Summary

After working a lifetime to save, you decide to create a living trust to distribute your assets to your children, grandchildren, friends, or charities. However – you forgot to fund the trust and never transferred any assets into it. As a result, all of your assets pass through probate and become easily open to will contests.

A will contest occurs when a disgruntled beneficiary, heir, distant family member, or other interested party believes the amount they will receive isn’t enough — or that they should have been included in the first place but weren’t. These will contests can give money to family members or people you never wanted to. Not only that but these contests dramatically increase both the cost and duration of probate.

The importance of properly funding a living trust cannot be overstated. Living trusts are like safes — they only work if you actually put your valuables inside. Otherwise, why get one in the first place?

What is a Living Trust?

A well-established and properly funded living trust is one in which title to your assets has been transferred into the trust’s name. You retitle real estate, investment accounts, business interests, and other assets so they are owned by the trust.

When done correctly, upon your death the assets held in the trust avoid probate and pass directly to your beneficiaries according to the terms of the trust. Avoiding probate is one of the strongest reasons to establish a living trust: probate often costs 3%–7% of the total estate value. For a $5,000,000 estate, those costs can easily exceed $300,000. On top of the high costs, the time savings is significant. The average probate process takes about 16 months, but it can last much longer with a more complex estate.

What is probate?

However, probate costs and timelines can be vastly increased by will contests. These challenges not only drag out the probate process for many additional months (or even years), but they also require lawyers — with the estate itself required to pay the legal fees. This reduces the size of the estate as litigation expenses mount.

Another major problem with probate is its publicity. It is a public court process: cases are filed publicly and all beneficiaries must be formally notified. This openly invites will contests.

What are Will Contests

While will contests are not extremely common, they do occur. The longer a contest drags on, the more the estate is drained. Typically the contesting party bears the burden of proof, so their claims are much harder to prove and ultimately many get rejected. But even when the contest fails, it still costs the estate massive amounts of time and money in legal fees.

There is also the possibility that a contestant can win and receive a payout from your estate if the court finds their claim valid. This can result in your assets going to people you never intended to benefit.

Don’t leave them Unfunded

This is your life savings — the funds that were meant to help your children, grandchildren, or a charity. Instead, they can be contested, delayed, and ultimately paid out to someone you never intended.

The beauty of a living trust is that you can explicitly set the terms so your assets go exactly where and to whom you want. You can even include specific provisions, such as a no-contest clause, to further discourage challenges.

But these trusts only work if you fund them. So many people go through the effort of establishing a living trust and then never properly fund it. So if you have established one of these trusts, fund it!

If you have any questions head to HamiltonFinancialPlanning.com to find out more and schedule a free call with our fee only CFP fiduciary advisors who specialize in building financial plans and investment management for clients nearing retirement in Austin and Houston TX.

About Scott

Scott Hamilton is founder and chief financial officer at Hamilton Financial Planning, a wealth management firm that specializes in providing comprehensive financial planning for retirees. With over 20 years of experience in the financial industry, and having completed over 250 financial plans for retirees across all industries, but mostly the oil and gas industry, Scott is passionate about providing his clients with the tools and insight they need to achieve their financial goals. He has a Bachelor of Business Administration in finance from Texas State University and an MBA in international finance from Pepperdine University. Scott has also been happily married to his wife, Gayle, for over 25 years. To learn more about Scott, connect with him on LinkedIn.

 

Additional Reading and Sources

Recent Blog: https://hamiltonfinancialplanning.com/blog/how-to-time-roth-conversions/

Historical will contests (Howard Hughes and Jimmy Hendrix): https://www.fa-mag.com/news/strife-after-death-36182.html?section=49&page=3

Beneficiary controlled trust: https://www.kiplinger.com/retirement/estate-planning/603425/what-a-beneficiary-controlled-trust-can-do-to-protect-your-legacy

Data shows 70% of wealth gone by the second generation and 90% gone by the third: https://www.advisorhub.com/resources/securing-the-family-tree-how-to-preserve-generational-wealth/

Kitces article, Estate gifting without spoiling the kids: https://www.kitces.com/blog/estate-planning-discretionary-trust-great-wealth-transfer-corporate-trustee-beneficiary-incentive-trusts/

Cost of Probate: https://clauselawgroup.com/probate-info/how-much-does-probate-cost-a-comprehensive-breakdown-of-probate-expenses/