What’s Best for Your Estate? A Will, a Trust, or Listing Your Beneficiary’s Name on Your Deeds and Accounts?
By Attorney William K. Hayes
“Probate” is one of those words that most of us know has something to do with dying and asset distribution, but beyond that we’re not sure what else is involved. Probate is a process to transfer ownership of the deceased person’s assets to her or his beneficiaries and to make sure that all appropriate debts have been paid.
The new owner of the deceased person’s assets might be a creditor, a beneficiary under a will, or (if the decedent dies without a will) a beneficiary from a pecking order of “intestate heirs” set forth by state law. The term “intestate” applies to estates where the deceased person did no estate planning and “testate heirs” are those who have been specifically designated as heirs in a will or trust.
You are not experiencing your best analytical moments if you think that letting the probate court handle your estate planning is preferable to creating your own plan. Only the uninformed believe that intestate probate, also known as “the government’s estate plan for you if you don’t have your own,” is preferable to planning ahead to protect your family and the assets that you’ve spent your entire life developing.
If you do no estate planning, the government has a plan for you which it will implement. However, if you should plan for your estate, there are three fundamental goals that you will want to achieve:
(1) To transfer your property to those you designate in a timely and efficient fashion,
(2) To provide for your own physical needs and the management of your property if you are physically or mentally unable to do so yourself, and
(3) To minimize the amount of estate taxes imposed by the government as your property passes to succeeding generations.
No Estate Planning at All
Did you know that you have an estate plan even if you’ve never made a will or trust? It’s true. The government has prepared a “stand-by estate plan” for everyone who has failed to plan his or her estate. The government’s estate plan is known as “intestate succession” which means that you died without planning.
You’ll usually get a cheer from probate attorneys and the IRS when you do this type of non-planning. The IRS will be happy if you have an estate which may be subjected to estate taxes and probate attorneys will be happy because they get a percentage of your gross estate for handling the probate proceeding.
So in effect you have planned. You just inadvertently planned to have the IRS and a probate attorney named as your beneficiaries. It is not unusual that at the end of a probated estate, your heirs receive nothing but the attorney and the administrator get paid their percentage of the gross value of the estate in accordance with state law.
While having the government decide who gets your property and when may at first glance seem somehow beneficial, the odds are that the government will do the job differently than you would have. As with many government programs, the “one size fits all” mentality of the government’s estate plan fails to take into account your wishes, even though it’s your estate.
For example, you may have wanted all of your separate property, or none of it, to go to your spouse, but with the government’s plan, it will likely go one-half to your spouse and one-half to your children. This is true even if one child has a substance abuse problem and the other is undergoing a messy divorce. Your heirs will receive their shares outright if they are at least 18 years old.
On the other hand, you may have actually wanted your separate property to go only to your spouse, and for your own reasons you want none to go to your children or vice versa. Neither will occur unless you plan for it to happen.
As you can see, if you fail to plan, your wishes don’t much matter. Oftentimes a lack of planning allows the estate to go to family members that you would not have wished to receive any of your hard-earned assets. Unwanted outcomes are simply the result of not taking the time to plan for the assets that you’ve accumulated over your lifetime. If you fail to plan your estate, you will lose the opportunity to protect your family from an impersonal and complex governmental process so that they can ultimately receive your property or what is left after high fees and costs and a very long waiting period.
Most people will choose one of the following alternatives as their method of planning.
Joint tenancy is frequently thought of as a “poor man’s will” because the asset transfers automatically upon death to the people named on the title.
What this technique offers in convenience it loses in protection. Consider the case of Dorothy Schmit vs. the Internal Revenue Service. Mrs. Schmit put her husband, who happened to be delinquent in his taxes, on “her” property as a joint tenant for convenience. Mrs. Schmit had to sue all the way to the 9th Circuit Court of Appeals, an expensive proposition, to get the IRS to finally accept the “nominal” status of her husband.
Anytime that you put anyone else’s name on your assets, their life becomes your life. Their lawsuits become your lawsuits. Their tax issues become your tax issues. Their divorces become your divorces. Their bankruptcies become your bankruptcy. You get the picture. Despite your well-intended desire to provide for that loved one, putting their names on your assets is probably not the best way to go.
Furthermore, when you put someone else’s name on a highly appreciated piece of real estate, what you are doing is creating a highly unnecessary tax problem. Let’s say that you bought a piece of real estate in 1970 at a cost of $100,000.00. In the year 2000, you decide to put your child’s name on the title as a way to transfer ownership upon your death with the intent to avoid the expense, time delay and public exposure of the probate court process. As the law currently stands, if you die in 2013 and your child sells the property which is then worth $500,000.00, your child will be required to pay capital gains tax on $400,000.00 worth of appreciation. With proper planning, your child could have avoided the payment of that tax entirely. Do not put the names of your children’s or anyone else for that matter, on your long held real estate. There are other ways to accomplish your desires at much less cost.
Many people think that a will avoids probate. Unfortunately, this is not the case. A will simply avoids the assets going to the slate of intestate heirs selected by the state of California and instead passes to the beneficiaries that you designate.
The complexity, cost, and time for probate varies substantially from state to state. Unfortunately, anywhere you own real property you must have a probate. So, even if your state’s probate process is simpler than others, you may have assets in a different state that has a more difficult probate process. The probate process typically takes about a year, sometimes more, sometimes less. In some instances, a probate can remain open for years due to unforeseen circumstances. In my own office, we recently closed a probate case that had been open for 28 years and had seen three estate administrators and two attorneys die before we were hired.
If you can avoid the probate court process, you will be happy that you did. The process is expensive, takes a long time to complete before assets are distributed and anyone who wants information on what assets are in the estate and who will receive them and when, has only to make a visit to the courthouse and pull the file.
Living trusts are the most popular estate-planning tool to allow families to avoid the expense and delays of probate, lower your taxes and protect the privacy of everyone involved.
But would a living trust be the best strategy in your own particular situation? Let’s take a closer look at the uses and benefits of a planning strategy that can help build your future—and save your past.
The desire to ensure that an heir is provided for materially is the most common reason for creating a living trust. In the case of minors, a trust allows a parent to provide for a child without giving the child control over the property. The parent can also mandate how the property is to be distributed, and for what purposes.
A trust is also a useful tool for taking care of heirs who have physical or mental impairments or lack investment experience. The trust document can establish that all money is controlled by a trustee with sound investment experience and judgment.
A “spendthrift” provision in a living trust is often used to further preserve the integrity of assets. It prohibits the heir from transferring his or her interest and also bars creditors from reaching into the trust. Likewise, when the recipient has a history of extravagance, it can protect the property from an heir’s spendthrift nature as well as from his or her creditors.
This is also true of persons who may feel pressure from friends, con artists, financial advisors and others who want a slice of the pie. A living trust can make it extremely difficult for a recipient to direct property to one of these uses.
Living trusts are easy to update, modify or revoke in most cases and also do not require any additional tax filings.
Living trusts are harder to contest than wills. Part of the reason for this is that trusts usually involve ongoing contacts with bank officials, trustees and others who can later provide solid evidence of the owner’s intentions and mental state. A living trust that has been in place a long period of time is less likely to be challenged as having been subjected to undue influence or fraud. And because it is a very private document, the terms of the trust might not even be revealed to family members, allowing less opportunity for challenges to its provisions.
The trust provides you the opportunity to give a gift to your loved ones that they cannot otherwise get. If your trust is prepared properly, you can provide distributions to these beneficiaries in such a manner such that the inheritance is largely immunized from lawsuits, divorces, bankruptcies and taxes.
You can also build in great incentives into your bequest from the trust that will encourage your beneficiaries to become better people.
If you are leaving assets to institutions, it is not difficult to set up revolving scholarships or other funds with your name on them that will last for years to come and it doesn’t take as much money as you would think. Recently we had a music teacher client earmark $25,000 from the sale of her home to create a fund in her name that would provide band instruments for the students at the school where she taught. That fund will last for decades.
A living trust also avoids the painful ordeal of a probate court conservatorship proceeding. This occurs when a person is no longer competent to manage an estate because of a physical or mental disability. Without a living trust, a judge must examine whether you are in fact incompetent, and all of the embarrassing details of your incompetence are revealed in depth in court. The judge will appoint a conservator—even perhaps a stranger or a family member that you would not want to manage your affairs. Conservators act under court supervision and often must submit detailed reports, meaning that the process can become quite expensive.
With a living trust, your designated trustee takes over management of trust property and must manage it according to your explicit instructions in the trust document. The terms typically set standards for determining whether you are incompetent or not. For example, you may specify that your doctor must declare that you can no longer manage your financial and business affairs.
Of course, eliminating or reducing taxes is one of the primary goals of estate planning. Trusts allow for a highly flexible approach to taxes. Transferring income-producing assets to a recipient in a lower tax bracket can slash income taxes. Unless Congress acts to change the law for 2013 (and we’re familiar with the current tendency toward Congressional gridlock), the estate tax threshold will return to one million dollars, which means that the estate tax (which will be as high as 55%) will be applied to estates which exceed that amount.
In summary, the living trust’s avoidance of probate in the event of your disability and upon your death are very strong reasons to consider a trust-based estate plan.
William K. Hayes is a member of the American Academy of Estate Planning Attorneys. The Hayes Law Firm specializes in trusts, probate and asset protection planning. For free information or to request a free estate planning seminar for your business or social organization, contact Attorney Hayes at 626-403-2292 or visit the Hayes Law Firm website at www.LosAngelesTrustLaw.com. This article is provided for educational purposes only and is not meant to provide legal advice as the circumstances for each individual will differ. Please seek the advice of an experienced legal counsel.
This article was published in the Inland Empire Business Journal March issue. I wanted to share this article as it might be useful to you…