There are certain things in life that people tend to procrastinate on until something unpleasant happens that forces them to act. Visiting the dentist, vehicle maintenance—these things just don’t seem to make it to the top of the to-do list.
Setting up a trust falls into this same category—and I get it— who wants to contemplate their mortality? However, the cost and headache that awaits your loved ones should you pass unexpectedly makes it well worth the effort.
So, what is a trust and what does it do?
A trust is a document that outlines what you want to happen with the assets held in trust for your beneficiaries.
Why is it important?
From a financial perspective, it is important for reducing estate taxes, protecting your property and avoiding probate. From an emotional perspective, it minimizes the family conflict that might ensue following your death if there is not proper instruction on your end-of-life wishes and the allocation of your assets.
Now that we have that short tutorial out of the way, I want to share with you from personal experience some lessons learned and mistakes to avoid when setting up a trust.
The Scenario
I recently worked with a client as she navigated through the process of being a co-trustee with her brother. Prior to this instance, my client and her brother were not close, as they lived in different states and were 10 years apart in age. However, as a byproduct of the situation, their relationship deteriorated to the point of animosity.
Potential Challenges
#1 Naming co-trustees
Pro: Having co-trustees can create inherent accountability. To avoid the interpersonal conflict that can occur among co-trustees you can name a neutral party, such as a financial institution, instead. There is typically an expense for this service, but it can be worthwhile in the long run to keep the peace during an already emotional time.
Con: You need to take into consideration the physical location, disposition and availability of each individual when choosing co-trustees. When the co-trustees have differing opinions or goals, it can quickly result in a stalemate. In this digital age, distance might not sound like a big deal, but the paperwork involved with carrying out trusts can be very time-consuming and necessitates original signatures, making the process a logistical challenge.
#2 Getting very specific
Pro: Being specific with the language in your trust can be very important as it guarantees that your wishes will get carried out regardless of your ability to communicate them effectively in the future.
Con: In this instance, the client who set up the trust specified that she wanted to remain home until she passed. However, with her health conditions at end-of-life, she would have been better cared for in a nursing home setting. But since the co-trustees could not agree, their hands were tied.
Sometimes the person(s) who is best to handle the financial end of things is not the right person to handle health care decisions. To avoid this issue, you may consider appointing a separate, single individual as your Health Care Power of Attorney. This should be someone whom you trust to make important healthcare decisions when you are no longer capable.
#3 Naming the trust as your IRA beneficiary instead of individuals
Pro: This can be a wise move when the individual(s) set to inherit the money is a minor child or someone who can’t be trusted with the money. By naming the trust as the beneficiary, you can put safeguards and specific instructions in place or defer distribution.
Con: When you name a single trust as the beneficiary of the IRA instead of individuals, the beneficiaries of the trust have to all agree on the timing and method of distribution. This can be difficult to coordinate between multiple people as it often involves selling property, setting up financial accounts and signing stacks of documents. In the example above, one of the beneficiaries wanted the money right away while another wanted to delay the process due to some legal matters. Because the trust was named rather than individuals, that option was not available to them.
Lessons Learned
It can be tempting to make an emotional choice in regard to whom you select as your trustee because you don’t want to “favor” one individual. However, it is important to remember that naming someone a trustee is not really a “gift”—it involves a lot of time and legwork. With that being said, it’s helpful to involve the person you will be naming as trustee from the beginning so they know what will be expected of them.
Lastly (but really firstly), select experienced, professional counsel to advise you on the pros and cons based on your individual situation. If you don’t already work with an attorney you trust, almost all attorneys will give you a free hour-long consultation. You may also want to consider involving a financial planner to review your trust and help you get creative when making equitable distributions for your beneficiaries. You can avoid making emotional decisions when putting together your trust by working with professionals who can advise you along the way.
Julie Newcomb, a Certified Financial Planner™ in Orange County, CA, specializes in financial planning for women. As a wife, mom and business owner, Julie understands the pressures and challenges most women feel on a daily basis as they juggle many important priorities. Julie’s favorite thing about her job is the ability to give women peace of mind when they entrust her with their finances. To learn more about Julie Newcomb Financial, go to julienewcomb.com.