A lot of estate planning work can be done relatively easily. Joint ownership and proper beneficiary designations can make things a lot easier for loved ones to handle after you die. Proper levels of insurance can make the survivorship needs of your loved ones easy to cover. In fact, for most people, much of their estate planning can be accomplished using a few of these easy steps.
However, as applies to most things in life, it’s the remaining small amount that takes the most work. This remaining part is the provenance of estate planning attorneys and financial advisors, and includes some of the basic legal tools employed in estate planning: Most prominently, WILLS and TRUSTS.
One fairly routine question we tackle as advisors is: Which do I need – a will or a trust?
There is no one answer for everyone, and an advisor with a good background in estate planning can be a good place to start in determining which legal instruments line up with the needs presented. Let’s start, though, by taking a look at what, exactly, wills and trusts are.
The best way to define a will is that it’s a legally recognized list of instructions to a probate court. Rules vary from state to state on who can make a will and how it can be made, but generally they include minimum age (18 in Maine but younger in some states), the format (most require in writing, but in some states verbal or video wills are acceptable), and other requirements such as whether they require witnesses and notarization.
Wills are as diverse as the people who create them, but they tend to have common elements, including the name of an executor (in Maine, a “Personal Representative”), along with the powers these people have, property to be passed on, guardianship of children, identity of beneficiaries and disposition of assets.
For many people, the will is sufficient to carry out their post-death intentions. However, there are some situations where it isn’t adequate, and more robust measures need to be employed. Trusts are generally the next step up in the estate planning process.
I used to simply describe a trust as a box with a list of instructions on how to manage and give away its contents. Another, perhaps more useful parallel is that the trust is a lot like a corporation. Similar to a corporation, a trust is a legal entity that can own property and assets, and that can be subject to taxation. Unlike a corporation, however, a trust has donors and beneficiaries instead of owners and shareholders. A trust has trustees instead of directors and executives.
A trust can be created during someone’s lifetime (called a ‘living’ trust, or for Latin fans, an ‘intervivos’ trust), or it can be created at death as part of a will (a ‘testamentary’ trust). Generally, what trusts all have in common is that there is a ‘maker’ (the person who gives assets or property to the trust), one or more trustees, who are responsible for following instructions in the trust and for acting in the interests of the trust beneficiaries, and the beneficiaries themselves. Beneficiaries are generally divided into ‘income’ beneficiaries and ‘remainder’ beneficiaries, distinguishing who receives income and who gets the rest once the trust is dissolved.
WHY A TRUST?
Generally, a trust is employed when the will won’t suffice to carry out someone’s wishes adequately. Usually, having a trust isn’t a replacement for a will, but rather an accompaniment to the will. Usually when property is to be distributed by trust, a will is still created to ensure that any property owned at death is passed into the trust.
Some common situations that call for a trust include the following:
Property/Assets to be managed before death:
- Since a will only becomes relevant at death, if someone wants property or assets managed during their lifetime, a trust becomes preferable. Once assets are put into the trust, management of the assets no longer changes at the death of the person who put them into trust. A more seamless continuity of the care of the assets can result, for the ultimate good of the beneficiaries.
- This also can cover concerns about incapacity during life, which a will does not.
Desire to avoid (or mitigate) the Probate process:
- Maine has a relatively straight-forward probate process. That’s not true of all states, though. California and other states are notorious for complex, expensive probate. Since a will is, again, a list of instructions FOR the probate court, it does nothing to remove assets from probate. A trust, which is administered more under contract law than probate law, sidesteps this process.
Elimination of some probate ‘pitfalls’:
- Even in states with relatively simple probate, there are some reasons why people might want to use a trust to avoid probate.
- Probate is a public process, and if someone is interested in keeping their assets (and their disposition to beneficiaries) private, they’ll need to avoid this process by using trusts, which are not public information.
- Certain provisions in probate law may supersede someone’s intentions in a will. In Maine, for example, a spouse has a right to an ‘elective share’ of their deceased spouse’s assets. Someone who, for whatever reason, wants to disinherit their spouse may not be able to do so with a will, since the spouse can, after death, elect to take a pre-determined percentage of the assets.
Desire for ongoing care of assets:
- Since the probate process seeks to distribute assets and effectively close out the estate, a will may not be sufficient if the desire is to have assets managed for beneficiaries far into the future. This can be the case where the maker of the trust wants to avoid having a beneficiary spend all of their inheritance at once, or where they want income provided to one class of beneficiaries, with the principal passed on eventually to another class.
- On their own, income to trusts is taxed at levels that might be higher than those of an individual holding the same assets. Still, when contemplating estate tax implications, an individual may want to remove assets from their estate by moving their ownership to that of a trust. Generally, in order for this type of transfer to be considered a ‘completed gift’, the trust must be irrevocable, meaning that the person placing assets into the trust cannot have the ability to take them back. Recent increases to both federal and state estate tax exemptions make these types of measures less common, but estate taxation has undergone significant changes over the years and can probably be expected to change in the future.
Figuring out whether a will is sufficient or not is an important step in your estate planning. Taking the actual steps to create a will (and trusts if applicable) is vastly more important. There is perhaps no area as subject to procrastination as estate planning. I’ve even seen estate attorneys procrastinate on getting their own estate in order. Is this because we’re facing our own mortality when we do such planning? Or, maybe because we see it as being a distant future activity?
Take some time this week to think through the issues above. Then visit with your advisor and arrange some time with an estate planning attorney (or, if you’re a ‘DIY’ kind of person, use an online resource). Taking positive steps in this area will leave you with a good feeling. I promise.
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