Your life just changed, so should your finances

There is a myth out there that trusts are ‘set it and forget it.’ The fact is, they should be crafted in a way that reflects your goals, even as they evolve over time. The most flexible kind of trust is a revocable, or living trust, which lets the grantor retain control and make changes during their lifetime. It can even be dissolved.

Often people do not recognize the opportunity or need for a trust until a critical moment. But if you are checking in with your advisor frequently, you can adjust your trusts as needed and avoid exposure to potential risks. Anything that potentially triggers a transfer of wealth should also trigger a conversation with your advisor.

Here are a number of answers to frequently asked questions that I’ve encountered over the years as it relates to estate planning tactics for unexpected life changes.

Q: Suppose you or your ex remarry. How would you advise one approach that situation?

A: A second marriage can create financial complications. Updating your trust plan can bring clarity and let you avert family discussions around touchy money matters. With a revocable trust, you could add and re-distribute assets between stepchildren, or add or remove an ex-spouse.

A longtime client of the bank used this option recently, following a health scare that made her wonder what might happen to the wealth she brought to her second marriage. With a revocable trust already in place, she merely altered its terms so that, if she were to pass away before her second husband, it would take care of him for life while continuing to support the children from her first marriage. Even if the widower’s relationship with his stepchildren soured, he would remain comfortable but could not restrict the children’s access to their portion of the funds.

Q: How about a child coming of age?

A: Parents may love all their children equally, but that does not mean siblings should receive the same financial treatment. Say for example, a client has two kids, one pursuing a career as an artist, while his sister is in law school. This client will want to think hard about how her children’s needs might differ over time, and how she wants to support them.

In that situation, you need to consider whether each child would benefit from different boundaries that reflected their career choices. By authorizing the trustee to make distributions for healthcare, education, maintenance and support, the trustee could evaluate each child’s different situation to make distribution decisions.

Q: And what if a child or heir is just not quite ready?

A: As your children grow up, they may find themselves in unexpected circumstances that complicate their finances. Say your daughter becomes a successful surgeon — which carries the risk of malpractice lawsuits that could jeopardize her assets. Or your son goes through a bitter divorce and faces an aggressive lawsuit.

One key advantage of a revocable trust is that you can revisit the original document and remove or add assets from your estate while maintaining control over how they are disbursed. It would shield assets from any lawsuits your daughter might meet and would protect the family’s wealth from an ex-daughter-in-law, while still granting the son and his children the benefit of the assets.

Q: What are your thoughts on how to handle something that’s difficult to divide, like a vacation home?

A: Most people relish family gatherings in the mountains or at the lake, but vacation homes are not without challenges. They can also create a tax hassle for heirs. Many of these issues can be avoided if families place their vacation home into a revocable trust, or make the initial purchase through one. That allows the parents to name their children as the ultimate beneficiaries without necessitating a lengthy probate process when they pass away.

At death, most revocable trusts become irrevocable trusts, which means they cannot be changed without the permission of all beneficiaries. A trustee and successor trustee can be named to manage the asset so that the home is maintained indefinitely — unless the money runs out or the heirs decide to sell. The goal is to ensure that the house remains in the family for generations without having it become a potentially taxable asset in the estate.

Editor’s note: Pledger Monk is a Merrill Wealth Management Financial Advisor with the Monk, Mitchell, Williams, Vincent, Chance & McCauley team. The opinions expressed are those of the author.