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Wall Street Steward Blog

The Poor Man's Trust

Many attorneys are doing a phenomenal job of scaring people into creating trusts.  Truthfully, unless some unusual requests are to be made as part of your estate plan, very few people actually need trusts.  If that is the case, then WHY do so many people have trust accounts as part of their estate plan?

In a word: probate

When I meet with an investor who has a trust account (and an estate well below the $5 million threshold triggering estate taxes), I always ask “what is the purpose of this trust?”  This typically is answered with “well, I was told I needed one to avoid probate.”

First things first…I am not trying to hammer attorneys in this article.  We need estate planning attorneys, especially for the larger estates.  However, like in most cases, a few bad apples are spoiling it…..there are some attorneys out there setting up unnecessary trusts for purposes of generating personal income, all in the name of “avoiding probate.”

Probate court is annoying.  It scares people.  It can lock up the estate for 6-12 months, and can be costly (around 2-7% of the estate depending on the state).  It CAN’T be avoided altogether, but it can be simplified, and using trusts is one way to do that.  However, it is an EXPENSIVE way to do it.  Depending on the attorney, I have seen charges of $1,000-$3,500 to set up a trust account.  Save your money, as I am about to give you a way to do this for free.

A transfer on death (TOD) account is easy to open, and in many cases, carries no fee.  This type of account passes directly from account owner to beneficiary upon the account owner’s death.  This is similar to a joint account, except that with a joint account, the joint owner has equal rights to the money while the other account owner is alive.

Here is how it works.

John T. Doe
TOD to Sally P. Doe (daughter)

Sally has no right to the funds in this account while her dad is still alive.  However, once he falls over, the funds in this account go directly to Sally, bypassing probate.

And I didn’t even charge you $3,000 to set up a trust like that attorney wanted to do.

Most investment firms can set up this type of account very easily, and it can help a large portion of your estate avoid probate.  Other steps to reduce the sting of probate include naming beneficiaries on all 401(k) accounts, IRAs, life insurance policies, etc…

Using TOD accounts and naming beneficiaries will help 99% of you simplify probate and minimize costs.  For the uber-wealthy crowd (the 1%), we can help you too, but it will be more involved.  And for that, I will utilize an estate planning attorney, and will set up and attend the appointments with you.

MG