Estate Planning Basics
Tips for Older Adults Interested in Planning for
the Future
All property owners have done some estate planning for the distribu tion of their estate to their heirs whether they are aware of it or not. Without a will or a trust, the inheritance laws (laws of intestacy) of your state will determine who your heirs are and how your property will pass to them. If you have no heirs that fit the state’s formula, the assets will be taken by the state. Often times the state’s formula and rules for moving assets to your heirs will not be what you would have chosen if you had done some planning. Following are some basic things you should know about estate planning. Consult with your financial advisor and/or your lawyer to determine a plan best for you.
Dying Intestate. Dying intestate means dying without having created either a will or a trust which provides instructions for passing your estate on to your heirs. Dying intestate is like taking your property and attempting to move it to your heirs on the other side of a deep chasm, a chasm which is filled with hazards. These hazards (probate, creditors, con-artists, lawsuits, judgments, lawyers, and death taxes) can damage much of the value of your estate and allow your property to go to unintended heirs and in unintended ways.
Probate. If you die with any property titled in your personal name, there must be a probate process for that property (assuming the estate is above a minimal size). Probate is the state’s legal procedure for handling three major functions for your estate. (1) A final and definite identification of and appropriate payment to the estate’s legitimate creditors and claimants, (2) Identification of the rightful heirs to the estate and the share size that each heir will receive, and (3) Getting the legal title of the property out of your name and into the name of the heirs. Having a will drawn up in advance of your death will take care of the second function. With no valid will for your estate, the state will use its own formula for determining heirs and their share. But even with a will, the creditor/claimant identification and the re-titling of your property still must be handled through a court administered probate procedure.
Avoiding probate is desirable because it can be a time consuming and expensive process. One good way to avoid probate is through the use of a family estate planning trust, either a living trust or a life estate trust.
Think of the trust as a bridge that will allow a trustee to move your assets safely across the intestacy and probate chasm to your heirs on the other side. The way a trust avoids probate is by titling your property in the name of the trust before your death.
Joint Tenancy Ownership. Most married couples, and many parentchild combinations, choose joint tenancy with rights of survivorship as their method of holding title. This may be done with real estate, personal property and financial assets. The idea is that when one joint owner dies, the surviving joint owner or owners automatically receive the decedent’s interest in the property without probate.
Beneficiary Arrangements. Many assets may be transferred to heirs quite well with beneficiary arrangements. For example, beneficiaries may be specified on pension plans, insurance policies, annuities, bank and investment accounts. When the original owner dies, the remainder amounts or death benefit will be paid quickly to the named beneficiaries, in the amounts specified to each beneficiary and without probate.
Incapacitation. When a property owner has either sole or joint tenancy ownership, and then becomes mentally incapacitated, the property is in legal limbo. This is due to the incapacitated owner being incapable of conveying legal title or signing legally binding documents. This can prevent the property from being sold or even being leased. Often, an expensive and time delaying court conservatorship procedure is the only answer. A family trust is the most comprehensive way to deal with incapacitation issues. But, a simple device known as a durable power of attorney will take care of many of the problems.
Estate Transfer & Heir Planning. One of the big benefits of pre-death estate planning is the ability to name your heirs, specify the share of your estate they will receive, and dictate how and when they get their share. Usually, this part of estate planning may be done with either a will or a trust. But as mentioned above it takes a trust to avoid probate, protect the estate from legal problems and con artists, and to minimize death taxes.
What Is a Trust?
A trust is a legal entity or device used to take care of property in special ways. Trusts are created by a legal agreement, basically a contract, between two parties. These contracting parties are known as the grantor and the trustee. The grantor and trustee create the agreement for the benefit of a third party known as the beneficiary. This is an important feature because private agreements have tremendous flexibility in their provisions. Even though a trust is a private agreement, it is recognized by the laws and courts as an independent legal entity, an independent owner of property. In fact, trusts are independent entities much like corporations.
As stated above, trusts have three parties to them: grantor, trustee, and beneficiary. Grantors are the individuals who own property which they wish to have managed, controlled, protected and transferred to heirs by a trust. Once their property is in the trust, the grantors no longer hold the legal title to the property, though they usually retain the exclusive rights to use the property or its income and usually retain full control of the property. The trustee is the legal administrator of the trust and the legal title holder of the property. The grantors’ relationship to the trust is determined by the language which they put into the trust agreement. The beneficiaries are the individuals or charities that receive benefits or income from the trust property, and eventually receive the property itself. When the grantors retain for their lifetime the rights to the income and use of the trust property, then the beneficiaries will receive their benefits after the grantors die. In still other cases, the grantors and beneficiaries both receive benefits from the trust simultaneously.
Living Trust. A family trust in which the grantors hold all three positions — grantor, trustee, and beneficiary — is known as a living trust. This trust category is almost always revocable (see topic below). The living trust really isn’t a trust though because it is not an agreement between two separate parties, grantor and trustee. There is, in fact, just one party in the living trust, the grantor or grantors. Since one party cannot write a legally binding agreement with itself, the living trust is not a contract, not a complete trust during the lives of the grantors (even if there are two grantors, legally they are still one party). Therefore the living trust arrangement is not recognized by the laws and the courts as an independent entity. It is simply thought of as an extension of the grantors and as a special way the grantors have titled their property.
Revocable and Irrevocable. An arrangement where the trust may be revoked or canceled at will by the grantors is known as a revocable trust. If a trust cannot be canceled by a family member without permission of the other parties to the trust, the arrangement is called an irrevocable trust. Irrevocable trusts usually are recognized as independent legal entities whereas revocable trusts are not.