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This is the piece in an 8 part series on getting your financial house in order. Here are the rest of the posts. Please read them sequentially and hopefully, it will help you on your path to financial independence.
- Setting up a budget/expense report: Ever wonder what should be included in a budget? We cover what you may want to consider. You can also sign up for our email list and download our free Budget crushing tool!
- Determining net worth: Do you know how to calculate your net worth? We discuss how to do it and if things like your home or cars should be included? Check it out to see what I do.
- Get you some insurance: Here we discuss what insurance you need for your family? Is an umbrella policy really necessary?
- Setting up a will or living trust and What to place in a living trust: How do you protect your family with a living trust? Why would you want one and how much will this cost? How do you do it? Check out these posts to figure it out.
- Max out the 401K, 403b, 457, or Government TSP: Ever wonder what these different accounts are? How much can you put into one versus the other? Is a Traditional or Roth plan right for you?
- Start an IRA: What is an IRA? Should you have one? How do you do a backdoor Roth?
- Pay down debt: As Dave Ramsey says, debt is bad. Still which debt should you pay down first and when can you consider paying down debt versus investing.
- Start tax-advantaged accounts: Once you have done the above, what is the next thing to do with your money?
Setting up a living trust
As my wealth is slowly but surely building, and as I now have a son, I figure it is time to get my documents in order. The most important thing to complete was a Revocable Living Trust. A living trust is a document that describes the property placed in the trust by me (the trustee), who will get the property if I die (successor trustee), and in what manner. Here I discuss what a trust is and how I set one up using LegalZoom.
Part 2 of this series is about putting assets into the trust after it is set up.
A Revocable Living Trust
It is a Living trust because I am alive. It is considered Revocable because I can change the instructions of the trust going forward. The biggest benefit of a Trust is that it avoids probate. In Probate the court supervises the closure of a person's estate (who gets what, what taxes are paid, etc.). So basically by making a Trust, you can ensure your inheritors do not have to deal with the courts and that you can dictate who gets what. To be official, me, my wife, and a notary public sign the Trust document.
The benefit of a Trust over a Will is that with a trust you can avoid probate, reduce the chance of a dispute of where your inheritance should go, and keep your document private after death (also you can place your house under your trust, thus keeping your address private while living too). Basically, a trust provides all that a will does, plus more protection. (Disclaimer- I am not a lawyer nor do I claim to have any sort of law degree. The information here was my experience using LegalZoom. If you want legal advice, get a lawyer).
So WHY are we making a trust?
1) I have a son now and would like to determine what happens to him if my wife and I both die.
If I die then my wife will obviously take care of him and if she dies, I will take care of him. But what will happen if we both die?
2) If our son is under 18, I determine things such as where he lives and how much money from the trust he can get yearly.
Also, I determine how much time he should spend with each side of the family at a minimum. I determined a successor trustee and a guarantor and asked that all major decisions go between both. By doing so I can ensure that both my side and my wife's side of the family have a say in our son's upbringing.
3) We can also decide when he takes over the trust.
In our case, we have determined 25 years old. By then our son will hopefully be competent enough to not blow all of his inherited assets on a car, bars, etc. I almost argued we push this age to 28 or even 30 as I truly don't believe men grow up and begin to make stable decisions until that age (on average).
4) We can determine how much money he gets as a “salary” or “payout” starting at age 18 until age 25.
For instance, we wrote that he could use $30,000 for a gap year if he has a plan, i.e. is traveling around the country or world or living at home working to better himself by pursuing art, music, or starting a business. We also stated that we would like him to pursue higher education during those years at some point.
5) We have started to accumulate wealth and we would like to protect it.
We can place our home, retirement accounts, life insurance, after-tax accounts, and even this website in the trust. Then if we die, we know it will all go to our son in an efficient manner (and his trustee if under 25 years old). I also just realized we can determine who and how people get money in the tragic situation where my wife, my son, and I all die.
6) We can determine what the trustee can and can't use the money for.
For instance, we stated that the trust funds pay for all school and extracurricular activities. If, however, there are expenses greater than $15,000 then we want the trustee and guarantor to discuss the expense to ensure it is appropriate.
Ok, so how did we go about doing it?
I have colleagues who have spent $1,300 paying a lawyer to write up the documents and sign them. I was not willing to do that. I looked at LegalZoom to see if I can set my trust up through them for $250 for the basic plan and $300 bundle deal if I want revisions, lawyer advice, etc for 1 year.
So here is how easy it was.
It was quite easy to set up. Just a bunch of click-through items on the screens and addition of various information. Important things to have in order first are
1) What properties to put in the trust.
I would think you would put all of your properties in it.
2) Retirement accounts and other assets.
3) Who will inherit the items and any specific requests?
Who gets what heirlooms, etc or does it all go to the trustee.
4) How should the kids be raised in the unfortunate occurrence that both parents die?
Can I specify instructions for raising my kid or let the guardian make all the decisions? For instance, Philip Seymour Hoffman did not want “Trust Fund” babies. He wrote a will (different than a Trust) for his son. He stated that “his son would be raised in a city with art and culture,” “raised in certain geographic locales.” He specified they reside in or near the borough of Manhattan in the State of New York, or Chicago Illinois, or San Francisco, California.
5) Do you want a “pour over” will where any property you gain after the trust is written is placed into your trust according to your wishes?
That is it. Then you pay for the package and LegalZoom will review the documents, ask you any other questions necessary and then ship out the documents in a few days.
Update: Once you receive the paperwork you need a notary republic (LegalZoom provides a coupon for UPS) to witness and sign the documents. You will also need to witnesses that are not in the trust to sign. This will finalize and execute the trust.