Broker Check

Wills, Trusts and Fiduciaries: The Foundations of Your Rock-Solid Estate Plan

January 04, 2024

KEY TAKEAWAYS:


  • A will identifies precisely what you want to have happen to your
    assets and estate. Dying without a will means you have decided that
    the state knows what’s best for you and your family.
  • A living trust provides privacy. Those not inheriting need not be told
    who has inherited what, unless someone chooses to tell them.
  •  Review your estate plan every year or two and update it as needed
    based on what’s changed since you put your solutions in place.


Among today’s top business owners, family is paramount. Taking care of loved ones is the
No. 1 reason entrepreneurs seeking to become seriously wealthy want so much wealth,
according to our research.
Certainly, you expect to use your wealth to take care of family in the here and now—health
care, travel, college tuition and the like. But chances are you haven’t thought nearly as much
about positioning your assets so they’re ready and able to help the people you love after
you’re gone. Even if you have made some headway in this area, your plan for your estate is
probably a little—and maybe a lot—out of date.
If that describes your situation, don’t fret. Even as a successful entrepreneur with many
moving parts to your finances, you can get on track by focusing on just three main areas of
estate planning: wills, trusts and fiduciaries.
Here’s how to do it.

Where there’s a will, there’s a way
Read this next sentence three times in a row: Everyone should have a will.
Got it? A will should be the basic foundation of every estate plan—the starting point for a
well-conceived strategy to transfer assets at death.
A will identifies precisely what you want to have happen to your assets and estate. Dying
without a will means you have decided that the state knows what’s best for you and your
family. In addition, dying without a will means you want to make the settling of your estate as
difficult, as costly and as public as possible.
As with any decision, there are both positives and negatives to a will. That said, we strongly
believe the benefits of writing a will far outweigh the drawbacks.
Advantages:
• You decide on the disposition of your hard-earned wealth.


• Estate taxes are mitigated—especially when the will is part of a broader estate plan.


• You specify who the fiduciaries will be.


Disadvantages:
• You have to accept that one day—far in the future—you just might die.


• There is a legal cost associated with writing up a will and with estate planning.

Trust in trusts

The second component of a smart estate plan is often a trust. A trust is nothing more than
a means of transferring property to a third party—the trust. Specifically, a trust lets you
transfer title of your assets to trustees for the benefit of the people you want to take care
of—aka your selected beneficiaries. The trustee will carry out your wishes on behalf of your
beneficiaries.
Trusts are ingenious. You can use them in all sorts of ways to transfer your wealth and
determine how it’s to be deployed. They also can prove to be very useful in shielding your
assets from plaintiffs and creditors.
In crafting a trust, you are limited only by your own imagination, the ingenuity of your financial
and legal advisors, and (of course) the law. As long as you do not establish a trust for an
illegal purpose, you have an awful lot of leeway.

Types of trusts


Broadly speaking, there are two types of trusts: living (established while you are alive) and
testamentary (created by your will after you’ve passed).
Additionally, there are two fundamental trust structures.
• A revocable trust allows you to retain full control over the assets in the trust. You can
add or take out money as well as change the terms of the trust. However, the assets will
be included in your taxable estate upon death.
• An irrevocable trust is one to which you cannot make any changes. To obtain the tax
savings that can come with trusts, you have to relinquish control of the trust while you
are alive. By transferring control of assets to an irrevocable trust, you have placed those
outside your estate—that is, you no longer own them. The trust does.
Living trusts
A living trust is becoming more and more popular to avoid the cost of probate. In the probate
process, your representatives “prove” the validity of your will. The probate process also
gives any creditors the opportunity to collect their due before your estate is passed to your
heirs. There may be a long delay in settling your estate as it goes through probate. To add
salt to the wound, probate can be costly.
A living trust can avoid or mitigate the effects of probate. It is a revocable trust that you
establish and of which you are also typically the sole trustee. The assets in your living trust
avoid probate at death, and are instead distributed to your heirs according to your wishes.

Living trusts come with some attractive benefits, including the following:


• In contrast to a will, a living trust provides privacy. Those not inheriting need not be
told who has inherited what, unless someone chooses to tell them. With a living trust,
professional management can come in to take care of administering the trust.


• If you own property in another state and fund it into your living trust, you will avoid a
second probate on that asset that can be costly.


• In the event of your incapacity, a living trust can provide for private management of your
assets and affairs and avoid public probate court involvement.


Mistake to avoid: To make a living trust meaningful, it must be funded. That is, the assets
you want in the trust must be transferred to it. If you set up a trust but mistakenly never fund
it, probate will not be avoided. You can also write your will to ensure that assets you want in
the trust that are not there when you die are transferred to your living trust.


Living trusts are sometimes said to be superior to a will, but that is certainly not the case for
everyone. It’s important that you understand how the two compare (see Exhibit 1).

Is a living trust for you? It depends on your particular situation. Nevertheless, you should
certainly consider it in consultation with your advisor or wealth manager.


The role of fiduciaries


A fiduciary is a person or organization that is ethically and legally bound to act in the best
interests of another person and to oversee that person’s finances.

For example, with respect to your will, you need to name an executor. When it comes to
trusts, someone or some institution has to be the trustee. And if you have children who
are minors, it is imperative that you name a guardian for them—the person or people who


Executors and trustees
After you’re gone, wouldn’t it be nice if there were someone who would make decisions

concerning the disposition of your estate as you would have? When you name an executor
of your will, this is possible.


An executor has a number of responsibilities, including these:


• Collecting and organizing your assets


• Paying debts you owe


• Acting as a collection agency for money due to you


• Handling all necessary tax matters


• Ensuring that assets are distributed to beneficiaries


When you set up a trust, you are specifying how you want a situation managed in the future. It
is the responsibility of the trustee to make sure that your wishes are carried out. The explicit
responsibilities of the trustee vary depending on the nature of the trust you have set up, but
may include the following:


• Ensuring the proper tax forms are filed correctly and on time


• Making investment decisions


• Working with beneficiaries


Guardians
There are three key standards that you need to follow in making this decision:


1. Will the guardian(s) love your children?


2. Are the guardian(s) capable of doing a good job raising your children?


3. Do you think the guardian(s) are going to raise your children with the same morals and
values as you have?

Sometimes, the decision about who should be guardian of your children is obvious. Example:
Your sister-in-law wants the responsibility, and you are confident she will do an excellent job
as she has the same views on raising children as you do.

But many times the “right” person or couple doesn’t exist. Keep in mind that your decisions
are not set in stone. As circumstances change, you should adjust your decisions accordingly.
You can change your will or, for that matter, your entire estate plan anytime your situation
changes.


Pro tip: An often-used strategy is to put control of the money in the hands of a trustee and
make someone else the children’s guardian. This way, the trustee will make sure the monies
earmarked for the children will indeed get to them.

Your next move

We find that about 85 percent of the estate plans that successful business owners have in
place are more than five years old. That’s more than enough time for changes in tax laws,
changes in your business’s fortunes and your personal wealth, and changes in your family
situation to make your plan outdated and out of touch with your wishes.


We recommend that your estate plan be reviewed every year or two. The review should be
conducted by a high-caliber wealth manager or tax professional—one who takes the time to
learn what’s changed since you put your solutions in place, assess how those changes might
impact your strategy, and make recommendations for getting your solutions current and in
accordance with your wishes.

This information is not intended to be a substitute for individualized legal advice. Please consult your legal advisor regarding your specific situation.