What happens to your house or the money in your bank account when you pass away, or become incapacitated? Well, that depends…If you have a valid will, trust or other estate planning document in place, your assets will be distributed according to your wishes. If you don't, the state gets to allocate your property…perhaps to your loved ones, but maybe not. Our summaries of the laws related to wills, trusts and estates help you understand the rules and the tools for ensuring the orderly distribution of your property upon death or disability, so that you can make sure your coveted sports car goes to your grandson.
Wills
A valid will sets forth the intentions of the deceased with respect to the distribution of assets, the payment of debts and taxes, and the care of minor children or wards.
Trusts
A trust creates a separate legal entity, allowing you to avoid the transfer of property upon death. This can be an effective method for avoiding the time and expense of probate.
Estates
Estate planning involves setting up mechanisms such as wills and trusts that provide specific instructions for the distribution and management of property passing to a person's designated beneficiaries.
“I've seen the family turmoil that results when someone dies without a will.”
— Holly H. Little
What You Should Know About Estate Planning With a Living Trust
INTRODUCTION
In recent years, living trusts have grown increasingly popular as substitutes for wills in estate planning. They are sometimes called revocable trusts or inter-vivos trusts. Living trusts can have several advantages over wills, including avoiding probate, avoiding guardianship, maintaining liquidity, and keeping privacy. You can create a living trust with a simple trust document and change it at any time. You can transfer all of your assets to the trust but continue to use and manage them during your lifetime. After you die, your trustee will transfer ownership of the assets to the beneficiaries named in the trust.
An important benefit of living trusts is the speed with which your property can be transferred to your heirs after your death. In addition, a living trust is private. Only you, your trustee, and your beneficiaries will know the value of the trust property, how it is to be distributed, and the names of your beneficiaries. This pamphlet reviews the basics of how to create and use a living trust. Your lawyer can help you decide whether a living trust is appropriate in your circumstances and prepare a trust document that meets your goals.
USING A LIVING TRUST
Most people understand the importance of a will, but many are not familiar with trusts. Both a will and a trust can be used to transfer your property when you die, but the similarity ends there. A will has no effect until you die, while a living trust becomes operative during your lifetime to manage your assets. While a will is part of the public record a trust is not, thus providing greater privacy. Trusts are usually easier to amend than wills and less likely to be contested by your heirs.
You can use a living trust to make decisions about your old age care. The trust can specify your preference for care by your family or in a nursing home. If you become disabled or incompetent, your trust will control who will care for you and how your money will be managed. Without a living trust, a court might need to appoint a guardian if you become incapacitated. As with probate, guardianship proceedings can be costly and time consuming. A living trust provides a way to avoid legal proceedings to appoint a guardian. A living trust may also help you in a variety of other circumstances. For example, you can use a management feature of living trusts to appoint a professional trustee for the elderly, for the inexperienced persons who have recently inherited wealth, and for minors. Living trusts are also useful for those lacking time to manage their property, such as entertainers, entrepreneurs, and busy professionals. If you own real estate in more than one state a living trust can help avoid probate in each state. Probate in multiple states increases the cost and time to distribute your property to your heirs.
CREATING A LIVING TRUST
Your lawyer can prepare a living trust agreement that appoints a trustee to manage your property for your beneficiaries. To maintain control, you can be your own trustee. Commonly, the person creating the living trust is the first beneficiary while other provisions transfer the property to their heirs upon death. The trust agreement will provide details on your rights to change the trust, the duties of the trustee, how to distribute your property, how to provide for your family, and when and how to select a successor trustee.
You can cancel or change any of the provisions of your trust document, including the beneficiaries, the property they are to receive, and the trustee. You should review your trust every year to assure that it still meets your needs. Your lawyer can advise you about the legal and tax effects of your proposed changes and prepare a document that will accomplish those changes.
CHOOSING A TRUSTEE
As noted above, you can serve as your own trustee or you can appoint a professional trustee such as a bank or trust company. Most people appoint an individual such as their spouse, a relative, a friend, their lawyer, or other advisor to serve as successor trustee. When deciding whom to select as trustees, you should consider whether they are worthy of your trust and are willing to accept the job.
A professional trustee may be the best choice if your property will be difficult to manage or distribute. The disadvantages of professional trustees are that they are impersonal and charge annual fees ranging up to two percent of the value of the trust assets. Furthermore, many professional trustees are unwilling to serve if the value of the trust assets is less than $100,000.
The trust document will describe the duties of the trustee to manage the trust property, keep records, prepare tax returns, and make distributions to beneficiaries. The trust document can also designate a successor trustee or provide instructions on how to select the successor.
TRANSFERRING PROPERTY TO YOUR TRUST
After creating your trust, you must complete the formality of transferring your property to the trust. For example, instruct your broker to transfer your stocks and bonds into the name of the trust. Tell your insurance agent to assign your life insurance policies to the trust. Deeds transferring your real estate should be prepared and recorded in every county where you own real estate.
AVOIDING PROBATE
Although your living trust can help you to avoid probate for some of your property, you may still need a will. It may be inconvenient to transfer certain property, such as your car or personal checking account to a trust. Such a transfer could make it difficult to insure your car; it might be harder to obtain credit if your checking account is not kept in your name. A will may still be needed even if you transfer all of your property to a trust. A will is needed to appoint a guardian for your minor children. A will is also needed for assets that you acquire after the creation of the trust or may have neglected to transfer to your trust, such as furniture, clothing and jewelry. The will can have a "pour-over" provision to transfer your property to the trust when you die. Such a "pour-over" provision will cause your property to be distributed according to the terms of your trust.
STATE LAW
You can use a living trust to choose the state for administering your estate. The state for your trust can be different from the state where you reside. This can enable you to select a state that has laws that are most favorable to you for income tax and inheritance tax purposes.
TAX PLANNING
For tax purposes, the trust property is treated as if you remained the owner. You will report income from the trust on your federal income tax return until your death. However, the creation and funding of a living trust does not have any federal gift tax consequences. A trust can be used to avoid estate taxes. You lawyer can help you to design a trust that provides the most favorable tax treatment for you and your heirs.
CONCLUSION
Living trusts have many advantages in estate planning. Unlike wills, living trusts do not require lengthy and costly probate proceedings. Your property and heirs will not be listed in public records in a courthouse. And your property can be transferred to your heirs almost immediately after your death. The advantage of the living trust must be weighed against the expense and effort of creating and administering the trust. Ask your lawyer whether a living trust is the right estate planning tool for you. Your lawyer can carefully draft a trust document to meet your needs and objectives and help you to reduce taxes for yourself and your heirs. Your lawyer can also help you prepare other estate planning documents, such as a will, a durable power of attorney, and a health care power of attorney.
LIVING TRUST CHECKLIST
BENEFITS OF LIVING TRUST
A. Avoiding probate
B. Preserving privacy
C. Professionally managing your property
D. Handling out-of-state real estate
E. Avoiding guardianship when incapacitated
F. Avoiding will contests and family disputes
G. Designating trustees and their successors
NAMING YOUR BENEFICIARIES
A. Yourself
B. Your spouse
C. Family
D. Friends
E. Charitable organizations
KEEPING TRUST RECORDS
A. List of trust property
B. Record of income and expense
C. Tax returns
KEEPING TRUST RECORDS
A. Real estate
B. Bank accounts
C. Stocks and bonds
D. Life insurance
E. Furniture, jewelry, etc.
CHOOSING A TRUSTEE
A. Knowledge of your goals
B. Experience as a trustee
C. Trustworthiness
D. Understanding of beneficiary needs
E. Investment expertise
F. Affordability of fees
CHANGING YOUR TRUST
A. Divorce or remarriage
B. Death of beneficiary or trustee
C. Acquiring or disposing of property
D. Change in value of property
E. Changes in status or circumstances of your beneficiaries
F. Increase (or decrease) in your net worth
OTHER ESTATE PLANNING DOCUMENTS
A. Will
B. Living will
C. Durable power of attorney
D. Health care power of attorney
E. Marital trust
F. Minor trust
This provides general information. Laws develop over time and differ from state to state. This does not provide legal advice about specific legal problems. Let us advise you about your particular situation.
®2012 by BlumbergExcelsior, Inc
What You Should Know About Wills
INTRODUCTION
A will avoids costs and complications for your heirs when you die. Besides providing instructions about gifts of your property - like your home, car, investments and jewelry - your will can provide instructions for payment of your debts, selection of an executor for your estate, and appointment of a guardian for your children. Without a will, your property will be distributed according to state law and a court may select an administrator for your estate and a guardian for your minor children. Your lawyer can help you prepare a valid will that minimizes taxes and reduces the time and expense of handling your estate.
DISADVANTAGES OF DYING WITHOUT A WILL
If you leave no will, you will have given up your right to decide who inherits your property. Your property will be distributed according to state law, which might be quite different from your preferences. And without a will, you can't disinherit heirs. If you leave no will, you also lose the opportunity to select a guardian for any minor children and an executor for your estate. Court-appointed administrators and guardians may not be the family member or friend that you would have chosen to handle your affairs.
Dying without a will can be costly and may complicate the transfer of your property to your heirs. For example, the estate may have to pay bond premiums if there is no will stating that you don't require executors and guardians to post a bond. In addition, estate administration proceedings without a will may delay transfer of property to your heirs.
CHANGING YOUR WILL
You may need to change your will if you move to a new state, marry, divorce, have a child, acquire substantial property, or suffer the loss of a loved one. Tax law changes may also require a will update. Read your will at least once a year to consider changes. You can make the changes by writing a new will or by preparing an amendment to an existing will called a codicil. A new will is best if there are many changes. A codicil may be appropriate for a small change, but it must be made with the same formalities as a new will - crossing-out or writing inserts onto your will might invalidate it.
APPOINTING AN EXECUTOR
You should appoint an executor in your will. An executor locates heirs, lists property, pays debts, and distributes property to your heirs. A relative or friend can serve as your executor, but you should consider using a professional executor (such as a bank or trust company) if you have a large or complicated estate. An executor should be someone who is familiar with managing property, financial matters, and record-keeping. Before naming an executor, confirm that the person is willing to serve. Your lawyer can help you select the best executor. As noted above, your will can state that the executor is not required to furnish a bond, thus saving your estate this expense.
APPOINTING A GUARDIAN
If you have children under 18, you should appoint a guardian in your will. Otherwise, if you and your spouse die at the same time without such an appointment, a court will select a guardian to care for your children and manage their inheritance until they become adults. You can create a trust to control the property transferred to your children. A trust is useful if you are concerned that the children may lack the maturity to handle their inheritance after age 18. Your lawyer can help you to select a guardian and create a trust in your will that protects your children and your wishes.
KEEPING YOUR WILL IN A SAFE PLACE
Your will should be kept in a safe place so that it can be promptly located when you die. You may wish to have your lawyer keep the original to protect it from damage or loss. Although you are not required to give your executor a copy of the will, you should tell both your executor and a trusted family member where your will is stored.
LIVING WILLS
In addition to ordinary wills that state your wishes for your property when you die, the laws of some states permit "living wills" that instruct your doctors to withhold life support equipment while you are alive. A living will is important if you become comatose with no hope of regaining consciousness. Your "living wills" should be written in a document separate from your ordinary will and you should re-sign and re-date it every few years to comply with your state law and to reaffirm your preferences. Give a copy of your “living will” to your doctors and to a close family member. Your lawyer can help you write a "living wills" and advise you about re-signing it every few years to keep it valid.
MAKING YOUR FUNERAL ARRANGEMENTS
You can include instructions for your funeral arrangements in your will. However, you may wish to put these instructions in a separate letter. Give a copy of the instructions to your executor or a family member or friend to avoid delays when you die. You can also include instructions about gifts of your body organs to hospitals for research or transplants. Such instructions for gifts of body organs can be noted on your drivers license or a separate donor card that you can carry in your wallet.
REDUCING THE TAXES ON YOUR ESTATE
Federal estate taxes may be deducted from your property before it is transferred to your heirs. A federal estate tax applies if the value of your property exceeds the basic exclusion amount which was raised to $5.12 million in 2012 and is adjusted annually for inflation. Property given to a tax-exempt charity or spouse (as long as he or she is a U.S. citizen) is exempt from the federal estate tax. Stating in 2011, widows and widowers can add the unused estate tax exemption of a predeceased spouse enabling them to transfer up over $10 million tax-free. The right to the unused exemption is lost if the executor does not timely file an estate tax return for the spouse that died first. Your assets may also be subject to a state inheritance or estate tax, but some states have exemptions for charitable donations, gifts to close family members, and amounts ranging up to about $1 million. Your lawyer can analyze your situation and help you avoid pitfalls and taxes.
Your lawyer can help you prepare an estate plan that will reduce federal and state taxes. For example, your lawyer may suggest that you make gifts before you die to reduce taxes, hold property in joint tenancy with your spouse, transfer ownership of life insurance policies to your spouse or heirs, or use a trust arrangement. Your lawyer can also help you shift the tax responsibility among heirs if you would like some of them to receive their shares without being taxed on it.
REDUCING PROBATE COSTS
Probate costs include court fees, bond premiums and the fees of professionals who assist your executor with the administration of your estate. Your lawyer can help you reduce probate costs with estate planning tools like joint ownership, living trusts, lifetime gifts, and business recapitalizations. For example, your lawyer can prepare a living trust in which you appoint a trustee to distribute your property when you die. Some estate planning tools can help you reduce probate costs, but they may not lower your estate taxes.
PREPARING YOUR WILL WITH A LAWYER
Your lawyer can help you draft your will and explain the tax consequences. Your lawyer can also help you comply with the detailed requirements for a valid will, see that your property is distributed as you wish, and reduce estate taxes and probate costs. The legal fees are usually well spent and often less than the added costs and taxes that would result from dying without a will.
CONCLUSION
You should have a will if you own any property - a home, a car, bank accounts, stocks and bonds, retirement benefits, jewelry, clothing, household goods, and so on. A will lets you distribute your property as you want with a minimum of costs and taxes. It is an opportunity to select an executor for your estate, a guardian for your children, establish trusts and dispense with costly bonds. If you don't have a will, ask your lawyer about drafting one without delay. If you already have a will, your lawyer can help you revise it in accordance with changes in your personal situation or in the tax laws.
CHECKLIST FOR WILLS
1. ESTATE PLANNING TOOLS
A. Will
B. Joint tenancy
C. Living trusts
D. Lifetime gifts
E. Business recapitalization
2. SELECTING YOUR HEIRS
A. Spouse
B. Children
C. Parents
D. Other relatives
E. Friends
F. Charitable organizations
3. IDENTIFYING YOUR DEBTS AND LIABILITIES
A. Credit cards
B. Loans
C. Home mortgages
4. LISTING YOUR PROPERTY AND THE HEIRS TO RECEIVE IT
A. Automobiles and boats
B. Bank accounts
C. Computers and electronic equipment
D. Home and household goods
E. Insurance
F. Jewelry
G. Rental property
H. Stocks and bonds
5. APPOINTING AN EXECUTOR FOR YOUR ESTATE
6. NAMING A GUARDIAN FOR YOUR CHILDREN
7. CREATING TRUSTS FOR ALL OR A PART OF YOUR PROPERTY
8. ALLOCATING TAXES AMONG YOUR HEIRS
9. PROVIDING FOR FORCED HEIRS
10. DISINHERITING UNWANTED HEIRS
11. COORDINATING WITH THE WILL OF YOUR SPOUSE
12. DIRECTIVE TO DOCTORS TO WITHHOLD LIFE SUPPORT ("LIVING WILL")
This provides general information. Laws develop over time and differ from state to state. This does not provide legal advice about specific legal problems. Let us advise you about your particular situation.
©2013 by BlumbergExcelsior, Inc., NYC 10013