Despite advances in medical technology, the mortality rate for humans remains stubbornly fixed at 100 percent. So why is it that millions of Americans still die without a any type of an estate plan?
Suppose you die in a car wreck caused by a drunk driver. Even if you have no assets, your estate might have a wrongful death suit that produces a recovery of millions of dollars, all of which will be divvied up by the state if there’s no estate plan.
Dying intestate also triggers a little-known hassle in the form of an administrative bond. When someone dies without appointing an executor, the court appoints an administrator to disburse all property that wasn’t jointly owned with a survivor. The administrator must post a bond to ensure that he doesn’t loot the estate and vanish. The cost of that bond, usually about $100 per year for every $100,000 in the estate, is paid by the estate’s assets.
Just as domestic partners, pets and digital assets have made estate plans more important than ever, nearly half of all Americans, and almost three-quarters (71%) of adults under the age of 34, do not even have a will — putting the future of their families and loved ones at risk. And even 41% of aging Baby Boomers do not have one.
Most Americans don’t have a will because they think it is too expensive, they don’t have many assets to protect or are procrastinating. But what people don’t understand is with the right estate plan you are passing on your assets on to the right people, making sure they are taken care of and avoiding disputes. Some of the issues often ignored are:
•Pets: Most people want someone to care for their pets. But 61% of Americans don’t think it’s important to provide for a pet in their estate plan surveys found. Instead they may make an informal plan with a family member or friend. But things can change and if your plans are not in writing, your pet could end up at an animal shelter or worse.
•Digital assets. In the new era, digital assets are growing and include everything from online photos and bank statements to smartphones and tablets.
Americans place an average value of nearly $55,000 on their digital assets, a 2011 study by McAfee found, but more than a third of consumers lack protection for those devices. Very few people who already have a estate plan will have appointed an executor to handle their digital assets.
WHAT IS A TRUST?
The trust, also known as a living trust, is a written legal document similar to a will that sets forth your wishes and plans regarding matters during your life, such as your incapacity, and upon your death, such as who will inherit your estate and when. Trust can be revocable, in that it can be changed or even revoked by you at any time, or irrevocable wherein it cannot be changed. The terms of your revocable trust can be changed by you during your lifetime as your circumstances change and during your life you have complete control over the assets placed into your trust. By creating a customized estate plan, which includes a living trust, a will and a durable power of attorney, you will have peace of mind that your wishes will be fulfilled upon your death.
Unlike a will, a trust:
1. Avoids Probate:
Probate is a court proceeding that transfers title of your assets to others upon your death. Probate is time consuming, taking months, if not years, to complete. Probate is expensive costing approximately 4% of the gross value of your estate and is a public proceeding, which can subject your loved ones to the scrutiny of others. A trust avoids probate and as a result minimizes court costs, legal and administrative fees, time delays and keeps matters private, without the burden of court involvement.
2. Provides for Your Incapacity:
Under your trust and the documents associated with the creation of a trust, you will choose an individual to manage your property and pay your bills if you are incapacitated. If you do not plan who this individual will be, the court is required to appoint someone to manage your estate for you during your period of incapacity through a conservatorship proceeding. Like the probate process, a conservatorship proceeding takes time, is expensive and is open to the public.
3. Covers Life Circumstances:
A trust deals with a variety of situations. It can provide for an inheritance for your children, including determining the ages and stages you want them to inherit, protecting them from creditors, divorce, or themselves, as well as setting up estates for minor children or those with special needs. In the cases of blended families a trust can ensure that the children of both spouses are properly addressed so that no one is unintentionally disinherited. It can also appoint the person who you want to handle your estate upon your incapacity or death rather than leaving such a decision to the courts.
4. Prevents an Unnecessary Payment of Estate Tax:
Separate from the expense and delay of probate, your estate may also be liable for estate tax, also known as the death tax. Under a trust you have the ability to reduce or even eliminate your estate tax exposure.
A trust is a document which can be very instrumental in helping your family and loved ones at times of significant emotion or grief. A trust provides them with your wishes and plans and can resolve potential disputes which could destroy relationships between your loved ones or even prevail over your true intentions. Ultimately, a trust provides you with maximum flexibility and control over your property and peace of mind that your plans will be followed upon your death.
Many people say that they have a will and question why they need a trust. However, if you pass your estate on to your heirs using a will, as I have stated above, the will must go through the court process called probate to verify that the will is valid, settle any disputes over the estate before the will can be enforced and ensure that all of your last debts are paid. Further, probate fees paid to your attorney and/or executor are set by law at approximately 4% of the gross value of your estate. If you own property in more than one state, there may be a probate in each state. In California, typical probates last 9 months to 2 years during which time the assets are frozen; if your family needs money to live on, they must request a living allowance from the court which may be denied.
Additionally, a will is only effective when you die, it does nothing for you if you are alive or incapacitated. Without a proper estate plan in place your family will have to go to court to obtain a conservatorship over you to handle your affairs which is time consuming and expensive.
Also, if you lose your mental or physical capacity (due to Alzheimer’s, stroke, heart attack, etc.), without a trust and associated documents that go with it only a court appointee can sign documents for you – even if you have a will. Remember, a will only goes into effect when you die. Once the court gets involved it stays involved until you recover or die. The court, not your family, controls how your assets are used to care for you. This can be expensive, embarrassing, time consuming and difficult to end if you recover.
How Does a Living Trust Work?
When you set up a trust, you transfer assets from your name to the name of your trust, which you control. Legally, your trust (i.e. the Smith Family Trust) now owns your assets and you designate a back up trustee to handle your trust (according to your instructions) upon your incapacity or death. From a legal viewpoint, having a trust means that you do not hold title to anything; since your assets are inside the trust, the trust holds title to everything. However, even though you have relinquished ownership of your assets, you still retain control of those same assets.
A revocable living trust is considered a “disregarded” entity for tax purposes and asset protection. What this means is that your trust does not have its own tax id number until your death; you simply use your own social security number. Therefore, you pay your taxes the same way you always have.
Upon your death, since you have nothing titled in your own name, because your assets are titled in the trust, there is nothing to probate. If you are married, the surviving spouse typically becomes the sole trustee and continues to have control over the assets.
The property that is transferred to a trust becomes the trust estate. A trust estate consists of all of the property, rights and obligations that are transferred to the trust. The trust estate is managed in accordance with the terms and conditions of the document creating the trust.
When Should I Create a Trust?
The only time that you can prepare and implement a trust and an estate plan is while you are alive and have legal (“mental”) capacity to enter into a contract. If you should become unable to manage your own affairs or suffer from some other disability which affects your legal capacity, your trust may be effectively challenged by those who assert that you lacked capacity at the time the documents were created, that you were subjected to fraud, coercion or undue influence during the creation and implementation of your trust. The best time to discuss the need for a trust and its role as part of a comprehensive estate plan is now, while you have the capacity to do so.
Who Should Have a Trust?
You should consider the advantages of a trust over a will if: (1) you want to provide a mechanism for the distribution of your estate (2) you are the parent of minor children; (3) you wish to avoid conservatorship or probate; (4) you own real property; (5) you want to avoid estate tax; or (6) privacy is important to you, your business or your family.
WHAT ASSET PROTECTION IS AVAILABLE BY A REVOCABLE “LIVING” TRUST?
A revocable “living” trust is a vehicle that will avoid probate. During your lifetime, you can transfer ownership of your assets to the revocable trust so that it is owned by the trust at the time of your death, and thus not subject to probate. However, a revocable trust is not primarily an asset protection device – in certain circumstances assets that you transfer to the trust may remain available to your creditors. Most certainly having your assets in a trust makes it more difficult for creditors to access these assets in that before being able to access these assets the creditor must petition a court for a charging order to enable the creditor to get to the assets held in the trust.
In addition, in most cases a revocable trust becomes irrevocable upon the death of the grantor. Once it is irrevocable, a typical “anti-alienation clause” protects the assets held in the trust from being used as collateral by the trust beneficiaries. While you are alive and the assets are held in the trust, the beneficiaries do not have control over the property and any distributions are subject to the discretion of the Trustee, which is usually you. Creditors cannot force a Trustee to make a distribution to the trust Beneficiaries and thus, the assets held in a trust can remain outside the reach of the beneficiaries’ creditors until distributed into the hands of the Beneficiary.
What Other Documents Are Part of the Typical Estate Plan?
Typically we prepare the trust which has attached to it Schedules of Assets. Real property is transferred into the trust by way of a deed and other assets may have to be physically transferred into the trust. However, the majority of your assets will be transferred into the trust by identifying them in the Schedules.
However, we also prepare a pour-over will whereby all of your assets that are not identified in the Schedules are designated, by will, to be transferred or “poured-over” into your trust as the designated beneficiary of your will. This ensures that all of the assets in your possession at the time of your death are properly accounted for. However, assets that are not identified in your trust may be subject to probate which is why we often contact our clients on a fairly regular basis to inquire about assets acquired after we create their trust which have not been included in their Schedules.
We also prepare a durable power of attorney in which you designate an agent to handle a variety of tasks, including managing your medical care, upon your incapacity.
If necessary we can also prepare guardianship agreements for the care of your minor children or even family pets.
Estate planning is something many people believe they do not need in that we all would like to believe that death or incapacity will not happen to us. However, most certainly our demise is inevitable and we want our family to be protected from excess taxation, court intervention and the misuse or misapplication of our assets. The time to prepare our estate is when we are healthy and able to make informed intelligent decisions. Take the time to prepare for your families future. You and your family will be glad you did.