The Super Dave disclaimer: About ten years ago, there was a cable television show featuring Super Dave Osborn, a fictional stuntman. Each episode Super Dave would attempt several death-defying stunts, usually involving motorcycles, jumps, human cannonballs and other hair-brained Evel-Knievel-type daredevil antics. Inevitably, something would go awry with the execution of the stunt and Super Dave would suffer hilariously painful (and fictional) consequences. Of course, before each show Super Dave was careful to remind the audience that he was a professional with many years of experience. “So kids, don’t try this at home.”
All jesting aside, the same advice holds for individuals and families contemplating the establishment of either a will or a trust: Don’t try to do it at home with some mail-order kit. Get professional help. There are too many details that, if done incorrectly, can make a mess of your financial intentions. And while many of the estate issues you may face are common to others, every situation is unique. The first paragraph of Estate Planning Basics, an informational booklet from the National Association of Financial and Estate Planning (NAFEP) notes that while their publication is “designed to provide accurate and authoritative information in regard to estate planning… the services of a competent professional person should be sought.”
The purpose of wills and trusts NAFEP defines an estate as “the total property owned by an individual prior to the distribution of that property under the terms of a will, trust or inheritance laws. An individual’s estate includes all assets and liabilities.” This “distribution” occurs upon the death of the individual, and wills and trusts are legal documents used to determine the specifics of the transfer of the estate to others, including heirs, beneficiaries and charities.
If one dies without establishing either a will or trust, they are said to die “intestate.” In the absence of a will or trust, state law will determine how property will pass to heirs. Often these government-mandated standards for distribution of assets will not match the wishes of an individual. To guarantee your wishes for the distribution of your estate are carried out, you must properly execute the establishment of either a will or revocable living trust, and periodically update these documents to reflect your current circumstances.
Defining wills and revocable living trusts
A will is a simple document stating your instructions for the distribution of your property upon your death. This property may be real estate, securities, bank accounts, loans receivable, insurance policies, automobiles, household goods, etc.— anything titled in your name. These distribution instructions may be simple (“all assets divided equally among my surviving children”) detailed (“Jimmy gets my fishing gear, Joey gets my Ford Taurus and Johnny gets the house”). The will also serve to identify the rightful heirs (“Andrea and Linda, but not Marianne”).
Even with a will, the distribution of your property must be handled through a state administered procedure called probate. The probate process is intended to ensure that all creditors and rightful claimants to your property have the chance to be satisfied, and that the instructions delineated in your will are executed correctly.
But probate can be a time-consuming and expensive process. NAFEP reports that on a “national average, probate costs run from six percent to ten percent of the value of the estate.” This means that an estate worth only $200,000 could cost $12,000 to $20,000 to probate. These costs are based on the fair market value of the property, and not on just the net worth or equity. In some cases, probate ends up in litigation that drags on for years. Frequently it leads to family battles, and it often causes or allows the decedent’s wishes to be ignored. In addition, probate procedures are all made public, causing family privacy to be lost.
While a revocable living trust is also used to define the distribution of property to designated beneficiaries, it has a different legal standing than a will. The NAFEP states “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 parties are known as the grantor and the trustee. The grantor and the trustee create the agreement for the third party known as the beneficiary.” These private trust agreements are recognized by law and courts as independent legal entities, much like corporations. Through the actions of the trustee(s), trusts may own property, make purchases, earn income, distribute assets, pay taxes and conduct business activities.
One of the distinct advantages of placing assets in a trust is the avoidance of probate because property has been retitled prior to one’s death. The grantor (the person who transferred the assets into the trust) may die, but the trust lives on.
Another advantage of a trust over a will may be the protection of the assets from personal liabilities that might result from divorce, bankruptcy and lawsuits or other legal entanglements. Transferred properly, trust assets are no longer the property of the grantor, and are beyond the reach of creditors or money-hungry opportunists.
A will or a trust: Which is best for you?
Remembering the Super Dave disclaimer about every situation being unique and requiring expert input, NAFEP offers the following general guidelines:
A will is usually the best choice when:
- The estate is small enough that formal probate is not required.
- It is reasonable to leave all of the estate through beneficiary and/or joint tenancy arrangements (such as life insurance proceeds or real estate deeds).
- There is no significant death/inheritance tax liabilities.
- There is no need for heirs to receive controlled payments over time (such as payments for the care of minor children or college tuition).
A revocable living trust may be desired when:
- The estate, which cannot be transferred by beneficiary or joint-tenancy agreements, exceeds $100,000.
- There is the risk of challenge by a heir, or would-be heir, after the estate owner’s death.
- Avoiding probate is an important consideration.
- The estate cannot be distributed immediately because minors or heirs are supposed to receive payments according to a schedule over time.
- There are significant death/inheritance tax liabilities.
- There is a need to insulate assets from legal difficulties that an estate owner may have with a spouse, family member or business associate.
When it comes to estate planning, don’t let the government do it for you, but don’t do it by yourself, either. Get the expert assistance you need to be sure that whatever you leave behind gets left in the right place.