There
is no one right way to do an estate plan though there are certain
elements in common for all estate plans. An estate plan should
address not only what will happen when you die but what will happen
if you become incapacitated.
The
minimum for any good estate plan is an Advance
Medical Directive, a Durable General Power
of Attorney, and either a Last Will and Testament
or a revocable “Living” Trust.
An
Advance Medical Directive is
a document which combines a Living Will (a statement of your desires
in end-of-life situations) and a medical power of attorney (your
appointment of an agent). By stating whether and under what circumstance
you would want life support withdrawn you save your loved ones
the anguish of making such a decision. By appointing an agent
you ensure that those decisions will be honored. Your agent will
also make other medical decisions that need to be made when you
are no longer able to make those decisions.
A
Durable General Power of Attorney
appoints an agent (attorney-in-fact) to make financial decisions
for you when you are no longer able. Regardless of whether you
execute a Will or a trust there are always circumstances where
a power of attorney is needed. While a trust may own your assets,
you have other financial aspects to your life such as pensions
and medical insurance that may need to be addressed when you are
incapacitated.
A
Last Will and Testament is
your written statement of what will happen to your estate when
you die. Your “estate” is comprised of all assets
you own in your name alone or as a tenant in common with one or
more other persons. Your Will only affects those assets which
have no joint owner with right of survivorship and which have
no endorsement (beneficiary designation) which makes the asset
payable on death to another. Common examples of assets that a
Will will not act on are: life insurance that has a beneficiary
designation other than your estate; individually owned brokerage
accounts that have a transfer on death designation; individually
owned bank accounts that have a pay on death designation; tax-deferred
retirement accounts (IRAs, 401ks, etc.) that have a beneficiary
designated; and, real estate where title is held either as tenants
by the entirety or as joint tenants with right of survivorship.
Title to these assets will be transferred outside of probate.
No matter what your Will says, these kinds of assets are not subject
to the Will’s terms. When you die your Will is submitted
to the Probate Court, typically in the jurisdiction in which you
were last a resident. This begins the process of probate.
Probate also is required if you die without a Will and with assets
still in your individual name. This circumstance is called being
intestate and it simply means that the state has written a default
Will for you.
A
Living Trust (an inter vivos
trust) is established while you are alive. It is a contract which
spells out the ownership, administration, and ultimately the disposition
of the assets the trust owns. You are the creator (grantor) of
the trust and it is established for your lifetime benefit so you
are the beneficiary. Under most circumstances you name yourself
as the administrator (trustee) and you appoint successor trustees
to take responsibility if you become incapacitated and/or when
you die. You can amend or revoke this agreement at any time while
you are still competent. After the trust is established you transfer
title or change beneficiary designations of all your assets to
the trust (you fund your trust). The trust only controls those
assets you give it. Upon your death the trust sets forth how and
when the assets will be distributed; this process is called trust
administration. You can use the original trust agreement to
establish one or more trusts after your death (testamentary trust).
A testamentary trust might be used to preserve as much as possible
from estate taxes (a credit shelter trust), to care for minor
children; or to distribute over time (meter) large inheritances.
(A testamentary trust can also be established under a Will.) Because
people often leave assets out of their trust (both accidentally
and deliberately) when you do a Living Trust you should also do
a special type of Will, commonly called a Pour-Over Will. Your
trust will be the sole beneficiary of the Will in such cases.
People
have different reasons for doing a living trust. Some of the most
common reasons are:
• A desire to avoid the cost and time of probate. Probate
in Virginia typically costs between 3 and 5% of the estate under
administration and will take between 18 and 24 months to complete.
• A desire to preserve privacy, probate is a completely
public process, any one who wishes to can know what the value
of your estate was when you died and who exactly received it.
• Ownership of real estate in more than one state. Each
state in which you own real estate will require a separate probate.
If a trust owns real estate there will be no probate.
• A desire to plan for incompetency. A Will only comes into
action upon your death. Therefore, if you become incapacitated
there may need to be a petition to the court for a guardian to
be appointed for you. This can be expensive and humiliating. A
living trust allows you to appoint someone now to take care of
you and your affairs when you are not able to do so and under
what circumstances they may do this.
• Second marriages. Many people in second marriages are
at great risk of disinheriting children from a prior relationship.
If you and your new spouse own real estate, bank accounts and/or
brokerage accounts jointly your children will receive nothing
– EVEN IF you have a Will.
• A beneficiary with “problems” (he couldn’t
hold onto a dollar bill if it was stapled to him OR she is on
SSI or other needs-based government assistance OR your children
are minors OR substance abuse is or has been a problem). This
type of beneficiary needs careful planning to avoid harm to the
beneficiary by the receipt of your wealth.
• A desire to avoid estate taxes. For a married couple whose
net worth – including life insurance – exceeds the
estate-tax credit the additional cost of including provisions
for a credit shelter trust within the living trust can save their
beneficiary(ies) more than 40% of every dollar that exceeds the
credit amount.
Disadvantages
to a Living Trust are few but can be significant to the person
desiring to do an estate plan. The primary disadvantages are:
• The cost of establishing the trust. A trust will cost
significantly more than a simple Will, though commonly these costs
will be less than the ultimate cost of probate.
• The process of funding the trust can be tiresome and time-consuming.
This is most commonly a problem if you have many bank accounts
that you do not wish to consolidate and/or have actual paper certificates
for any stock you own. Most other assets are easily retitled to
the trust, with a little guidance from your attorney.
Finally,
a Living Trust does not shelter your assets from creditors and
it is not a tax savings device. In and of itself it does not save
you income or estate taxes but it can be used to incorporate further
planning which can save thousands of dollars in estate taxes.
