Wills vs. Trusts
Wills vs. Trusts - Planning for Disability
Regardless of your net worth, and particularly if any of your assets are titled in your sole name, then you should consider a Revocable Living Trust for mental disability planning. But beware, because not all Revocable Living Trusts are created the same. A well drafted Revocable Living Trust should contain provisions for determining your mental capacity outside of a court proceeding as well as how to take care of you and your finances if you do become mentally incapacitated. This will literally save you and your family thousands of dollars by keeping you and your assets outside of a court-supervised guardianship.
Wills vs. Trusts - Planning for Minor Beneficiaries
Often times the largest asset young parents have is either a life insurance policy or retirement account (IRA or 401(k) through work). This becomes a problem if the young parents later divorce and one of the parents wants to name the minor children as the primary beneficiaries or if both parents die while the children are still minors. What will happen to the life insurance or retirement account? These funds will be placed in a court-supervised guardianship for the benefit of the minor until the child reaches 18. Thus, in these situations, the parents should consider setting up a Revocable Living Trust and naming the trust as the primary or contingent beneficiary of the life insurance or retirement account. That way the Trustee will be able to accept the funds instead of a court-supervised guardian. In addition, the parent can dictate in the trust when the children will receive their inheritance, such as age 25 or 30 instead of 18.
Wills vs. Trusts - Planning for Singles
Anyone who is single and has assets titled in their sole name should consider a Revocable Living Trust. The two main reasons are to keep you and your assets out of a court-supervised guardianship and to allow your beneficiaries to avoid the costs and hassles of probate. The minimum net worth necessary for a single person to consider using a Revocable Living Trust will vary from state to state. For instance, in Florida estates valued at $75,000 or less are considered small enough to be administered through a simple summary probate process. If the value of your assets is over the minimum threshold in your state, then a formal, time-consuming and costly probate administration will be required instead.
Wills vs. Trusts - Estate Tax Planning for Married Couples
If you're married and the estates of you and your spouse exceed the federal estate tax exemption ($5.34 million in 2014) or your state's estate tax exemption (which can be as low as $675,000), then you should consider establishing Revocable Living Trusts to take advantage of both spouses' exemptions from estate taxes. This is accomplished by setting up AB Trusts or ABC Trusts and then dividing your assets roughly in equal shares between the two trusts (while the new concept of "portability" will allow you and your spouse to maximize the use of your federal estate tax exemptions, Hawaii is currently the only state that offers portability). You will also need to do this type of planning to maximize the use of both spouses' generation-skipping transfer tax exemptions (this cannot be achieved through portability). Also note that while this type of tax planning can be done in your wills, you and your spouse will need to divide your assets into separate names, in which case the assets will need to be probated after each spouse dies. The use of Revocable Living Trusts ensures that probate can be avoided after each spouse's death.
Wills vs. Trusts - Planning for Couples in Second or Later Marriages
If you're in a second or later marriage and you and your spouse will have different beneficiaries such as your own children or grandchildren, then you should consider establishing Revocable Living Trusts in order to ensure that each spouse's estate will go where he or she wants it to go outside of the probate process.
Wills vs. Trusts - Keeping Your Estate Plan Private
A last will and testament that is filed with the probate court becomes public court record that anyone can read (for example, you can see what the Last Will and Testament of actor James Gandolfini says and view a copy of it because it is public record). Contrast this with a Revocable Living Trust, which is a private contract between you as the Trust maker and you as the Trustee. Unless your beneficiaries have to go to court over something written in your Revocable Living Trust agreement (like Michael Jackson's heirs), then the document should remain a private document that only the trustees and certain beneficiaries will be able to read after your incapacity or death.
Wills vs. Trusts - Estate Planning for Real Estate Located Outside of Your State
If you own real estate in more than one state, then you'll need to establish a Revocable Living Trust and deed the out of state property into the trust. Otherwise, your family may be faced with two separate probate estates - one in the state where you live, and a second in the state where your real estate is located, which is referred to as "ancillary probate."
Probate and How to Avoid It: The Revocable Living Trust
While a Last Will and Testament is an important part of any estate plan, there's one main drawback to having your entire property pass under the terms of your will: The property must go through probate before your loved ones will be able to have access to it. Probate can take anywhere from six to nine months to over several years, which means that your family will have limited and often times no access to your assets until probate has been completed.
This is where a Revocable Living Trust comes into play. What is a Revocable Living Trust? It's a written legal agreement that sets forth how your property will be managed both while you're alive and then after you die. The part that deals with how your property will be managed while you're alive will contain your mental disability plan, and the part that deals with how your property will be managed after your death will contain the exact same terms that would have been written in your Last Will and Testament had you decided not to set up a Revocable Living Trust.
How Does a Revocable Living Trust Avoid Probate?
So how does a Revocable Living Trust avoid probate? If your assets are funded into the trust during your lifetime, then they won't need to be probated after your death. How do you fund your assets into the trust? For bank accounts and real estate, your name will be taken off of the asset and the name of your trust will be inserted in its place. For other assets, such as life insurance and retirement accounts, the trust will be named as a beneficiary of the asset. Once the trust is fully funded, you'll no longer own your assets – your trust will, and property that's owned by a Revocable Living Trust doesn't need to be probated after your death. Instead, the trust property can pass immediately and directly to your loved ones.
One Last Thought - Trusts Don't Work if They're Not Funded Of course, if you find yourself in need of a Revocable Living Trust, then be sure to fund your assets into your trust and update your beneficiary designations, otherwise your trust won't be worth anywhere near the money you spent on it.
Should you attempt to write your own Revocable Living Trust?
Most experts say flat out no! Experts, including Trust Attorneys, agree that taking on this task on your own, while better than not doing a Trust at all, is not in your best interest to do your own Revocable Living Trust, even with the help of books, computer software or online programs such as Legal Zoom. Here is a summary of the reasons why not.
1. Estate planning is not one size fits all, or even most.
Estate planning documents found in books or online and those generated by estate planning software are specifically designed to cover only the most basic of estate planning needs. These generic forms are also deliberately kept as simple as possible in order to comply with the laws of all 50 states and the District of Columbia. Just as everyone's fingerprints are different, so are everyone's estate planning needs. Thus, what will work for you and your family will most likely be different from what will work for your sister, your parents, or your next door neighbor. The bottom line - a generic Revocable Living Trust generated by computer software won't do you or your loved ones any favors.
2. Trust laws vary widely from state to state.
Unlike the federal estate tax laws, which apply to all U.S. citizens, state laws are all over the place when it comes to probate, state estate taxes, gift taxes, and inheritance taxes, and particularly wills and trusts, as well as the legal formalities required to write and sign a valid trust agreement. There are also many specific state issues that can affect a trust, including the definition of descendants, anti-lapse statutes, community property laws, homestead rights, common law marriages, putative spouses, and elective share laws. The bottom line - I find it hard to believe that a generic trust form can properly address all of these specific state law issues.
3. Books, software and online programs contain disclaimers.
Every book or software program about estate planning that I've come across contains this same type of disclaimer - "The information contained in this book/program is not legal advice and is not a substitute for legal advice. For legal advice, consult with an attorney." The bottom line - enough said about that.
What is the very bottom line?
Estate planning is not something that you should do yourself, without the assistance of a professional. Just as seeing a dentist to stop the pain in your tooth makes sense, seeing a qualified estate planning professional who is familiar with the probate, trust laws and estate tax laws of your state to create and maintain your Revocable Living Trust makes sense. And don't forget about real estate that you own outside of your home state - chances are the trust laws there are different from the trust laws of your home state. The very bottom line - the time and money that you spend on the services of a qualified estate planning professional to assist you with drafting and funding your Revocable Living Trust will certainly pay off in the long run.
7 Fundamentals of Estate Planning
The key to understanding your estate plan is to understand the answers to the following seven questions:
What is the purpose of an estate plan? Estate planning is not just about planning for what happens to your property after you die, it is also about planning for what happens to you and your property if you become mentally incapacitated. Many times mental disability planning is either not discussed or only touched upon during the estate planning process. This is a mistake since statistics show that while people are living longer, they are not necessarily living healthier. Aside from this, accidents can happen at any time that can render you incapable of making personal and financial decisions. Therefore, your estate plan should address planning for incapacity and for death.
What is a revocable living trust, and do you need one? A revocable living trust is a legal document that covers three phases of your life - what happens to you and your property while you're alive and well, if you become mentally incapacitated, and after you die. One of the main reasons people use a revocable living trust as part of their estate plan is to avoid probate, but it is also a powerful tool to keep your estate plan a private family matter. And because estate planning is not one size fits all, there will be many factors that need to be considered before deciding if a revocable living trust is right for you.
What are the options for paying your beneficiaries their inheritance? Once you have put a plan in place to care for you and your property if you become mentally incapacitated, you can focus on who will inherit your property and how they will inherit it after you die. There are many different ways you can leave your property to your beneficiaries - outright in one lump sum, in phases or stages, in lifetime discretionary trusts, and everything in between. It is also important to understand the difference between providing for minor beneficiaries versus providing for adult beneficiaries. Aside from this, you can attach strings to your property and limit how your property can be used.
What are the essential estate planning documents? The building blocks of a good estate plan include a Last Will and Testament, Advance Health Care Directive, Living Will, and Power of Attorney. Aside from these documents, as mentioned above, some people may benefit from including a Revocable Living Trust as part of their estate plan.
How often should you review your estate plan? Once you have your estate plan in place, you cannot simply stick it in a drawer and forget about it. Day in and day out things will happen that will affect your estate plan - you may get married or divorced, have children or grandchildren, lose a loved one, move to a new state, or buy or sell a business. Aside from this, state and federal laws are changing all of the time. All of these things, and many others, will affect your estate plan, and so you need to review your plan on a regular basis to insure that it still meets your estate planning goals.
Which taxes affect an estate? There are four types of taxes that can affect your estate: estate taxes (including state estate taxes), gift taxes, generation-skipping transfer taxes, and income taxes. Understanding if and how these taxes will affect your estate, and, thus, the inheritance that will be received by your beneficiaries, is an essential part of the estate planning process.
How is your property titled? This is a simple concept - how your property is titled will dictate who will inherit it after you die - and yet day in and day out estate planning attorneys meet with people who do not know how all of their property is titled. Is it in joint names with right of survivorship, tenants by the entirety, tenants in common, or in the revocable living trust? Or, for certain types of assets, who have been named as the primary and secondary beneficiaries? Understanding who owns what is the real key to good estate planning since who owns it now leads to who will inherit it after death. For example, if your will leaves everything equally to your brother and sister but all of your property is titled in joint names with right of survivorship with your sister, then all of your property will go to your sister after you die and absolutely nothing will go to your brother. Then what was the purpose of your will?
A common question an estate planning professional is asked by clients is "How do I figure out if I need a trust instead of a just will?" Many people assume that Revocable Living Trusts are just for wealthy people, but the benefits that they can offer to someone with even minimal wealth are significant. Here are some factors to consider when deciding if you need a Revocable Living Trust instead of just a will.
What Will Happen if You Die Before You Make a Will and Estate Plan?
What will happen to your property if you don't make a will and estate plan before you die?
All states have a legal process in place for determining who will inherit the property of a person who fails to make a valid will through each state's "intestacy laws."
What does it mean to have died “intestate?” This simply means that a person has died without having made a valid last will. If this is the case, then the intestacy laws of the state where the person lived and owned real estate at the time of their death will determine who will inherit their property. While each state has different laws, they all follow the same general pattern - first your spouse and your children will inherit your property; if you don’t have a spouse or any children, then your parents will inherit your property; if your parents have predeceased you then your brothers and sisters will inherit your property; if not, then your property will go to your nieces and nephews.
The above information is provided as general information only and should not be relied upon as legal advice. You should consult an attorney for legal advice.
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