create a living trust so that your children would receive a modest allowance, but only if they did certain things or met certain goals.
For example, if you want your children to enjoy culture and fine arts, you can set up limited trust funds so that the money would be used for those purposes. Remember my post on Phillip Seymour-Hoffman (in my May Newsletter)? He left instructions for the guardian of his minor son of where he wanted him to live and grow up… along with what he believed to be the attached cultural values of being raised in those places.
The point is that a good trust can achieve almost any goal. A person who sets up a trust with a good estate planning attorney can craft special language to tie the distributions to any number of conditions or events, based on that person’s values and goals.
2. Trusts are only for rich people.
“I don’t need a trust; I’m not a millionaire.” Estate planning professionals hear this all the time. It’s simply not true. Who is a trust for?
How about anyone who wants their heirs to avoid the expense, hassle, aggravation and stress of probate court?
A properly-funded revocable living trust can avoid probate court entirely. And, maybe even more importantly, allows the creator of the trust to control their legacy from the grave.
I have a case now where my client’s modest earnings is a real challenge to paying us the fees required to probate his father’s estate. His father passed away leaving a small amount in several bank accounts and a home which is worth almost 300k. However, to get to those assets, the estate needs to be probated and attorney’s fees, court fees, a bond, and other expenses must be paid. It is really a catch-22 for him. He doesn’t have the money to probate the estate because that is where all the money is at the moment. Crazy huh!?
Even for those who don’t care if their loved ones have to deal with probate court, a living trust also helps in other ways. It can help people by setting up one or more people (or institutions, if they prefer) to manage their assets during their life if they become unable to — in the manner, and under the conditions they want. This, again, can all be done without the need for a court proceeding, like guardianships or conservatorships (which many families need when the proper planning was not done).
This is why they are called “living” trusts. Once funded with assets, a revocable living trust start working even during the person’s life.
3. If I set up a trust, then I will lose control of my money.
This is where the “revocable” part of revocable living trusts come in. In most cases, trusts are meant to be revocable, meaning they can be changed, amended, canceled altogether, or added to, whenever the person who signed the trust wants to … as long as they are competent to do so.
Trusts also foster control even after someone passes away. By setting up a detailed, specific, and well-crafted revocable living trust, everyone can control exactly how, when, if, and why their money passes, and of course, to whom. That means more control for the person creating the trust, not less.
4. I don’t need a trust because I already have a Will.
This is my favorite. Wills, unlike trusts, have to pass through probate court to work. YES! if you have a Will you STILL have to go through Probate. Remember: WILL = PROBATE. That means, they are public record, more expensive and difficult to administer, and more likely to lead to family fighting. Philip Seymour Hoffman, Michael Jackson, and Anna Nicole Smith’s estates provides a great example of this. These Wills can be read from the comfort of your computer because they are totally public. None of us would know the details of his estate, or to whom or how he wanted to pass his assets, if he used a proper trust instead of relying on a will.
Plus, there are tax benefits that can sometimes apply with trusts, which wills and joint bank accounts can’t achieve. In Hoffman’s case, in particular, he created an extensive tax problem by leaving the money to his girlfriend, who will pay estate taxes, and then the money will be taxed a second time when she dies or gives the money to the kids (depending, of course, on what tax planning she does and what the estate tax laws are when she passes away). A trust providing money to his children could have avoided the double estate taxes that will be incurred.
No one has to make the same mistakes that (believe it or not) celebrities made.
Talk to your legal or financial professional about whether a revocable living trust makes sense for you and your children.