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September Blog

Why a Trust is Not Just for Rich People

Posted on September 13, 2017

 

Of the 30,219 homes purchased in 2016 in Portland, 19% of them were cash transactions, according to the Regional Multiple Listing Service (RMLS ™), the Pacific Northwest’s largest REALTOR®-owned multiple listing service.

 

This statistic doesn’t surprise me. In fact, many of our clients fall into this category and their stories are similar.

 

Take, for instance, John and Carol Anderson. Both retired from successful tech careers in Austin, put the home they’d been living in for 30 years on the market, and sold it within a week for $800,000.

 

They pocketed the cash, called the movers, packed up the cars and the dog, and headed west, to Portland, to live near their kids. With our help, they bought a home for $550,000 and paid cash.

 

Is this a happy ending to a client story? Not necessarily, I learned.

 

The Problem

As realtors, we are required to take 30 hours of continuing education every two years to maintain our licenses. So I recently took a class on working with fiduciaries, that is, attorneys, trustees, conservators and the like, sponsored by Fitzwater Meyer Hollis & Marmion, LLP, one of Oregon’s largest Estate Planning and Elder Law firms.

 

That was when I learned about the potentially negative legal implications of a cash real estate transaction for clients like John and Carol Anderson.

 

Like the Andersons, many of our clients have a net worth in excess of $200,000, including cash, savings, bonds, collectibles and real estate. If this net worth is maintained until their deaths, their estate will more than likely go into probate.

 

Probate is a court process to determine who gets your assets upon your death.

 

It works like this: a court-appointed personal representative will take charge of your estate, pay the debts and taxes, and distribute the remaining assets to your heirs.

 

Sounds simple, right?

 

There’s only one big hitch for your heirs, according to Fitzwater, et al: Probate can last up to a year and cost up to $10,000 in fees.

 

And probate is a state process, so if assets are located in multiple states, guess what? You can multiply the cost by the number of states that hold your assets.

 

(There are, of course, situations where probate may not be required, such as if a beneficiary is specifically named.)

 

The Solution

Today’s retirees are in the midst of the greatest transfer of wealth that has ever occurred in the United States, according to the Insurance Journal. In fact, by 2052, they will have transferred $40.6 trillion to their heirs.

 

But it may be a slow and costly transfer of wealth, I learned, unless clients like John and Carol Anderson set up a trust.

 

A trust is a legal entity that holds the title to real or personal property. And it comes in lots of flavors:

  • An Irrevocable Trust is for special needs and situations and can’t be changed
  • A Charitable Trust benefits a charitable organization
  • A Revocable Living Trust is used for estate planning.

A Revocable Living Trust is, in fact, perfect for people like John and Carol Anderson.

 

A Revocable Living Trust enables you to manage your assets and distribute them both during your lifetime and upon your death. It would, for instance, hold the title to the home John and Carol purchased in Portland for $550,000.

 

A Revocable Living Trust would insure that John and Carol’s kids and grandkids avoid probate by clearly passing their wealth to the beneficiaries they name in the trust.

 

Here’s how it works, according to Fitzwater, et al:

  • You manage your income and assets, and pay your taxes, as you’ve always done
  • You set and change the terms of the trust as you wish (hence, the title “revocable”)
  • You can appoint a successor trustee in the event you become incapacitated.

The beauty of a trust lies not only in the avoidance of probate.

 

You are also able to “test run” a successor trustee to make sure he or she follows your wishes and acts responsibly before you are forced to hand over control due to cognitive impairment.

 

What is the likelihood of that?

 

Find out in my next post, along with the financial fallout related to it.

 

To protect our clients’ privacy, anecdotes shared are based on true stories; however, names and specifics have been changed and/or combined into composites.

 

Photo Credit: Legal Gavel & Closed Law Book by Blogtrepreneur is licensed under CC BY 2.0.



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