Will your Estate Plan Actually Work?

Some people really only need a simple Will. For others though, the need for a Trust of some kind is essential to their estate plan, for a variety of reasons. For example, for clients with minor children, at a bare minimum, their plan should create a Trust when they pass away to prevent their children from receiving their inheritance outright when they turn 18 years old (think about the amount of money children could inherit from life insurance proceeds alone at such a young age!). Additionally, many others wish to leave their assets in Trust for the lifetime of their beneficiaries for protection against divorce, lawsuits and bankruptcy. Still, others want to avoid both “Living” and “Death” Probate and thus plan with what is commonly referred to as a Revocable “Living” Trust.

Many clients seem to think that once they sign their documents, everything is done, and they can then rest peacefully knowing that their affairs will be taken care of if they become incapacitated and ultimately, when they die. In reality, though, they’re probably only half way there. What is often the most tedious and time–consuming part of completing the estate plan has not even begun, which very few client realize.

Whether you plan with a Revocable “Living” Trust or a Will that creates a Trust when you die, it is extremely important that your assets be funded into your Trust. Otherwise, your plan will NOT work as you were told and paid for.

A Trust Must Be Funded to Work

For your Trust to actually work as you are told you it would, it must be fully funded – that is, your assets have to actually be in the Trust or somehow associated with the Trust. For example, the Trust should probably be either the primary or contingent beneficiary of your life insurance policies and retirement plans.

But Will It Be Funded?

When it comes down to who will actually fund your Trust, you may just be given instructions on how you, the client, is to accomplish the funding. In reality, however, the vast majority of clients simply will not do it. They set off intending to, but life gets in the way so they delay doing it and continue delaying to the point where the Trust never gets fully funded. And because it is not fully funded, the client’s Trust is NOT going to function as the client was told.

Other times, though, you may be presented with two options regarding funding: Either the attorney will provide you with instructions on how you can fund the Trust on your own OR you can pay the attorney “x” amount per hour for the attorney to handle it for you. At this point, the client is thinking to themselves, “I’ve already paid a lot of money for this estate plan and I’m really not looking to pay anymore. I’ll just do it myself.” And as mentioned above, the client sets off intending to do it but never actually gets around to it. Again, the client’s Trust will NOT function like the client was told.

As for the very few clients who do attempt to do the funding themselves, I’ve seen them do it wrong. The most common problem is that the client will fill out the beneficiary form incorrectly on a retirement plan, which can have serious negative tax consequences later when the client dies.

The True Cost is Often Misleading

A client may have paid a lot of money for their estate plan. The traditional estate planning practice involving Trusts has features similar to the “bait and switch” technique. For fear of losing the client, the true cost is often not disclosed. Clients are often told that properly funding their Trust is not a difficult task. I disagree. Frequently, I spend more time funding the Trust than on actually drafting the Trust and walking the client through the signing of it. An unfunded Trust is like a car that does not run. No one is going to go to a dealership and knowingly buy a car that does not run. Often times, a client buys a trust that does not work, but the client does not realize this and it’s not discovered that it does not work until after the client dies. Given that’s the case, for most clients I do the legwork – I personally fund your Trust. I make sure your plan will work like I tell you it will and in the way that you paid for.

After all, why pay for an estate plan if it’s not going to work?

Contact Hamrick Law in Greenville, SC for estate planning and business planning!