An Estate Plan Begins with a Will or a Trust
What is a Will?
A Will is a legal document that sets forth your wishes regarding the distribution of your property and guardians for any of your minor children after you pass away. If you die without a Will, those wishes may not be carried out. If you fail to prepare a Will, this will leave the ultimate decisions about your assets and your children to a court. In addition, you could be the cause of family strife if you don’t have a Will and your family members cannot agree on what you would have wanted.
In order to be valid, you generally must be over the age of 18, be of sound mind, and the Will must be “properly executed.” This means that all of the legal requirements for signatures and witnesses are met. These requirements vary by state. Each state has a law that defines what is required for a Will to be valid. Failure to adhere to your state’s law regarding Wills often results in a court declaring the Will to be invalid and it will proceed as if you had not made a Will at all. For this reason, it is very important that you work with a Trusts and Estates Attorney, to ensure your Will is valid and will be implemented by the court.
Some people incorrectly believe that only the very wealthy or those with complicated assets need a Will. However, there are many good reasons why everyone should have one. For example, with a Will:
- You can designate who receives your assets when you pass.
- You can keep your assets out of the hands of people you don’t want to have them (like an estranged relative).
- You can name who should be the guardian and care for your minor children. Without a Will, the courts will decide what happens to both your belongings and your children.
- Your heirs will have a faster and easier time getting access to your assets. Without a Will, the court will have to go through the process of first electing a person to administer your estate, before any assets can be gathered and distributed to heirs.
- You can plan to save your estate money on taxes.
- You can give gifts and charitable donations, which can help offset estate taxes.
- If you have a Trust, a Will can be used to “pour over” any assets that you forgot to put into your Trust. This saves time and money associated with full probate.
Therefore, we believe that everyone over the age of 18 should have a Will.
What is Probate?
Probate is the court procedure your heirs and/or executor must go through in order to have the court determine who gets your assets and who is appointed to be the guardian of your minor children if you have any. If you have a valid Will, the court will follow your instructions in your Will (unless you instruct something that is illegal or impossible).
If you do not have a Will, that is called “dying intestate’. If you die intestate, the court will decide what happens for you – by applying your state’s “intestacy laws”. Intestacy laws are the laws that govern what will happen to your assets when you die. Each state has its own intestacy law and they vary slightly. However, generally the intestacy laws say that some or all of your assets will go to your current spouse when you die. If there is no-spouse, then everything will be split equally between your children. If you have no children, then your assets will go to your parents. If your parents are no longer living, then your assets will be split equally amongst your siblings, and if none, then to your next of kin and so on.
You may think the “no plan” “dying intestate” sounds pretty good, and therefore you may not need a Will or a Trust. But here are a few of the problems with dying intestate:
- It can be very costly and time-consuming (often taking over a year or more and tens or even hundreds of hours of professional work).
- Your property can end up being shared my many people jointly, and that can make it extremely difficult to sell later on.
- If you wanted something specific to go to a certain loved one, that will not be achieved.
- If you have life insurance or other assets with beneficiary designations or joint ownership, dying intestate can have the unintended consequence of unevenly distributing your assets when you did not intended that would be the case. For example, if you have a $100,000 life insurance policy that names child 1 as the beneficiary and you have a $100,000 bank account that names child 2 as the beneficiary and you own a single property worth $100,000, When you die, child 1 and 2 will receive the equivalent value of $133,333, but child 3 will only receive $33,000 in value. Perhaps worse, the house will be jointly owned and will not be able to be sold unless all three children agree to do so.
- If one your heirs is a minor or a young person, they may receive a great deal of money at a very young age, which is usually not a good idea. With a Trust, you can ensure that any money given to a you person can be held “In Trust” until they reach a certain age or appropriate maturity to receive the funds.
What is a Trust?
A Trust is a separate legal entity from an individual. It is created when the you (the “Grantor”) executes a Trust Agreement. When the Grantor of a Trust passes away, the assets in the Trust do not enter into the probate process that is controlled by the court. Instead, the assets in the Trust pass to your heirs immediately pursuant to the terms of your Trust.
The person in charge of administering your Trust is called the “Trustee”. When you work with an Estate Planning professional to draft your Trust, you will discuss with them who would be the best person to choose for that very important role.
How to Choose Between a Will- Based Estate Plan and a Trust- Based Estate Plan?
A Will provides your instructions, but it does not avoid probate. Any assets titled in your name or directed by your Will must go through your state’s probate process before they can be distributed to your heirs. (If you own property in other states, your family will probably face multiple probates, each one according to the laws in that state.) The process varies greatly from state to state, but it can become expensive with legal fees, executor fees, and court costs. It can also take anywhere from six months to two years or longer. With rare exception, probate files are open to the public and excluded heirs are notified and encouraged to come forward and seek a share of your estate. In short, the court system, not your family, controls the process.
Not everything you own will go through probate. Jointly-owned property and assets that let you name a beneficiary (for example, life insurance, IRAs, 401(k)s, annuities, etc.) are not controlled by your Will and usually will transfer to the new owner or beneficiary without probate. But there are many problems with joint ownership, and avoidance of probate is not guaranteed. For example, if a valid beneficiary is not named, the assets will have to go through probate anyway and will be distributed along with the rest of your estate. If you do not have a Trust and name a minor as a beneficiary, the court may insist on a guardianship proceeding to appoint a guardian for the child’s inheritance until the child legally becomes an adult. At which point, the child will get everything all at once, without any protection from creditors.
For these reasons a Trust-based Estate Plan is preferred by many families and professionals. It can avoid probate at death (including multiple additional probates – known as “ancillary probates” – which are required if you own property in other states). In addition, a Trust-based Estate Plan can prevent court control of your assets if you become incapacitated, bring all of your assets together into one plan and provide maximum privacy. It is valid in every state, and can be changed by you at any time.
Assets can stay in your Trust, managed by the Trustee you selected, until your beneficiaries reach the age you want them to inherit. Your Trust can continue longer to provide for a loved one with special needs, or to protect the assets from beneficiaries’ creditors, spouses, and irresponsible spending.
A Trust-based Estate Plan is initially more expensive than a Will-based Estate Plan, but considering it avoids the expense and time associated with court proceedings at your incapacity and death (which your estate ultimately pays for), many people consider it to be a bargain.