Tagged: Estate Planning
Trust or Will in Hawaii? Deciding the Best Option for You
“The best time to plant a tree was 20 years ago. The second-best time is now.”
-Chinese Proverb
This well-known Chinese proverb serves as a simple reminder that it’s never too late to start anything—whether it’s chasing a lifelong dream, investing for retirement, or, in the case of this article, drafting your estate plan. Experts emphasize that regardless of your net worth or age, having an estate plan—at a minimum, a Last Will and Testament—should be a top priority.
I frequently share this sentiment with my financial planning clients. A common response is: “Garrett, isn’t an estate plan just for the wealthy?” It’s a valid question, and it’s crucial to understand the facts. Documenting instructions for the transfer of one’s possessions has ancient origins, some tracing back to ancient Rome. Clearly, explicitly outlining one’s final wishes has stood the test of time.
The American Bar Association defines estate planning as “a process involving the counsel of professional advisors, including your lawyer, accountant, financial planner… covering the transfer of property at death…” The core document most often associated with this process is your Will. In essence, estate planning involves setting up a plan for the management and transfer of your estate after your death, using a Will, Trust, or other legal mechanisms.
When it comes to basic estate planning, one usually starts with a Will. However, Wills are not an end-all. As with all things related to financial planning, it depends on your situation. Depending on your assets, children, and property, having a Will means there will be legal proceedings (probate) before any asset distribution. This is where having a Trust can be beneficial.
If you’ve wondered if estate planning is right for you, understand this: It’s more about your wishes and goals than about the monetary value of your assets. It also clarifies how you want your affairs handled if you are unable to manage them yourself. The bottom line is that estate planning is not just for the wealthy. Even people with modest assets need a written plan. Like many other things in life, the biggest step is simply getting started.
So, what is a Will? It’s a legal document that expresses your last wishes for the distribution of your property and other assets. Some say a Will is one of the single most important documents a person can have. Yet, many Americans delay dealing with it for various reasons. Some think they’re “too young” or “too old” to need a Will. Others believe they don’t have enough net worth to necessitate a Will.
Do you need both a Will and a Trust? It’s a valid question. There are significant differences between the two. A Trust goes into effect as soon as it is signed, whereas a Will takes effect after you pass away. Another major difference is that Wills are public records, while Trusts are private. Many choose a Trust for privacy reasons alone.
Technically, what is a Trust? Trusts come in many varieties, nearly a dozen at last count. All Trusts are legal entities with separate and distinct rights, like a person or corporation. The type of Trust you need depends on your circumstances, and consulting a professional is essential.
While there are many online resources for estate planning, it is vital to do your due diligence and find an estate planning attorney you trust. You’ve spent a lifetime accumulating your assets, so be diligent in selecting an attorney to ensure your estate transfers smoothly to your heirs. Just like engaging with a fiduciary financial advisor, the value of hiring an estate planning attorney lies in the counsel they can offer for your unique situation.
Having an estate plan gives you control over your wishes, not the courts. As a veteran attorney once told me, “If you do not have a Trust, the courts will have one for you. However, you may not like it, and by then, it will be too late.” This may not be eloquent, but it drives the message home.
In financial planning, there aren’t many guarantees. But here’s one: even if you don’t have many assets, your estate plan ensures that everyone will know your wishes. That alone is invaluable.
After developing your estate plan with your attorney, remember don’t just put it in a drawer and forget about it. As your life evolves, your estate planning documents should reflect those changes.
In summary, it is imperative to work with an experienced professional. There are many moving parts in estate planning. Life is unpredictable, but planning today ensures your tomorrow is exactly as you envision it. If this article can do one thing, I hope it encourages you to start planning now. It will make things easier for your family later.
Garrett Wheeler serves as a board member with Yacht Harbor Towers AOUO, Inc. He is a Honolulu-based fiduciary and financial advisor with SEA Financial Hawaii. Curious about which type of estate plan is right for you? Contact us today and we’ll email our quick and easy quiz to find out. Aloha!
Do I Need a Trust?
Oftentimes, trusts are used as a tax-reduction solution in the estate planning discussion, as part of our comprehensive financial planning process. But it can do so much more in the way of giving clients control over their immortal destiny. As you’ll learn, there are many types of trusts that can be used as part of an individual’s overall financial planning strategy. In our day-to-day meeting with advisory clients, we are finding that individuals need to also consider ‘non-tax reasons’ for the use of trusts. What are these non-tax reasons? Well, they include ensuring that assets pass to the intended beneficiaries at the time and in the manner desired. And defensively, to protect the assets passing to beneficiaries instead of creditors.
I’m often asked by some clients, ‘Do I need a Trust?’ And like many things planning, it depends on your circumstances. But without reservation, I wholeheartedly believe that trusts provide significant benefits.
And similarly, the reasons for establishing a trust are as different as the people who have them. Like financial planning, there are no two alike due to the uniqueness of each person’s needs, desires and concerns. Regardless of their personal differences, many people discover that a trust is a smart addition to their estate strategy. A properly structured trust can be a prudent way to hold and distribute assets. And, depending on the type of trust established, it can protect assets from creditors, reduce estate taxes, and allow for greater control over asset management and distribution after death.
Because SEA Financial Hawaii does not give tax or legal advice, we encourage individuals to consult with their tax and legal advisors to explore the concepts discussed below. However, we do have vetted resources—professional alliances—with various attorneys and firms that we share with clients. In fact, I accompany my clients on their first visit with an estate planning attorney, especially if being referred by us. This referred group of professionals can work you to help determine if, and how, a trust can be used as part of your estate strategy.
So, what is a trust? Investopedia says that a “trust is a legal entity with separate and distinct rights, similar to a person or corporation. In a trust, a party known as a trustor gives another party, the trustee, the right to hold title to and manage property or assets for the benefit of a third party, the beneficiary.” https://www.investopedia.com/terms/t/trust.asp
Simply put, a trust is an arrangement where one person agrees to hold property for the benefit of another person or persons. This is especially useful in situations where the beneficiary is vulnerable or under legal disability, such as when:
- One spouse wishes to protect assets from their creditors so that they may benefit the other spouse.
- The beneficiary is a minor.
- The beneficiary is unskilled in financial matters.
Of course, this is only a cursory list. In the real world, the kinds of situations and outcomes are very broad, and again, unique as the people who have trusts. Years ago, I was told if you have a spouse, children and/or you own a home or substantial assets, you need a trust.
There are all kinds of trusts, with varied uses and purposes. But they all fall into one of two classes:
- Living and
- Testamentary.
Living trusts can be either revocable or irrevocable, and testamentary trusts are created at death based on terms in your will. The discussion that follows focuses on some of the more commonly used trusts, including an explanation of any tax advantages.
A Revocable Living Trust is a trust created during the grantor’s lifetime and allows the grantor (you) to maintain total control over the trust during your life. A revocable living trust is an efficient and effective way to transfer property at the time of the grantor’s death.
An Irrevocable Living Trust is a trust that is established by the grantor while they are still alive and which, by its terms, cannot be revoked or terminated by the grantor. One reason to choose irrevocability is to remove the trust assets from the grantor’s taxable estate. An irrevocable life insurance trust (ILIT) is probably the most common example of an irrevocable living trust.
A Testamentary Trust is a trust established under a decedent’s will is known as a testamentary trust, and the grantor is referred to as the “testator,” that is, the maker of the will. Testamentary means “at death,” and such a trust has no legal value or effect until the testator’s death, as it does not come into being until the testator dies. Because a testamentary trust is not actually established until death, the trust may be modified or revoked beforehand by amending the will. After the grantor’s death, the testamentary trust becomes irrevocable. Because it is created by a will, the assets of a testamentary trust are subject to probate and may be taxed as part of the estate.
As a fiduciary financial advisor, my mission is to do what is in the best interest of my clients. When clients ask me why they should have a trust documented and recorded, it comes back to one thing for me: Your desires and wishes. In my work, I find that most trusts are created to help minimize transfer tax consequences (i.e., estate and gift taxes, generation-skipping tax, etc.). However, I often share with my clients that they may offer advantages beyond the surface tax savings. Most importantly, trusts allow you (the grantor) to do what you really want to do with your assets, possessions and wealth. Again, it gives you control over your wishes. Not the courts. That’s invaluable. Years ago, a veteran advisor told me, ‘Just tell your clients this: if they don’t have a trust, the courts will have one for them. However, they may not like it, but by then, it will be too late…’ Yes, not eloquent, but it drove the message home for me.
Finally, here are more non-tax advantages of using trusts. First, control. Gives you oversight as the grantor. Then there is financial management. A trustee you select can ensure beneficiaries are taken care of. And it also provides protection against creditors. An important benefit to some is the use of ‘staggered distribution ages. I have a client who wanted to ensure that the trust made distributions to his children over a period of time to enable them to become more mature and learn how to handle financial matters. In this client’s case, income from the trust was distributed annually plus one-quarter of trust funds (corpus) at age 25, 1/3 at age 30, ½ at age 35 and the balance at age 40. If there was no trust in place, the inheritance would be handed to the children at the age of majority (Hawaii recognizes the age of majority as age 18).
As this brief article explains, it is imperative that you work with an experienced professional. We can provide you with an overview, as well as the costs associated and the complete details including a referral to an estate planning attorney. As indicated, there are a lot of moving parts. But remember this: Life is unpredictable, and procrastination can really hurt you. So, take action today to protect those you love. And I guarantee, you won’t regret it. -SEAFIHI
At SEA Financial Hawaii, we do not provide tax, accounting, or legal advice. Clients should consult their own independent advisors as to any tax, accounting, or legal statements made herein. This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients.
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