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What you need to know about Trusts, Wills and beneficiaries

Top 8 Reasons to Have a Trust

There are two important components that make up the Estate Planning process: a Last Will and Testament and Trusts. While most people are aware of the purpose and structure of a Will, Trusts can be a little more difficult to understand. Trusts generally have a more complex legal structure when compared to Wills, and with the various types of Trusts available it can be hard to know which (if any) are right for you. However, there are a number of reasons to have a Trust that you should consider before Estate Planning.

Trusts typically come into the Estate Planning picture for individuals with over $200,000 in assets, including homeowners. They can also be a crucial tool for parents who may need control over how their assets are distributed to children, for example if there are children from previous marriages to consider or if there are young children involved. With that being said — Trusts can be beneficial for a number of reasons. Here’s a look at them.

  1. Trusts can avoid probate court
  2. Certain Trusts help reduce Estate taxes
  3. Trusts provide more control over your assets
  4. They are low maintenance
  5. Trusts can protect your loved ones in worst case scenarios
  6. The structure of Trusts can assist children with special needs
  7. Complex assets can be properly divided using Trusts
  8. Ensure everyone in your family is taken care of with a Trust

Avoid Probate Court

One of the biggest reasons for Estate Planning is that it can prevent your loved ones from lengthy proceedings in probate court. Trusts help ensure your Estate avoids this process. This saves your loved ones from the difficulties of court during what will already be a challenging time. There are also numerous costs associated with probate court, such as attorney costs and court fees, that you can avoid with a thorough Estate Plan.

Reduce Estate Taxes

Trusts are a great way to reduce, and in some cases eliminate, hefty Estate taxes. Essentially, by transferring assets into Trusts you can reduce your overall taxable Estate. Though there are various types of Trusts to choose from, they almost all take tax planning into account.

Maintain Control Over Your Assets

A Trust allows you a certain level of control over your Estate that Wills cannot provide. The structure of Trusts allows you to decide how and when your assets will be distributed. If you have young children, this can be a great way to ensure they do not receive their inheritances in one lump sum. Trusts can be created with certain life milestones in mind, allowing children to receive funds after graduation high school or college or even after marriage.

Low Maintenance Estate Planning

Once you take the time to create a Trust, they are relatively low maintenance. While you may need to update your Estate Plan after new life events (such as the birth of a child, or purchase of a new asset), Trusts rarely need to be amended.

Plan For Worst-Case Scenarios

While no one wants to think about the worst-case scenario, life can sometimes get in the way. Estate Planning is a crucial step in protecting yourself and your loved ones in the event you were unable to make decisions near the end of your life. Trusts can help ensure your loved ones are taken care of in the event you became incapacitated.

Provide Extra Care to Children With Special Needs

If you have children with special needs or long-term medical challenges, the creation of a Trust can help offer extra protection after your death. Trusts can be set up to provide long term financial assistance to your child. There are also numerous types of Trusts that can help you plan differently for the needs of each child.

Divide Assets Fairly

As you begin Estate Planning, you may realize that certain assets are more difficult than others to split up among your beneficiaries. Trusts are one way to designate how more complex assets will be distributed after your death. For example, if you have a family business that needs to be split up or a vacation home that you don’t want to leave to one person Trusts can be a good way to do that.

Add Family Protections

Trusts are one way to ensure your spouse and children remain cared for after your death. What I mean by this is, distributing assets can become more complicated after divorce or remarriage. Creating a Trust can ensure your spouse or children receive their rightful inheritance, no matter if they remarry or if their family structure changes later in life.

Commonly Asked Questions about Trusts

Now that we have discussed the various reasons to have a Trust, you may still be wondering if they are right for you. Read through the following commonly asked questions for more insight on why you may need a Trust.

Do I need a Trust if I have a Will?

You may need a Trust even if you have a Will, depending on your legal and financial needs. While a Will names your beneficiaries and how assets will be distributed, Trusts can provide you with more control over these components. Trusts can also allow for more complex Estate Planning structures, particularly for those with large or blended families.

Do Trusts Avoid Probate?

Depending on how they are structured, most Trusts avoid probate entirely. Trusts allow assets to smoothly transfer from one person to another, thus circumventing probate court proceedings and the associated costs.

How Does the Secure Act of 2020 Affect my Trust?

The Secure Act of 2020 established several rules on Trusts and their designated beneficiaries. The new law specifically designates how IRA accounts can be distributed. We

It is not uncommon for individuals to create a Last Will and Testament and never think about Estate Planning again. Unfortunately, this can leave your Estate vulnerable to probate court and various Estate taxes. The creation of a Trust can provide much more control over the distribution of your assets, and can even provide tax benefits. That being said, there are numerous reasons to have a Trust that you should consider when making an Estate Plan.

Now I want to talk about 10 reasons why beneficiary designations are sooo important:

It’s important to understand that upon your demise, the easiest way to transfer an account or insurance policy is through beneficiary designations. If you are not careful enough, missing or outdated beneficiary designations can result in various consequences.

Most times, we rush to fill these designations without carefully focusing on the details; the truth is that they are very important and hence, deserve our full attention. The reason behind this is that beneficiary designations hold more power and are above what is in other estate planning documents like a will or trust.

For example, in case your will states that you want your spouse to inherit all your wealth after your demise, but the beneficiary designation on your life insurance policy has your ex-spouse’s name, he/she may get the proceeds instead of the intended person.

Where can I find them?

Beneficiary designations can be found in; Employer-sponsored retirement plans [401(k), 403(b), etc.], IRAs, life insurance policies, annuities, transfer-on-death (TOD) investment accounts, pay-on-death (POD) bank accounts, stock options, and restricted stock, and executive deferred compensation plans.

With so many different accounts where you’re required to designate beneficiaries, you may find it difficult to keep tabs. Nonetheless, it is worth the effort because failure to maintain the beneficiary designation on that 401(k) from three employees ago is likely to get the money to the wrong person.

When you begin setting up your estate plan, it is advisable to go over all the designations you previously made to ensure that they align with your plan. After this, you ought to regularly review and update them; at least once a year.

Beneficiary designations are very important, thus, here are some things that you need to consider in your estate planning;

1. Ensure to name your beneficiaries

Failure to name a beneficiary may result in your account or policy going through probate court. This court process often results in needless delays, extra costs, and unfavorable income tax treatment. The agreement that controls the account or policy may provide for “default” beneficiaries. The downside of this is that the default beneficiaries are not likely to be the individuals whom you intended.

2. Name both primary & contingent beneficiaries

Two is better than one! Having a “backup” beneficiary is a good idea because the primary beneficiary might die before receiving an inheritance; you never know. In the case that you may have only a primary beneficiary, you may consider naming a charity (or charities) as contingent beneficiaries.

3. Update for life events

It is advisable to regularly review your beneficiary designations and update them accordingly depending on major life events for instance divorces, marriages, deaths, and births.

4. Keenly read the instructions

Note that all beneficiary designation forms are quite different. Take your time to carefully read the information on the form before filling in names.

5. Coordinate with your will & trust

Let your will and trust align with your beneficiary designation. In case you make any changes to the two documents contact your attorney to ensure that everything is aligned in your beneficiary designation as well. The reason behind this is that these designations often operate independently of your other estate planning documents, therefore, it is good to understand how the different parts of your plan work as a whole.

6. Take your time and think first before naming individual beneficiaries for particular assets

For instance, when you establish three accounts of the same value and name a different child as a beneficiary of each; with time, these accounts may grow unevenly, resulting in the children getting different amounts – which is not what initial intention.

7. Avoid naming your estate as beneficiary

The disadvantage of naming your estate as a beneficiary is that your account will have to go through probate. On the other hand, designating a beneficiary on your 401(k) will save all the hustles of going through probate court. Note that there may be unfavorable income tax consequences for IRAs and qualified retirements.

8. Take caution when naming a trust as beneficiary

Seek advice from your attorney before naming a trust as beneficiary for IRAs, qualified retirement plans, or annuities. However, some situations allow you to name a trust- for example, you can do this if your beneficiaries are minor children, or you are currently in a second marriage, or you intend to control access to funds. In such occurrences, it is important to realize the tax consequences before naming a trust as beneficiary.

9. Understand the tax consequences

Special tax consequences are often placed on many assets that transfer by beneficiary designation. Reach out to your experienced tax advisor who will, in turn, provide planning ideas for your particular situation.

10. Use disclaimers when necessary — but be cautious

In some occurrences, a beneficiary may want to decline (disclaim) assets on which they are designated as beneficiaries. Disclaimers attract complex legal and tax issues; aspects that require careful consultation with your attorney and CPA.

Next steps

In every step you take; be it creating, updating, or reviewing your estate plan, be attentive to your beneficiary designations. Always remember that beneficiary designations are superior to what you have specified in a will or trust. Also, remember to update your beneficiary designations annually to ensure that they align with all the other documents.

When you join the Her Retirement Platinum membership program, one of the benefits we offer is a trust and will with our preferred vendor for less than $500. Reach out to us for more details. You can also email me for a free estate planning checklist.

As always, as your RetireMentor I’m here to help you navigate this whole retirement thing. You can email me at anytime.

Until next week, make sure to go out and Get Her Done.

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