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Transitioning Your Legacy

Death isn’t fun. It’s not fun to talk about, to think about, or to deal with. This makes estate planning one of those ‘I’ll deal with it later’ kinds of things. It shouldn’t be. 

Cerulli Associates estimates that nearly 45 million U.S. households will transfer $68 trillion over the next 25 years in what is expected to be the largest generational wealth transfer in history. There’s no doubt it’ll affect most of you – the question is: do you want to be prepared?

In our experience most people that are dealing with this fall under one of these categories: 

  • I’m unsure I need a Trust, and if I do I don’t know how to create one
  • I want to know more about the inheritance process 
  • I’ve inherited money and need to know how to manage it. 

In this article, there’s something for all three. 

Trusts, Wills, and Probate – what’s the difference and which one is right for me?

People often use “Will” and “Trust” interchangeably, but there are a few key differences. A Will instructs what things go to which people, much like a Trust does. However, a Will still has to go through probate, it just makes the probate easier. Trusts, on the other hand, skip probate altogether. They tend to be more specific and appoint a trustee to ensure your desires are upheld. Consequently, they’re more expensive and take longer to establish.

Probate is also expensive and time-consuming. This court-supervised proceeding can cost thousands and can take months (or even years) to finalize. If you can, you should always avoid probate. Aside from having a Trust, there are some scenarios that avoid probate:

Probate is skipped if:

  • Estate is under $166,250
  • You’re only asset is real estate (California allows a Transfer on Death (TOD) deed)
  • Investments accounts are registered as TOD
  • Funds are held in a pension plan
  • Wages, salary due to the deceased
  • Cars, boats registered in TOD
  • Life insurance/ retirement accounts (IRA, Roth IRA, 401k) has a beneficiary listed

Okay, I need a Trust. What now?

The first step in setting up a Trust is to decide the type of Trust needed. Here are a few examples:

  • Irrevocable Trust: for estates exceeding the tax limit ($12-24 million as of 2022) 
  • Revocable Trust: appropriate for most situations, allows for provisions to be altered or canceled if the grantor(s) are living
  • Special Needs Trust: for those who rely on State programs and don’t want to lose eligibility. 
  • Asset Protection Trust: protection from creditors. 

The most common trust used to avoid probate is a Revocable Trust.

Secondly, compile a list of your assets (and their descriptions) that you want to be included in the Trust and decide how you want your estate to be distributed and to who.

Thirdly, decide who to appoint to fulfill the following roles:

  • Power of Attorney (POA) – Acts on my behalf if the trustee is unwilling. Void once the current trustee has passed.
  • Durable Power of Attorney (DPOA) – Acts if the trustee is unable. Also, void upon death.
  • Health Care Directive – governs all medical-related decisions (while living). 
  • Successor trustee - the primary contact going forward. Provides death certificates, signs paperwork, and coordinates with other heirs.
  • Guardians – (for children under 18) who will make decisions on their behalf.

These don’t have to be different people. The same person can fill multiple roles. It ultimately comes down to you and your family dynamics.

Congratulations!  You built the framework for your estate plan. Next is to work with a legal professional to establish the Trust. A reasonable price for a simple Revocable Trust is about $1,500-$2,000. It’s not cheap but it’s better than probate. It also takes about 1-2 weeks for the paperwork to be drafted and finalized. 

Once finalized, do not forget the crucial step of retitling accounts, titles, registrations, and deeds. The assets you choose to be distributed via the Trust, need to be titled in the name of the Trust. This includes bank accounts, cars, properties, boats, non-retirement investment accounts. Retirement accounts (IRAs, Roth IRAs, 401k, etc.) should NOT be listed in the Trust. These accounts will remain in your individual name, and we strongly encourage listing individuals as beneficiaries.  

Finally, we recommend you review your Trust every 5-10 years to make sure relationships are still intact and check to see if new assets need to be added to the Trust. 

The next stage of Trusts is inheriting the estate. This begins with a death certificate. We recommend requestioning several death certificates, as each financial institution will require one. Once obtained, the assets in the trust will be distrusted in accordance with trust instructions. The beneficiaries will inherit cash, property, and/or investments. Our job as fiduciaries is to help guide them through the process and help them make wise decisions. 

If inheriting real estate:

  • Instructions for how to split the property are typically indicated in the Trust. Often, the property is sold, and cash is distributed among beneficiaries. 
  • Alternatively, if the Trust permits, a beneficiary can request to be bought out of their share of the property. 
  • Beneficiaries can invest their proceeds from the sale in a taxable account. 

If inheriting investment accounts:

Investment accounts vary by tax structure, taxable and qualified.

  • Taxable: (individual, TOD, or trust accounts) 
    • Receives a step-up in the cost basis 
    • Earnings/gains are taxed
    • No distributions required 
    • We have tax-conscientious investment models (Muni’s, etc.)
  • Qualified accounts (Roth/Traditional IRA, etc.) 
    • MUST be distributed anytime within 10 years
    • Taxed as ordinary (taxable) income at the beneficiary’s tax bracket.
                 Roth IRAs are tax-free; earnings are also tax-free if the 5-year rule has been met
    • We do tax planning to see when’s the best time to take the distribution(s). Usually, annually, a one-time lump sum can create a big tax event (some exceptions).

At this point, the Trust’s purpose has been fulfilled and your beneficiaries inherited your estate. This is where the Trust ends, and the legacy continues. The point of doing all this in the first place is to build a foundation of wealth (and wisdom) that your loved ones will build on. That’s why the third phase doesn’t really have anything to do with the trust itself, but the money habits that come with it. 

In our experience, families that discuss their finances
with their beneficiaries tend to be
more organized, prepared, and financially successful
regardless of estate size. 

During your next financial review, note how much you’re anticipated to pass on. We encourage you to bring your beneficiaries in for education and introduce your successor trustee(s) to us. 

Answer the following questions and then pose them to your beneficiaries – you’ll be shocked how the answers can vary:

  • If you inherited the family estate, what is the first thing you’d do with the money?
  • Can your beneficiaries survive without your inheritance? Are they relying on it or would it supplement their existing nest egg?
  • Will your beneficiaries know what to do with it? How to manage it? Invest it? 
Just know, we are here to help. Whether it’s with establishing your estate plan, educating your beneficiaries, and/or helping your legacy lives on, we’ve got your back.  

 ~ Igor Nikachin