Wills Trusts or TOD: three modern options—dump cakes, whole gardens and sealed envelopes
You can choose among three major means to leave your legacy: 1. A Will (the dump cake method); 2. A Trust (the whole garden method); and 3. TOD or Transfer on Death (the sealed envelope method). You can mix and match as you please, and many folks use all three.
Maybe you also want: 4. A letter to your grandchildren.
1. When a Will makes sense—the dump cake
Probably for most folks a dump cake is what works and what they want. Just dump my stuff on the next generation and let them do what they will with it. These people do not have special situations nor do they want to think too hard about predicting and controlling the future. A Will allows for maximum freedom for them and their survivors. It is easy to understand, and can be as simple or complex as your situation calls for.
Your Will can go beyond simple, naming special gifts to special people and charities, saying when (and sometimes if) particular people will get particular gifts.
It can name guardians for minor children: this is a reason for young people without money to have a Will.
A Will can name your choice as Executor, so your take-charge daughter does not overrun her siblings.
Making a Will is a good time: a time you can make good for thinking about the people who will likely survive you, and what, in all considered love, you want for them. Maybe your home for a child who has never been able to afford one, an education fund for a bright grandchild, your farm to your child who has worked it with you and poured his or her blood and sweat into it for 25 years, and cash or life insurance to the others. Equal gifts are not always fair gifts. This is the good time to engage both your heart and your mind with your imagination and see what is best for each person.
One other thing to think about: Medicaid. A Special Needs Trust (also called Supplemental Needs Trust or SNT) for your Spouse must be done in a Will. This protects your spouse’s money from snooping and grabbing by Medicaid and allows your spouse to have a more dignified and comfortably whole life. A free-standing trust will not work. Why? No one seems to know, that’s just how Congress wrote the law.
A Will is easy to understand, and makes what you wanted to happen the law after you die.
2. Where does a trust shine? The whole garden
A trust is a wonderfully flexible instrument. It is simply an agreement between you and someone you trust (hence the name), for them to do what you want some time later.
So it can provide for a whole garden of possibilities (and Oh, how poor in the imagination are the trust mill people, who just want to use it as a dump cake!):
A is for Age: Someone you love is too old or too young to handle money well, and needs help.
B is for Budgeting: Someone you love is incapable of handling money well, either from some physical challenge, or from a mental or emotional issue.
C is for College: You want to make sure your child or grandchild gets a good education, and has some impetus to study and not just party.
D is for Decrepancy: You might want a trust for you or your spouse in case you see physical or mental challenges on the horizon.
E is to Enjoy: Maybe you have someone you want to have extra money simply to enjoy.
K is for Knotty: Your family is a complex dynamic and you have some special things you want to do: If-Then things, or particular rings and tools to specific people, or things you want to leave up to the time they will be paid out. Or perhaps you want to make sure X gets nothing. A simple beneficiary or Pay on Death designation just does not fit you. A trust might make sense, or merely a simple listing in your Will might be easier.
T is for Taxes: If your estate is large enough for Federal ($5 Million in 2011 and 2012, $1 Million after) or even State (for Indiana residents, $100,000 per child and per grandchild) death taxes, a Trust can keep some significant money out of the government’s hands and in your children’s.
But: a Trust is harder to understand than a Will. It is just plain complicated. Bill and Alice (not their real names) came to see me a few months ago with a pretty trust all in a padded cover three ring binder, about a hundred pages worth. They did not understand them. They were uncomfortable. So we unraveled their Trusts and gave them a straightforward Will. A Trust is not for everybody.
What it does allow you to do is special things for special people: George had a daughter running amok, and he wanted to encourage her to go back to college. So he built in incentives to help her go to college. You can be very inventive here, and fit the gift to the need, or the punishment to the crime!
Trusts are being misused: they are for protecting your family and often that means long term protecting. But the trust mills are trying to use them as Will substitutes. Why? Because they want to get their hands in your wallet, and because they want to do that sooner than later. But it is the wrong tool for your family. As a Will substitute, it is more expensive up front than a Will, and does not have the ability to cover forgotten and new assets that a Will does. It requires you to re-title all bank accounts, investments, houses, cars. It requires you to maintain it each time you buy or sell a car or a house or an investment.
A Trust can be an even better time to think what is good for your survivors, better than a Will, because there is more you can do. The flowers you can grow can bloom over decades instead of just a few months as with a Will; and your trust can touch a wider range of crops (something to a favorite charity for X years, then it all goes to your children, for instance). But it could also be a straight jacket for you survivors, providing only spinach and brussels sprouts for the rest of their years.
3. Enter the TOD—the sealed envelope
Recently a new method has been developed: Transfer on Death. This is like a beneficiary designation on an insurance or annuity policy. It says “After I die, give what’s left to Jenny.”
You can use this for investments. Most people do not know you can even use it for real estate—say your home.
This is the sealed envelope method because it is something you can change at any time you want to up until the time you die—or go nuts. Just sign a new designation, seal it in the envelope.
But the go nuts part might give us pause. If you become incapable of understanding enough, you will not be able to change or revoke your TOD designation. It then becomes frozen, even if you really do want to change it. There is, surprisingly, a lower standard of mental capacity for making or changing a Will than for a TOD or even a Trust. If you had made the gift in your Will, you might still have enough on the ball to change your Will, but your TOD ties your hands.
One way out is to have a Power of Attorney with a trusted person given power to change TODs and Trusts for you. But that means that even if you do a TOD, you probably also need a Will and definitely need a Power of Attorney, both well-drafted to coordinate together.
So: do you want to accelerate probate, have a dump cake Will, a whole garden Trust, a sealed envelope TOD, or some combination of them?
You want to use the right tool for the good job you want to do. As my Dad used to say, If you want your tools to take care of you, you must take care of your tools. You clean, oil, keep them sharp. The same is true of all these tools—Wills, Trusts, TOD designations and TOD deeds, as well as POAs, Living Wills, and especially your family conversations about emergency medical and end of life decisions. Keep them up to date, clean and sharp, ready for use.
Douglas D. Germann, Sr., Professional Corporation P.O. Box 2796, South Bend, IN 46680-2796 telephone 574/291-0022; fax 574/291-0024 email 76066 [dot] 515 AT Compuserve [dot] com