IntelliQuote Insurance 101: Wills, Trusts and Estate Planning

By John B. Palley, Estate Planning Attorney

Introduction

Before we look at wills and trusts, let's quickly discuss the need for estate planning in general. Without a written plan in place you and your heirs will likely encounter many problems and inconveniences upon your incapacity or death. They range the gambit from court room battles among family members over custody of minor children to relationship ending feuds between family members over the distribution of assets.

Additionally, there are many problems that arise if a person becomes incapacitated. For example if you were ever to end up in the hospital in a coma, you need someone to be able to make decisions for you. In these situations it is important to have written instructions to handle your personal and medical affairs. The key is planning ahead. By establishing a written plan, your wishes and needs will be carried out exactly as you desire; without the written plan in place, anything is possible!

Simple Will

The simple will (or "last will and testament"- its official name) is something that has been utilized for hundreds, if not thousands of years. It is a writing which declares your desires for you, your assets, and your family upon your death. The two main reasons people write a will are because they do not want the state to decide who gets their assets after death (as would be the case without a properly drafted will in place) and also because they want to select who should be the guardian of their minor children if the parents are to die prematurely.

Although a will is not the most effective means of estate planning, it does do a lot. A will makes sure your property is given to the people you desire to benefit, how you want it distributed to them and it does so when you want it to go to them. This distribution can include real estate, cash, bonds, stocks and other valuable assets; as well as other items with less monetary value such as family photos, collections of knick-knacks, and other items around your house. The person appointed to handle this distribution is called the "executor" or "personal representative." The executor is generally a family member or very close friend, who is highly trusted to take care of your affairs. The other big job of a will is to establish a successor guardian for minor children, to avoid court battles after your death. Many people also use a will to establish a testamentary trust to protect money given to minor children, make requests for burial arrangements, and even set up provisions to provide for family pets.

The will is the main piece of a basic estate plan. The other documents that complete a basic estate plan include a Durable Power of Attorney for Financial Affairs, a Durable Power of Attorney for Health Care, and a Living Will (or Health Care Declaration). With all this, a person has put together a well thought out plan which will provide for them during incapacity as well as after death.

Probate

This basic will package is an estate plan that does a lot, and does not incur substantial legal fees. Unfortunately, it is not perfect. Having a will still requires a person's estate to go through a very archaic process, called "probate." This is the court administered process of dividing up one's assets in an "orderly" fashion. The only problem is this "orderly" process costs your estate time, money, and makes your estate a public record.

In rough terms, you can lose as much as 6% of your gross assets to probate fees and costs. In California people with under $100,000 in gross assets can avoid probate; as can people who hold their assets in certain title arrangements. In general the time delay, the cost, and the public nature of the probate process make the antiquated procedure unnecessary and in fact painful in many situations; it is something to avoid if possible!

Probate can be particularly cumbersome if you have real property in several states; each state requires its own probate "case." In addition to costing more, the time and trouble involved with hiring multiple attorneys and attending Court hearings all around the country can be very taxing. A living trust avoids the need for multiple probate cases and the 6% in probate costs.

Living Trust

The most exciting title arrangement that allows a person to avoid probate is called the "living trust." The living trust, or revocable trust, is a device which holds all of your assets during life, allows you full control over your assets, can give you and your heirs added protection from creditors, and can efficiently distribute your assets after your death avoiding the probate costs and delays.

A living trust is actually a pretty straightforward device. It is simply a separate entity (analogous to a corporation) which holds your assets. You retain complete control over your assets while you are alive and mentally competent. Upon your incapacity or death another person (called the "trustee") steps into your shoes and manages your assets for you. This trustee can be a relative, a friend, or a professional fiduciary (like a bank). Avoiding the probate process is critical, as your trustee can distribute your assets in an expedient manner to your heirs.

In addition to the shorter delay in distribution, a trust also can make it more difficult for creditors to collect money from you or your heirs; as they are forced to sue the trustee or the beneficiaries, which can be a time consuming process. This difficulty in collections also carries over by analogy to relatives wanting to "contest" the trust; as a trust is much more difficult to get overturned than a traditional will.

One of the greatest features of the living trust is that it enables you to avoid the need for a conservatorship should you become incapacitated. A conservatorship is a court administered process, similar to the probate process, which costs you money and can be very frustrating and time consuming for your heirs. Avoiding a conservatorship may be even more important than avoiding the probate!

A fallacy has developed that living trusts are complicated and burdensome to maintain; this is just not true. A living trust is completely revocable and amendable. This essentially means that it can provide for whatever you want; and if it doesn't say it already, it can be added. Except for the initial setting up of a trust, when our offices get everything "placed" into the trust (the "funding process"), you never have to do anything different with your assets than if you owned them outside of a trust.

Estate & Gift Taxes

Regardless of which document is selected, a will or a trust, there are other things that may need to be considered. Most notably are tax planning devices. Currently Federal law allows each of us to give away during life or at death $600,000 without incurring the wrath of the Federal Gift and Estate tax scheme. In case you were not aware, the Federal Estate tax tables quickly escalate to a 55% tax, making proper planning important. It is important to note that simply getting a trust does not get around the problem. Special provisions are needed within the trust to establish the tax savings. These same provisions can also be placed into a will, but it does not get around the Probate problem discussed above. The important thing is talking to an estate planning attorney about this tax so that you and your family do not fall prey to it.

Conclusion

If you have minor children or assets of any kind, I strongly urge you to consider putting together some sort of estate plan. The first step is seeing an estate planning attorney; myself or another qualified attorney. Although it is easy to procrastinate on such an unpleasant topic, I urge you to get it done and put it out of your mind. In addition to planning, putting together an estate plan can provide you and your family a lot of peace of mind!

John B. Palley is an estate planning attorney serving all of Northern California. His offices are located in Sacramento, and he can be reached at 916-920-5983.