Most people sense a need and desire to put their financial and property affairs in order, to prepare for the eventuality that each of us must face. No one will live forever, at least not in our current state.
Yet most people also hesitate to take the necessary steps to prepare themselves. Why is that? Some say it is an unwillingness to acknowledge our own mortality. I believe, however, that frequently it is no more than an unfamiliarity with the process of what needs to be done, what the options are, and what the cost will be.
In this little paper I undertake to explain some of the terms used in discussing Estate Planning, to explain some options available for orderly planning, and to clarify some common misconceptions.
Plainly, an article
this size is not a course in financial and estate planning. I can only
give general information, and little of that. Your particular needs
will vary with your circumstances. What works best for you may be very
different from what works best for your neighbor. No one should base
important financial decisions solely on the simple things set forth
here. I hope, however, that this will give you better insights into
where to begin and a clearer understanding of what you will need to
discuss with your Attorney, Banker, Financial Advisor and family members.
LIVING TRUSTS and OTHER CREATURES
has seen the old movies where the lawyer reads Grandpa's will, and he
leaves the ranch to Little Katie and his favorite horse to Jed. We understand
that a will is a document written while a person is alive, with certain
formalities observed, that will have legal effect after death to carry
out one's wishes concerning one's property. Wills have ranged from writing
on the wall (not a method I recommend) to videos (a fad of very questionable
legal value). A well-drafted will covers all the possibilities and ensures
that the desires of the testator (a lawyer word for "the person
who made the will") are carried out. After the death of the testator,
the will is presented to the court in most cases and the terms of the
will are carried out through a judicial process called Probate. This
has been done this way for centuries.
The Living Trust
A more recent creature is the Living Trust. Once tools of only the very rich, these have become immensely popular with the average American. Despite that, few people understand them well.
A living trust is called that because both the person making it (called the settlor or grantor or trustor) and the person administering it (called the trustee) are living persons. This is in contrast to a trust created in a will, where the settlor is deceased. By creating a living trust, you create another entity, an entity which continues to exist after you are gone. This can be likened to a corporation. If the president of XYZ, Inc. dies, the company does not have to go through formal court proceedings to determine who owns the assets of the company. The corporation owns the assets. Someone else just takes over the President's job and takes care of business. Similarly, in most living trusts, the settlor is also the first trustee. The settlor turns the property over to the trustee (himself or herself) in trust. When that person dies, someone else (designated in the trust) becomes the trustee, and takes care of the details. The wishes of the settlor, as set forth in the trust, are carried out by the successor trustee.
Most living trusts are revocable. This means that the settlor can remove any of the property from the trust any time for any reason and do with it whatever he or she pleases. There are also irrevocable trusts, where the property is permanently given away to a special kind of trust and the settlor has no further legal control over it. Since those do not fit the needs and desires of most people, they are not commonly used for everyday estate planning. This pamphlet addresses only revocable living trusts.
Why go to all the
bother of a trust? Why not just do like Grandpa did, and leave the ranch
to Little Katie? The reason is Probate (mentioned above). Probate is
the process by which property held in the name of a person who has died
is transferred to the ownership of the people entitled to receive it.
It is a court proceeding, and can be time-consuming and expensive. If
the ranch is worth $500,000, Probate can cost Little Katie over $20,000
in executor's fees, attorney's fees and court costs, take a minimum
of 8 months, and be 100% in the public record. If the ranch were held
in a well-done living trust, the transfer could be handled quickly with
a minimum of cost. A living trust is a bit more complex in the short-term,
but can make things much easier for those left behind.
Perhaps the greatest
misunderstanding of living trusts by most people is the belief that
there are some huge tax advantages for everyone who does one. Generally
speaking, there is no tax advantage at all for a person making a living
trust, while the person remains alive. For income tax purposes, a revocable
living trust is a non-event. There can be certain estate tax advantages
for the survivors of Settlors who are married and have property worth
over $1,000,000. Those advantages can be significant, though will become
decreasingly so in the next ten years as the dollar amount rises and
the estate tax is finally eliminated entirely, due to recent changes
in the law. Otherwise, the advantages of a trust are flexibility, ease
of administration, and avoidance of probate.
A Will, Too
A well-done living
trust also includes a document called a pour-over will. This is simply
a will, brief and to the point, that leaves everything to the Living
Trust to be administered according to its terms. It acts as sort of
"wrap-around insurance" that nothing will be accidentally
left out. So if Great-uncle Joe passes away the day before you do and
leaves you his condo on Maui, it will go into and be distributed as
part of your trust, instead of by intestate succession. The will also
provides the opportunity to designate someone to care for your minor
children, if any.
Is There Any Other Way?
There are other options. One is to do nothing at all. While not generally recommended, it is free. By the time everyone else has to deal with what is left behind, you will be beyond worry. Your property will pass to those persons the law designates, through the probate process. (This is the intestate succession mentioned above.) If all you have is your personal items, doing nothing is not always bad. If you have anything that will require a transfer of record title, or if you would like to have some say in what goes where, however, doing nothing is rarely a good option.
You may arrange
things so that property passes by the way title is held. Bank accounts
can be held as payable upon death, real estate can be held in joint
tenancy, and then when you die, everything goes to the other person
or persons on the title. Many people (especially with just one child)
have done things that way. It is extremely simple, both now and later.
There can be serious disadvantages to this method. Many parents have
discovered this when their children (whom they have put on title to
their home) have had car accidents or other liabilities that have cost
them their homes. Worse yet, some children have gotten greedy and put
Mom and Dad on the street. Nasty, but it happens. Or Junior defaults
on his income tax and the IRS takes Mom's house. It is such circumstances
as these that make direct title transfers a risky estate planning device,
and require a person to think long and hard before doing it that way.
Only rarely do I recommend it.
We cannot pretend that cost doesn't matter.
The cost of doing
these things varies widely. Doing nothing is free. Changing the names
on property can cost under $50. You can write a will for the price of
a piece of paper and some ink, or spend a few thousand dollars. The
price to have a will done professionally ranges from about $300 for
the cheapest simple will to thousands for a complex document, with the
average about $1,000. A living trust will run from $400 for a form with
blanks filled in, to many thousands, with the average about $2,500.
Remember that writing it is only a small part. If that were all there
is to it, you could photocopy someone else's document and change the
names (which is what some services do). It is the advice and consideration
of what goes into your document that will determine its value to you;
how thoroughly it provides for your desires, how well-informed you are
as to its provisions and the options, and how accurately it meets the
legal requirements for validity. When I buy a bucket, I care about the
price, but my first concern is, will it hold water? The absence of snakes
is good also.
What is Best For You?
That is a question that only you can answer. After considering your assets, your family, your desires and your individual situation, and discussing all of it with your advisor or attorney, you will be in a position to make a sound determination as to which method best suits your needs. Then, you will understand what you have done, why you have done it, and what it will mean to your loved ones when you are gone.
The important thing is to decide what to do, follow through and do it, and ensure that it is done thoroughly with all the required legal formalities. By the time mistakes are discovered, it is usually too late to fix them.
My experience has
taught me that people truly desire to have these things well-arranged
and in place, and that there is a strong sense of accomplishment in
knowing that it is done.
© 2007 Steven R. Pogue
All Rights Reserved
in San Jose, California, the Law Offices of Steven R. Pogue represent
clients in the communities of Alameda, Belmont, Burlingame,
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