The recent deaths of Robin Williams and Joan Rivers have saddened millions of fans. But at the same time, they’ve also provided two positive models for helping to ensure that our loved ones won’t have to face unnecessary complications in managing their finances after we’re gone. And trusts played a crucial role in both comedians’ estate planning.
They can be incredibly useful tools, and thanks to the publicity, more people may consider using them, but many people misunderstand how trusts work. Let’s take a look at — and dispel — three common myths about them.
Myth 1: Trusts Only Make Sense for Rich People
When many people hear about trusts, they think of the ultra-rich, with images of trust-fund babies who will never work a day in their lives. Indeed, many people worry in their estate planning that leaving too much money to their children will sap their kids’ personal ambition and leave them less motivated to make their own way in their lives. Moreover, there’s a sense that having a trust prepared is so expensive that it only makes sense for those who have extensive assets.
Yet having a trust in place or ready to take effect when needed is something even those of limited means should consider. From the perspective of paying a lawyer to have estate planning documents prepared, trusts can indeed be more expensive, but in many cases, those higher upfront costs help produce valuable savings later on by avoiding costly probate. Also, if a family member is willing to act as trustee, then the administration of a trust can be very inexpensive.
Myth 2: Trusts Involve Too Much Effort to Work Effectively
Some people hesitate to use trusts because of some hassles involved in their creation. At some point during the trust’s existence, assets have to be moved into the trust, and that typically involves changing the formal designation of ownership from one or more individuals to the name of the trust. If assets don’t get retitled properly, it can force surviving family members to bear the brunt of a probate proceeding after all.
But getting assets into a trust doesn’t have to be complicated, according to estate planner John Kitzke of Kitzke Associates. In many cases, Kitzke notes, you can use simple methods like naming the trust as a payable-on-death or transfer-on-death beneficiary to fund the trust without having to take immediate action. Because those designations also avoid probate, using them achieves the goal of saving on court costs and delays while also giving you maximum flexibility to handle your own affairs as long as possible
Myth 3: There’s No Need for a Trust Before Death
Because most people associate estate planning with death, it often comes as a surprise to people that trusts can play a role in your financial life even while you’re still living. But the challenges that your family can face if an illness or injury incapacitates you to the level that you’re unable to handle your finances can be even harder to address than suffering the death of a loved one.
A trust put in place before your death can handle your affairs while you’re still alive, providing for the management of your money if you’re unable to do it on your own. With total latitude to give instructions on what you’d like done under what circumstances, considering a trust to take place during your lifetime rather than after your death can have substantial long-term benefits.
The biggest advantage of using trusts for your estate planning is that they’re inherently flexible, allowing you to meet a wide variety of specific needs. Even though trusts do have their flaws, many of the myths that keep people from using them simply aren’t true. If you believed any of these myths, take a closer look at trusts and whether they might play a useful role in your estate planning.
You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+. For more on ensuring a comfortable retirement for you and your family, see our free report in which Motley Fool retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule to boost your retirement income.