Trust & its Application to Financial Management

KnightNguyenKnightNguyen subscriber Posts: 6
Financial Management is often interpreted to mean managing a budget. Most of us envision a budget as how much money comes into an account, how much we spend, how much we save. Not much thought is ever given to the protection aspect of the assets you acquire with your budget. Houses, cars, stocks, IRAs, et cetera. Money is something that creates assets. So prudent financial management demands we protect what we have. We have set up a Q&A style post to show people the common ins and outs of prudent financial management.

I have a will. Why would I want a living trust?
Contrary to what you've probably heard, a will may not be the best plan for you and your family. That's primarily because a will does not avoid probate when you die. A will must be validated by the probate court before it can be enforced.

Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated. So the court could easily take control of your assets before you die -- a concern of millions of older Americans and their families.

Fortunately, there is a simple and proven alternative to a will -- the irrevocable trust. It avoids probate, and lets you keep control of your assets while you are living -- even if you become incapacitated -- and after you die.

2. What is probate?
Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will. If you don't have a valid will, your assets are distributed according to state law.

3. What's so bad about probate?
It can be expensive. Legal fees, executor fees and other costs must be paid before your assets can be fully distributed to your heirs. If you own property in other states, your family could face multiple probates, each one according to the laws in that state. These costs can vary widely; it would be a good idea to find out what they are now.

It takes time, usually nine months to two years, but often longer. During part of this time, assets are usually frozen so an accurate inventory can be taken. Nothing can be distributed or sold without court and/or executor approval. If your family needs money to live on, they must request a living allowance, which may be denied.

Your family has no privacy. Probate is a public process, so any "interested party" can see what you owned, whom you owed, who will receive your assets and when they will receive them. The process "invites" disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.

Your family has no control. The probate process determines how much it will cost, how long it will take, and what information is made public.

4. Doesn't joint ownership avoid probate?
Not really. Using joint ownership usually just postpones probate. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate. But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs.

Watch out for other problems. When you add a co-owner, you lose control. Your chances of being named in a lawsuit and of losing the asset to a creditor are increased. There could be gift and/or income tax problems. And since a will does not control most jointly owned assets, you could disinherit your family.

With some assets, especially real estate, all owners must sign to sell or refinance. So if a co-owner becomes incapacitated, you could find yourself with a new "co-owner" -- the court--even if the incapacitated owner is your spouse.

5. Why would the court get involved at incapacity?
If you can't conduct business due to mental or physical incapacity (dementia, stroke, heart attack, etc.), only a court appointee can sign for you -- even if you have a will. (Remember, a will only goes into effect after you die.)

Once the court gets involved, it usually stays involved until you recover or die and it, not your family, will control how your assets are used to care for you. This public, probate process can be expensive, embarrassing, time consuming and difficult to end. It does not replace probate at death, so your family may have to go through probate court twice!

6. Does a durable power of attorney prevent this?
A durable power of attorney lets you name someone to manage your financial affairs if you are unable to do so. However, many financial institutions will not honor one unless it is on their form. And, if accepted, it may work too well, giving someone a "blank check" to do whatever he/she wants with your assets. It can be very effective when used with a living trust, but risky when used alone.

7. What is a living trust?
A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die. But, unlike a will, a living trust can avoid probate at death, control all of your assets, and prevent the court from controlling your assets if you become incapacitated.

This article or post is not to be interpreted as any form of investment advice to any person. The information above is a general view point without any specific audience intended only to be used as an informational tool by those willing to independently research the topics discussed herein. Nothing will be interpreted as an application to your particular circumstance and the author makes no attempts to determine suitability for any reader within this forum thread. If you would like to discuss the contents of this article and its application to your particular situation please contact Knight Nguyen Investments, a Texas Registered Investment Advisor. Please note if you do not reside within the State of Texas you may or may not be eligible to become a client of the firm if inquiring for services. Please consult with Knight Nguyen Investments to discuss the eligibility of being accepted. The contents of this post did not create a profit or fee in any way for Knight Nguyen Investments.
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