Determining which documents and tools best fit your goals and needs is central to having an effective estate plan. Do I need a trust? What’s the difference between a will and trust? Do I need both? Do I need either one? These are common questions. While there are deeper layers of detail and nuance that of course merit consideration, a simple explanation could go as follows:
A Will designates where your property goes but has to go through probate to do so. Probate is often costly and time-consuming. A Will does not offer much in the way of control and direction as to how property and money is used after you die. However, a Will is effective at making basic designations about property and in some circumstances, it is really all that is needed.
A trust avoids probate altogether and gives you wide-ranging control over how trust property is used. It is effective at addressing unknown variables in the future. It can be an especially effective tool when named beneficiaries are young or you do not want them to get their whole share of the trust at one time. A trust is also tremendously effective in planning for education, living expenses and other needs of beneficiaries. A trust’s administration after you die is also very private, is not generally intertwined with any type of court proceeding and it is usually a much more streamlined process when compared to probate.
Ultimately, the determination of what documents would make up an effective estate plan is highly dependent on your unique personal and family circumstances together with your goals and concerns.
When undertaking any type of estate planning, the question of “who?” becomes nearly as important as the questions of “what?” Designating the right person (or people) to manage financial and other affairs is tremendously important. When a trust is in place, the individual “in charge” of the trust is called the “trustee.” The trustee’s role is central in the management and administration of the trust. While the written terms contained in the agreement bind the trustee to certain duties, action and limitations, a trustee will undoubtedly still be given significant decision-making authority. In particular, a trustee generally (i) has broad discretion in investing trust assets and (ii) has some significant discretion relating to trust distributions to the named beneficiaries. Accordingly, an appropriate trustee must have financial aptitude and strong organizational skills. Trustworthiness and integrity are also a must. Communication skills are similarly a major advantage as the trustee will likely be communicating with the beneficiaries. The selection of the right trustee requires careful consideration and a thoughtful determination of who would best fill this central role.
Good estate planning contemplates potential future life changes. If the right planning is in place, a Will or Trust will remain viable for a long time. Sometimes life throws curve-balls (sudden death of a loved one, divorce, dramatic financial changes) that necessitate some changes to an existing estate plan. Also, laws sometime change in a manner that make it desirable to revisit existing estate planning.
So how do I know if I need to review my documents? A review every few years is a good idea. If it has been 10 or so years, a review is a really good idea. Whether changes would be beneficial will ultimately depend mostly on personal preferences and goals, coupled with the effects of any changes in life or in the law. I offer a free review at any time for any existing client. I also offer a review for new clients at a very modest cost.
Do I really need a Will? What about a trust? What’s power of attorney and why would I want to grant that to someone? These basic questions about the need and value of estate planning are common. The preparation of a will, powers of attorney over health care decisions and financial decisions and a health care directive is absolutely essential for everyone, no matter their income or wealth status.
In short, these documents and this type of planning can be boiled down to taking care of those around you. In varying fashion, each of these documents helps make life easier, smoother and less expensive for your loved ones in the event of your death, diminished capacity or similar circumstances. Proper estate planning provides answers (and clear directions) to questions such as: Who will handle my legal and financial matters if I become incapacitated? Who will make medical decisions for me if I cannot? Within what parameters? What happens to my property when I die? Who gets my money, property and personal affects? Who administratively handles my property and how? The questions that are addressed by estate planning could go on for pages and pages. In the end, estate planning matters and when done properly, ought to be straightforward and affordable while squarely addressing your unique personal and family circumstances.
In the course of estate planning, it is not uncommon for a client to share their concern about potential liability and to wonder what can be done to help protect them from a lawsuit or some other type of financial liability. Does a trust shield your assets from liability in such circumstances?
A revocable living trust typically does not offer added liability protection. For a married couple, some types of joint trusts may provide a layer of protection in some instances. As a general principle, a revocable trust is simply not a tool for broader liability protection. What can be done?
There are variety of approaches and tools that can be utilized to protect a client from liability. Some types of irrevocable trusts can be used to reduce or shield liability. Separate business entities such as an LLC or corporation are effective in some situations to provide liability protection. Additional measures can also be considered such as insurance and titling. Liability considerations are top priority concerns in some situations and the use of the right tools, and the right approach is vital.
In seeking to avoid probate, the use of beneficiary designations to “automatically” transfer accounts or other assets to an intended beneficiary can be a simple and useful approach. This is often an effective approach and is always a low-cost approach. These sorts of designations are most commonly used in connection with retirement accounts, other bank accounts, insurance policies and even interests in small companies. However, in many instances, simply utilizing beneficiary designations is not adequate to put into place desired planning and to assure the intended outcomes. Beneficiary designations often do not contemplate many unexpected scenarios, provide clarity with respect to heirs nor allow for any direction or limitations as to the use of assets. Frequently, a trust can be used to better address these many situations. However, even when a more comprehensive trust-oriented plan is in place, beneficiary designations can be used effectively to direct certain assets seamlessly into the trust. Ultimately, every individual and family situation is unique and requires careful consideration and use of all available estate planning tools.
Once a Will, Trust or Power of Attorney is signed and finalized, one naturally asks “Where should I put it?” As I work with individuals and families, this is a frequent question and one that I am always careful to be clear about. The best recommendation is for original documents to be stored in the most secure location possible. In some cases, this may be a bank safe deposit box, some other secure deposit box, a home safe or another secure location. Originals are important documents and need to be maintained in a reliable location. However, maintaining adequate copies is similarly important. My law firm generally retains backed up electronic copies of all client documents, which we hold without any additional fee. We also provide electronic copies of all signed documents to our clients for their additional storage. Informing family members or close friends of the location of originals and copies is also often recommended. Although it does not need to involve extreme measures, proper retention and storage of documents is crucially important.
A beneficiary deed can be an effective (and efficient) estate planning tool. This instrument is used by an owner of real estate to designate a “beneficiary” who would become the owner upon their death—with no requirement for probate or any other drawn out process. A signed and notarized beneficiary deed is recorded with the county recorder of deeds office and then, upon the owner’s death, only a subsequent affidavit needs to be filed in order to fully effectuate the transfer. Broader estate planning is often needed, but for simple real estate transfers, a beneficiary deed can be a wonderful approach due its simplicity and cost-effectiveness.
In estate planning, choosing the right decision maker is crucial. Who will serve as trustee of your trust when you cannot? Who will you name as agent under a power of attorney? Who will you nominate to serve as personal representative (executor) in your will? Deciding who should be in charge can be a difficult thing—and the ramifications of those decisions really are important. While the trustee, agent or personal representative is bound, limited and directed by the content of the documents you have prepared (and in many cases, by certain state statutes), their role is still central to your estate plan. In many cases, the role of such an individual is both administrative (i.e. handling a process, handling paperwork, etc.) and substantive (i.e. making important decisions regarding real life situations and what to do with your assets).
While every situation and every individual or family is unique, I generally advise my clients to consider the following characteristics when naming people to these important roles: (i) relevant expertise (health, financial, etc.), (ii) trustworthiness (always a central consideration), (iii) communication skills (in many cases they will be a key communicator to family members) and (iv) a commitment to carrying out your plan (the documents guide, but a commitment to following these is crucial).
When I meet with a new client, we almost always discuss the differences between a Will and a Trust. Frequently, an individual assumes that: Will = simple; Trust = complicated and Will = affordable; Trust = not so affordable. Fortunately, such is often not the case. A Will and a Trust really do different things—or at least address the same matters in much different ways.
A Will directs where someone’s property (accounts, home, car, personal belongings, etc., etc.) goes when they die. For this to happen, a probate estate (court supervised process for handling the affairs for a deceased person) needs to be opened and a personal representative handles the administration of the probate estate. Initial cost of a Will is often a bit less expensive but final administration is more time consuming, more involved and can also end up more expensive.
A trust generally functions as a functional replacement for a Will. A trust’s unique virtues include avoidance of probate and the opportunity to provide ongoing support or distributions to named beneficiaries. While initial cost is often a bit more than a Will, its final administration is dramatically easier, less time consuming, more private and often less expensive.
While every individual, family and situation is unique, it is generally true that a trust is a superior planning tool to a Will. However, I work with clients for whom a Will is the best fit and that’s what I prepare. For others, a Trust makes the best sense. Ultimately, these important determinations are based on a person’s needs, preferences, goals and unique personal and family situation.