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State Plan…or…Estate Plan?

August 7, 2013 Douglas Davis

“I am from the government and I am here to help you.”  We laugh about that statement but when it comes to the distribution of property after our death, we often fail to make an effective plan.  Instead we let the government determine distribution of our property and the fate of our minor children.  In many cases the government’s plan is devastating.

In every state, if you die without a plan, the laws of that state will determine what happens to your property and what happens to your minor children. So unless you believe your elected officials have your best interests in mind, you need to make your wishes known with a written plan.

In addition to Will based planning, you may also want to consider a Revocable Living Trust in order to avoid court ordered probate.  Regardless of the approach, the laws governing Wills and Trusts are complex and you should always hire an attorney to assist in the planning process.

Last Will and Testament

The primary purpose of a Will is to name a guardian for your minor children, name an executor to handle your estate according to your instructions, specify which individuals and charities are to receive your estate, and how they are to receive your estate.

The guardian’s job is to take care of your children until they reach the age of legal adulthood in your state.

The executor’s job is to fully comply with the court’s requirements, pay all of your bills, file tax returns and pay taxes due, file inventories and accountings, and then deliver your property to your beneficiaries in the manner you desire.

Remember: if you die without a valid Will, your state law and the law of every state where you own real estate, will control what happens to your children and your stuff.  Not a good solution! 

Revocable Living Trust

For many people, avoiding probate is a primary goal.   Probate is a court-supervised legal process intended to make sure a deceased person’s assets are properly distributed.  Probate typically means that your affairs and assets are made a part of the public record, and your estate pays increased fees and experiences the delays of governmental red tape.  These are things to be avoided when possible. That’s where the Revocable Living Trust comes in.  Here’s how it works.

You establish a Revocable Living Trust and then transfer legal ownership of your assets (such as your tangible property, real estate including your home, your cars, investment accounts and life insurance) to the Trust.

In the Trust document, you name yourself as the Trustee with full control over all of the assets that are in the Trust.  You also name a successor Trustee to be in charge of the Trust’s assets if you are incapacitated during your life and after you die.  You then specify which beneficiaries will receive which assets from your Trust.

The Trustee could be your CPA or attorney, a financial institution, or a Trusted friend or relative.

Because a Revocable Living Trust is revocable, you can change its terms at any time, or even unwind it completely, as long as you are alive and legally competent.

For income-tax purposes, the existence of the Trust is completely ignored as long as you are alive. As far as the IRS is concerned, you still personally own the assets in the Trust.  This means that you will continue to report the income generated by the Trust’s assets and any deductions related to those assets (such as mortgage interest on your home), on your personal tax return.

If your estate plan is designed by using a Revocable Living Trust, every asset owned by your Trust will avoid the publicity and red tape of court ordered probate.

Wills and Living Trusts Are Not Cure-Alls

The use of a properly prepared Will or a Trust plan will ensure that the government’s default plan does not apply to your estate.  However, you won’t obtain the advantages of such planning without paying attention to the details.

  • For married couples, you and your spouse should have separate Wills or Revocable Living Trusts.  That’s because you never know whether you will be incapacitated during life or who will die first.  Also, if  you have a blended family, real estate in other states, or business interests, those issues will need to be addressed individually and together as a couple.
  • Your Will or Trust will not deliver the expected advantages unless you make it compatible with your beneficiary designations and the manner in which your assets are legally owned. For example, when you fill out forms to designate beneficiaries for your life insurance policies, retirement accounts, and brokerage firm accounts, the named beneficiaries will automatically receive the money upon your death without having to go through probate.   The same thing happens with bank accounts if you name a payable-on-death beneficiary. It makes no difference if your Will or Trust document includes instruction to the contrary.  For that reason maintaining beneficiary designations in accordance with the terms of your  Will or Trust is important to ensure that funds go where you intend them to go.
  • When you own real estate or a bank or investment account jointly with right of survivorship, the other joint owner(s) will automatically inherit your share of that asset.  Your Will or Trust will not make a difference in that case so it is important to own assets in a manner consistent with your overall estate plan.
  • If you set up a Trust, you must transfer legal ownership of your assets into the Trust in order to avoid governmental oversight through the probate process. Many people fail to follow through by actually transferring ownership, and the probate avoidance advantage is lost. 

It’s a Process.  Not an Event

Estate planning is a process because for most of us, things change.  You may acquire new assets, win the lottery, lose relatives to death, disown relatives, take them back, marry or re-marry, get divorced, inherit wealth, gain children or grandchildren or move out of state. Any of these events could require changes in your estate plan. In addition, the federal estate tax rules have been completely unpredictable in recent years, and that trend appears to be destined to continue. For all these reasons, you should review your estate plan at least annually and update it as needed.

Your situation is unique but the good news is that you have a choice.  You can depend upon the government’s plan for your family and your assets, or you can make one of your own.  Contact an attorney who specializes on estate planning and eliminate uncertainty.