You have three basic choices for estate planning (transferring your assets on your death): the will, which is the standard method; the living trust, which is rapidly growing in popularity; and beneficiary designations for assets such as life insurance and IRAs. If you die without either a will or a living trust, state intestate succession law controls the disposition of your property that doesn’t otherwise pass via “operation of law,” such as by beneficiary designation. And settling your estate likely will be more troublesome – and more costly.
The primary difference between a will and a living trust is that assets placed in your living trust, except in rare circumstances, avoid probate at your death. Neither the will nor the living trust document, in and of themselves, reduces estate taxes – though both can be drafted to do this. Whether a will or a living trust is better for you depends on many personal factors. Let’s take a closer look at each vehicle.
If you choose only a will, your estate will most likely have to go through probate. Probate is a court-supervised process to protect the rights of creditors and beneficiaries and to ensure the orderly and timely transfer of assets. The probate process has six steps:
1. Notification of interested parties.
Most states require disclosure of the estate’s approximate value as well as the names and addresses of interested parties. These include all beneficiaries named in the will, natural heirs and creditors.
2. Appointment of an executor.
If you haven’t named an executor, the court will appoint one to oversee the estate’s liquidation and distribution.
3. Inventory of assets.
Essentially, all assets you owned or controlled at the time of your death need to be accounted for.
4. Payment of claims.
The type and length of notice required to establish a deadline for creditors to file their claims vary by state. If a creditor doesn’t file its claim on time, the claim generally is barred.
5. Filing of tax returns.
This includes the individual’s final income taxes and the estate’s income taxes.
6. Distribution of residuary estate.
After the estate has paid debts and taxes, the executor can distribute the remaining assets to the beneficiaries and close the estate.
Probate can be advantageous because it provides standardized procedures and court supervision. Also, the creditor claims limitation period is often shorter than for a living trust.
Because probate is time-consuming, potentially expensive and public, avoiding probate is a common estate planning goal. A living trust (also referred to as a revocable trust, declaration of trust or inter vivos (during one’s lifetime trust) acts as a will substitute, providing instructions for the management of your assets, either during your life if you’ve funded the trust, or on your death. You’ll still also need to have a short will, often referred to as a “pour over” will.
How does a living trust work?
You transfer assets into a trust for your own benefit during your lifetime. You can serve as trustee, select some other individual to serve or select a professional trustee. In nearly every state, you’ll completely avoid probate if all of your assets are in the living trust when you die, or your assets are held in a manner that allows them to pass automatically by operation of law (for example, a joint bank account). The pour over will can specify how assets you didn’t transfer to your living trust during your life will be transferred at death.
Essentially, you retain the same control you had before you established the trust. Whether or not you serve as trustee, you retain the right to revoke the trust and appoint and remove trustees. If you name a professional trustee to manage trust assets, you can require the trustee to consult with you before buying or selling assets. The trust doesn’t need to file an income tax return until after you die. Instead, you pay the tax on any income the trust earns as if you had never created the trust.
A living trust offers additional benefits:
First, your assets aren’t exposed to public record. Besides keeping your affairs private, this makes it more difficult for anyone to challenge the disposition of your estate.
Second, a living trust can serve as a vehicle for managing your financial assets if you become mentally incapacitated or disabled. A properly drawn living trust avoids potentially embarrassing guardianship proceedings and related costs, and it offers greater protection and control than a durable power of attorney because the trustee can manage trust assets for your benefit.
Who should draw up your will or living trust?
A lawyer! Don’t try to do it yourself. Estate and trust laws are much too complicated. You should seek competent legal advice before finalizing your estate plan. While you may want to use your financial advisor to formulate your estate plan, wills and trusts are legal documents. Only an attorney who specializes in estate matters should draft them.
(Technical assistance for the information contained in this article was provided by The Law Offices of Afshin A. Asher, with offices in Los Angeles, California.)