When Dave Ramsey’s Wrong, He’s Really Wrong

Zander_2016-04-15_1200I’ve listened to Dave Ramsey. My wife owns a couple of his books. I get what he does, and I think he probably does a some good–in the debt area, at least. But he’s not always right. For example, I don’t care for some of his opinions about life insurance and much of his investment advice is off the mark as well. Further, his one-size-fits-all approach and his dismissive attitude towards insurance agents and other financial advisors are a real turn off for me. Seems that everybody’s out to get you but Dave and those he recommends. (I have more to say on this point, but I won’t.)

In short, I’m basically not a fan.

So you will not be surprised that I’m posting this link to a blog post by attorney Richard Chamberlain in response to a wildly uniformed excerpt about living/revocable trusts from one of Dave’s books. Make sure to read the entire post and the links in the post.

I must add my two cents on living/revocable trusts: Though they are just one part of a well-executed estate plan, they are an important part. Among many good reasons to establish a living/revocable trust, there’s this: setting one up and funding it will help you and yours get your minds around what you own, how you own it, and how you want it distributed or handled upon your death or incapacity. Mind you, I could add more than two cents to this conversation, but I’ll stop here.

Funding is to Trusts as Fuel is to a Car

map-poi-fuel-pumpI find that people are mystified by trusts. The mention of the word seems to raise mental blocks and other barriers to understanding. It gets even worse when you mention the word “funding” in the same breath as “trust.” Let’s see if I can clarify.

A Trust is Like a Corporation–sort of

For our purposes, a trust, plain an simple, is an entity, a kind of, sort of legal thing, with a distinct and separate existence from its creator. Maybe it will help to compare it to a corporation.

Most everybody knows that a corporation is a separate, distinct legal entity or business. And they know that to form a corporation, the persons who form it–the incorporaters–must follow the law governing corporations in their state–a set of steps, if you will. They must file certain forms, pay a fee, etc. etc. The result will include articles of incorporation and bylaws that spell out the purpose and objectives of the corporation. In the end, the incorporators will have a corporation that is separate and distinct from themselves.

With the corporation in place, the incorporators or owners can now go about doing business through or in the name of the corporation. They’ll probably have corporate checking accounts and credit cards. They’ll probably hold corporate meetings. One or more of the incorporators will probably be CEO, or they may hire someone to be CEO. And on and on. People doing business, but through a separate entity–their corporation. By the way, the CEO of the corporation has responsibilities to the people who created it or own it–the shareholders–and to the people it serves–its customers.

Likewise with a trust, a  person–we’ll call her a grantor or settlor–creates the trust by following certain legal formalities governed by state law. The result is typically a paper document called a trust or trust document that spells out the objectives of the trust and the duties of the trustee. Like a corporation, the trust has an existence separate from the person who created it. And like a corporation, that person–that grantor–can do business through the trust. However, to do that, the grantor must name herself or someone else the trustee of the trust–the CEO so to speak. And like a CEO does in a corporation, the trustee has certain powers and responsibilities to the person who created it–the grantor–and to others who will benefit from its existence–the beneficiaries.

The analogy is not perfect because trusts and corporations are not exactly similar, but I hope you get the idea.

Now a Trust in Like a Car

Cars need fuel to run. When you need fuel, you go to a gas station or plug your car into an outlet.

Trusts need fuel as well because if there is not fuel in the trust, the trustee has things to do and nothing to do it with. By fuel, I mean fuel in the form of assets, assets in the form of cash, securities, homes, art, other real estate, bank accounts, and the like. Putting such property into a trust is called funding the trust. How you fund a trust depends on the type of property involved. If you want to fund your trust with your home, then you deed your home to the trustee of your trust. If you want your bank or brokerage accounts in your trust, then you fill out new account cards at your bank or broker, naming the trustee of your trust as the account holder. If you want your life insurance proceeds to be paid into the trust, then you must change the beneficiary to the trustee of your trust. And so on.

Once the property is in your trust–and assuming you are the trustee–life goes on as before. Only this time and only with regard to the property that is in your trust, you act as Jane Doe, trustee of the Jane Doe Trust rather than as simply Jane Doe. When you sell your home, you don’t sign the deed, Jane Doe, trustee of the Jane Doe Trust signs. When you want cash out of the bank, you withdraw as Jane Doe, trustee of the Jane Doe Trust.

Trusts and funding a trust is all about you, but in a different capacity–trustee of an entity separate from yourself.

I hope that’s clear.

Trusts: You Can Avoid Probate, but You Can’t Avoid (All) the Costs

Onassis_NYTThere’s a misconception out there that if you use a revocable living trust in your estate planning, you avoid probate and save on all those costs associated with probate. Well, maybe and maybe not.

First, in order to avoid probate, virtually everything you own has to be owned in a way that will do just that–avoid probate. Sounds circular, I know. What I mean is that if you own property

  1. As joint tenants with rights of survivorship–it will avoid probate.
  2. In so-called POD or Payable on Death accounts–it will avoid probate.
  3. That allows for you to name beneficiaries–a life insurance policy, for example–it will avoid probate.
  4. In a revocable trust–it will avoid probate.
  5. That doesn’t amount to much–you may avoid probate, or at least be eligible for some sort of simplified probate.

Put all that together, and you may avoid probate. But if you have a will, it will need to be proved valid in court–usually a routine process. If you own property that doesn’t fall in one of the categories I just listed, it will probably have to go through probate.

Bottom line, you may be able to avoid probate if you do everything right, own all of your property correctly, dot all your “i’s” and cross all your “t’s.” But if you don’t . . .

That said, to the extent that you do own your property as described above, you reap the big benefit of probate: You keep things private. For example, if your will says who gets the Picasso that hangs over the fireplace and who gets the cabin in the mountains when you die, anybody with the time to go down to the court and check can find that out. If, however, you say who gets what in your revocable trust, nobody has to know except for the people receiving the property. Maintaining your family’s privacy and saving time are the main benefits of avoiding probate to the degree possible. Don’t believe me? Ask Jackie Onassis’s family.

Now, about those costs. Yes, there are costs to probate. Attorney’s fees. Executor’s fees. Court costs. They all add up and can be expensive. But you know what, it costs money to administer a trust when you die: Attorney’s fees, again. Trustee’s fees, again. But typically no court costs. So yes, your estate will probably save money by avoiding probate, but your estate will still spend some money.

One more thing, a thing about revocable living trusts as an estate planning tool: They are predictable. You set them up. You outline all your plans, appoint trustees you trust, and tell them what you want them to do–in writing–and it’s all so predictable and happens almost seamlessly.

You turn that all over to the court in a probate proceeding, and predictability goes out the window.

Revocable living trusts are the way to go–for most people.

Funding: The Second Step of the Living Trust Two-Step

Just because you have a will and a living trust doesn’t mean you’re finished with the estate planning process. There is another, essential step, a step called funding your trust.

Slide1Remember, among the reasons you have (or hope to have) a will and living trust are to avoid probate to the extent possible and to make sure your property goes to whom you want it to go, when you want it to, and with as little income and estate tax taken out on the the way. It stands to reason that for that to happen, your trustee–probably you–has to have some control over your property.

To make that happen, you must fund your trust; that is, you must transfer property you and your spouse (if married) personally own to the trustee of your trust–again, probably you. My purpose here is not to go into depth on the subject. (For an extensive Q&A on the subject of funding, I suggest you visit EstatePlanning.com.) Rather, I thought it would be interesting to give you an idea of what funding meaning in the practical sense.

Essentially, there are three basic ways to transfer property into your living trust: 1. a general assignment–a short document referring to miscellaneous personal property such as books and jewelry and signed by you, 2. transferring or changing title–title to real estate for example, and 3. changing beneficiary designations–on a life insurance policy for instance.deed-framed

What follows are lists of property that you must transfer by changes in title or beneficiary designations:

Property Requiring a Change in Title

  • Checking, Money Market, and Saving accounts
  • Section 529 educations plans
  • Certificates of Deposit
  • Safe deposit boxes
  • Stocks, bonds, mutual funds, and brokerage accounts
  • Real estate
  • Vehicles
  • Business interests

Property Requiring a Change in Beneficiary Designations

  • Life insurance policies
  • IRAs
  • Annuities
  • 401(k)s
  • 403(b)
  • Keogh Accounts
  • Pension Plans
  • Profit Sharing Plans

Sometimes the attorney will take care of all of this, generally for an additional fee. Often the attorney and client share the responsibility, the attorney taking care of, say, the deed and business interests, and the client talking with her broker and bank. And then there are the clients who prefer to do it all themselves.

The critical thing is that until the funding is complete, so that the estate plan works the way it was intended to work.


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