Given the positive response to my previous post on learning more about how to make, keep, and grow financial wealth, I'm going to share a little about what I think is the #1 most important financial decision for most people to make.
This is going to apply to US law, so if you're someplace else in the world, check to see what the laws are there. And even if you are in the US, keep in mind that I'm not a lawyer, so am just sharing what I've been told by lawyers and friends who have needed to hire them. If you find this information useful, you should also make an appointment with a lawyer for a free consultation to discuss these ideas and see what he/she can do for you.
No matter what, my subject today is a massive financial benefit that can only be executed by a lawyer.
That subject is called a Trust.
What It Means
Often when people think of trusts they think of "trust fund baby." That idea may seem irrelevant to you, but the reason those parents gave their child a trust fund may be different from the reasons you also need a trust.
The basic idea behind a trust is that it:
- Protects assets by putting them legally in someone else's possession (the trust's)
- Transfers assets confidentially (unlike a will)
- Transfers assets with minimal fees or legal procedure required, including allowing you to put all kinds of conditions on what happens with your assets after your death
There may be more reasons to have a trust, but these are the 3 that have the most meaning to me.
One, protecting assets can be important at any point in your life. For example, if you are in business for yourself you may have formed an LLC to protect your assets. But often in times when you need that separation of business assets from personal assets most, such as in the case of a lawsuit, you will discover that the courts don't recognize that separation. This is especially the case if you have a single family LLC, with no other officers besides you and maybe your spouse. It's called "piercing the corporate veil."
In a recent conversation, a friend was advising me to form a trust and put my business into the trust. She said that had she done that she wouldn't now be fighting a lawsuit going after half her company. Turns out, she had an LLC and a live-in boyfriend. No prenuptial agreement, of course, because there was no marriage.
That didn't stop him from suing her for half her company when they broke up. But if she had had that company in a trust, he would have had no one to sue. He didn't live with the trust.
This is just one example of how unexpected challenges to one's resources can occur that a trust would protect against. Of course, someone could still sue the actual business for harm done by the business, and no trust will protect the business's resources from that financial liability.
(If you own both a business and a house, you should check with a lawyer whether having both held by the trust would expose the house to any legal risks posed to the business.)
Two, did you know that when you file a will it becomes public legal record? That means anyone can see what's in your will if they bother to. That alone might be good reason to use a trust. You still have a will also, but the will basically just says, "Refer to the trust for details."
Three, and this to me is the biggest one, when you eventually die, as we all do, your assets definitely won't go into probate. It doesn't always happen, as a binding will also avoids probate, but I've seen wills from one state fail to be considered binding in another, forcing the family into probate. Having the trust instead can save your family tens of thousands of dollars if you have even just a few hundred grand in assets, like a house and new car. It can also save them months of back and forth with the government, which is very stressful for most people.
Additionally, when you have a trust you can say exactly what conditions are necessary for the money to be accessible to whoever you're giving it to. That's the idea with trust fund babies, because often wealthy parents will put the child's inheritance into a trust when the child is still young, but make it conditional on them turning 25. Or graduating college. Or whatever they think will show the child is now mature enough to handle the money well.
Depending on your state law, there can also be important tax implications of when you put your assets into a trust. It's important to talk to a lawyer from the state you live in, since those are the state laws that will apply.
In Summary
I hope I've enticed you enough that you're ready to find that local estate attorney to schedule that free consultation to hear what he/she can do for you using this powerful legal tool. And do make sure when you schedule that the consultation will be free. Some legal and financial professionals don't bother to mention that they charge for their time even when giving a consultation. You don't want that surprise at the end of your appointment!
While you may think you don't have enough assets to make the cost of a trust make sense, if you can afford to pay the legal fees at all, you probably do. That's because with the trust you'll also likely be doing things like getting a formal Power of Attorney (POA) in place and getting a legally binding will in place. These are things an attorney preparing the trust should also help you with, and are vitally important to protect your financial well-being in the case of a bad injury or any incapacitating event. Or in the case of the will, ensure that the courts actually recognize your will as valid if anyone contests it (because they didn't get as much as they thought they should).
Again, I'm not a lawyer, so you should confirm anything I tell you according to your state (and federal) law with someone who is. But this should get you started asking the right questions.
Let me know if you find a subject like this interesting. If you do, I'll mix in more articles like this from time to time.
(Photo source: Pixabay)
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