This video is apart of our Ask an Expert Series where we take the top questions related to estate and end-of-life planning and ask one of the advisors from our Expert Network. This question is answered by Chris Jeter who is a founding partner of MJC Attorneys. You can watch the video or read the transcript below. Got a question to ask? Email us at email@example.com with the subject like "Ask an Expert".
What is a trust and should I have one?
Probably the question I get answered the most and trusts have been all, have become all the rave in recent days and sometimes people think they need one and they don't. Sometimes people don't think they need one and they do. The simple explanation is this traditionally our estate plans have involved what we call last will and testament. A last will and testament, which is kind of very rigid you and it's like, hey, look, I leave this to this person. There wasn't a lot of ability to be more creative in the distribution scheme. It's like you just leave something to somebody. If they don't want it, then they disclaim it or whatever and it goes to the next person. And if they're 18, they get it. If they're not 18, then someone holds it for them until they turn 18. It was really simple. There just weren't a lot of options.
The whole idea of trust came about because trust allow for a lot more control and creativity. In a trust we can leave a gift to somebody who's under 18 as long as there's a trustee to watch over it. The obligations of a trustee are much higher than those of just a custodian. I mean, if you give me something and tell me just to hold onto it till your kid turns 18, I can put it under my mattress, bring it out and hand it to them and I've done my job. A trustee has an obligation to invest and grow, owe and reasonably increase the value of assets, which is a higher standard. Trust allow you to do anything. You can say, I'm only going to give this gift to my son when he gets married or my daughter when she graduates college. Or you can protect your beneficiaries from creditors.
You can account for the fact that maybe they're recovering from addictions. You can limit what they use the money on. You can have a trustee that someone who approves their expenses. Literally, it's just limitless. We often find trusts are also very helpful for folks that have either a more complex distribution scheme. They've got three kids, they own a business, a very successful business. Maybe only one of the kids wants to inherit the business. A trust will allow us to essentially leave the business to one kid and then backfill similar or equal gifts to the other kids either through life insurance, funded policies or the liquidation of other assets. You can do all that in a trust. There will really is kind of a pharmacy vehicle that doesn't allow that much of it. Also what we see a lot of times today is folks will idle real estate in a trust.
The benefit of that is it avoids you having to conduct any probate proceedings in other states, right? I mean, property in three different states back in the old days you had to start a probate in all of those states. Now with trust, we can title all that stuff in a trust and we don't have to do any of that. Probably the biggest benefit of a trust is that it creates non probate assets. I think if the folks watching this don't understand anything else, Gabe, today, they should understand this, that everything in their state falls into one or two buckets. It's either a probate asset or it's a non probate asset. A probate asset is an asset that we have to look to your last will and testament or your estate documents to figure out where it goes. Because it's something that doesn't have a title or it's not titled in anybody else's name.
Your clothes, your watches, your bank accounts with only your name on it, a house that's only in your name, we'd have to look to your documents to figure out where that goes. Non probate assets are those assets where you have already identified where that stuff's going. That's because you've either jointly titled it or you've filled out what we call a Tod Transfer on Death or a Pod Pay on Death certificate. A great example of that would be an investment account, a life insurance policy, all those if you go to your local Charles Schwab or Edward Jones, you can't even open it up an account without putting who your beneficiaries are going to be. Once you execute those assets pass wholly outside of probate. They go to whoever you've listed on those documents. A life insurance policy is a contract between you and the policyholder to pay a person at your death has nothing to do with your will or with your trust.
It's just totally outside of that. People can take a probate asset and make it a non probate asset. A great example is a home. If my home is titled Only in My Name when I die, you're going to have to pull out my documents, figure out where it goes. If my wife and I are too jointly titled on my house, it goes to her by operational law. It doesn't have anything to do with my will, doesn't have anything to do with anything else. It's just automatic. And so we update the state plans. We want to make sure that we update both that we have good documents and we've also looked at our beneficiary designations and that those are all up to date. A trust also can essentially take probate property and make it non probate by listing beneficiaries retitling property into the trust. And that can have benefits, too.
But not everybody needs them. Sometimes when folks have very simple distribution schemes, they have a traditional family, they're leaving things with their wife and their kids. The assets are easy to identify, or maybe a lot of it's in an investment account, which isn't going to be included. Rules and last rule and testament can still work, and there's nothing wrong with it. I always tell folks you want to find a good estate lawyer who can get you in the best tool to accomplish what you want to at the lowest dollar figure.