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What kind of trust?

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  • What kind of trust?

    My partner and I are trying to decide between a testamentary and a revocable living trust (RLT). We have 2 minor children less than 3 years old and want to make sure in the event of our passing they will be taken care of financially. We want to minimize the logistical and financial burden of their guardians but we don't want to make our lives a hassle in the present. Our assets include our checking and savings accounts (at Capitol One), brokerage accounts (at Fidelity and Vanguard), retirement accounts (also at Fidelity and Vanguard), and individual term and group life insurance. We do not own a home, but plan to purchase in the next year.

    1. Do assets for a testamentary trust avoid probate? I was told by an estate planning attorney in my state that the assets will pass through probate before they are placed into a trust. (Perhaps state specific.)

    2. When a testamentary trust is created upon your death, does the executor of your will/trustee have to go through the process of titling all the assets? I assume they don't magically title themselves. Any sense of how onerous this is?

    3. Any one have issues performing their banking with their accounts titled in a RLT trust? Does this ever cause raised eyebrows or hassle beyond the titling process itself?

    4. If your bank has a payable/transfer on death option, why not leave the assets to the trust instead of titling into a RLT now?

    Thanks everyone! Stay safe!

  • #2
    1) A testamentary trust, by definition, is a Trust created by your will when you pass away. This would result in you having to go through probate because it is the Will that creates the Trust and that means you have to go through probate.

    2) Yes, your executor would have to go through the process of interpreting the document and following the instructions to set up the Trust/follow your instructions. Avoiding probate is the easiest for your heirs/executors.

    3) I like to title bank accounts as a joint accounts and then "TOD" (transfer on death) to your RLT. This is the cleanest in my opinion, but you'd want to check with the estate attorney as there are varying laws by state you want to be aware of.

    4) Banks are not fun to deal with in general, and usually the $$ amounts in a bank account aren't that large so keeping the bank accounts titled jointly allows for an easier transition than the banks legal department having to interpret the Trust and confirm everything is being distributed properly according to the Trust document.

    Your estate attorney should give you funding instructions of how to title assets/beneficiaries. For physicians there are benefits to titling your home as Tenants by Entirety for asset protection (depends on state laws if you can do this). For investment accounts, things have changed recently with the increased estate tax exemption, but usually those are larger dollar amounts, so titling the accounts in your RLT could allow for other Trusts to be created from an estate tax perspective or follow your intentions for what you want to have happen with the money. This is especially important for minor children. Typically the RLT can set up separate Trusts for your kids with stipulations of ages when they can access the money (1/3 at 25, 1/2 at 30, the rest at 35) while allowing them access to the money for emergencies like healthcare, education, maintenance. It's then up to the Trustee you list in your RLT to interpret the Trust and follow your intentions.

    Typically you have a Will (outlines your guardians - very important with young children) and then has instructions as a "catch all" for any assets not titled in your Trust to then be "poured over" into your Trust and follow the instructions you laid out there. Having an RLT avoids probate. You'll also want power of attorneys for healthcare/property and those documents are usually all included in a package that estate attorneys will provide.
    Andrew Musbach, CFP® | Co-Founder & Financial Advisor at MD Wealth Management, LLC | Podcast Host - The Physician's Guide to Financial Wellness

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    • #3
      Andrew has a great post above. To add to his thoughts, it is often just a question of whether to do a bit more work now vs. work later, depending on what your state's probate process is like. What state are you in? Also, a person's age factors in. The older they are, the more likely they should just do a revocable trust and get it over with so they can also avoid probate. Revocable trusts do have some added benefits so I often recommend going that route and avoiding probate, but not always.

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      • #4
        Thanks so much! We are in Maryland (with potential to move to Pennsylvania to be closer to family in the next 5-10 years). I'm leaning towards doing a revocable trust because although it feels like more than we need at this very moment, it seems like something we'd may like to have in the future. We can provide funds as Andrew suggested in his post for now and if we want to title more assets directly to a revocable trust in the future we can. It seems like either will accomplish our main goal (providing fiduciary protection of our assets to care for our minor children in the event of our untimely passing) but a revocable trust provides some added benefit that we may like in the future and I'm all for a little work and money now to save effort in the future.

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