Trusts and Wills are just tools in the larger process of "estate planning." There is an unfortunate, widespread misconception that this is a subject of interest only to the wealthy. In fact, an estate plan provides the legal mechanism for disposing of property upon death in a way that recognizes your wishes and the needs of your survivors, while minimizing taxes. For many it involves, even more importantly, planning for the handling of affairs in case of disability, and the deeply personal medical choices to be made as life nears its end. Estate planning is not just for rich people.
There are three basis choices, for planning your estate: 1. Do nothing (and have the state decide what happens. 2. Have a will and go through probate. 3. Have a will and a trust and potentially avoid probate. Any of these choices can effect your children, your spouse, your other relatives and the largest outlying factor, TAXES.
I. THE DISPOSITION OF PROPERTY, WITH OR WITHOUT A WILL
If an individual has a a Will, the distribution of their property or probate estate is ordered under the terms of his/her Will. If there is no Will, the property will be distributed per that state’s intestacy law. (Note that one who dies with a Will is said to have died "testate," and is called the "Testator." A person who dies without a Will has died "intestate.")
What is included in one's probate estate? All property owned individually. In addition any other property or property interest that do not pass to anyone else by operation of that state law. (For example, If a house is held jointly with right of survivorship, the survivor gets 100% ownership of that house at the moment of the other owner’s death. It does not then pass as part of the estate.) However, there is a large distinction between an individuals probate estate and taxable estate. Please keep in mind that avoiding probate does not mean that you will be able to avoid paying taxes. The IRS will get there money, one way or the other!
Should I have a will?
Do you have children? If so, then you should probably have a will/or trust. If you don’t have kids, it can still be recommended. If you know for a fact that what you want to happen to your stuff, is what the state provides for, then NO you don’t need a will or trust. Do you know what happends when people die intestate in your state? If what you want differs from the state law, then you should have an estate planning mechanism in place.
There are a number of reasons that people don’t have an estate plan. I’ve heard them all:
"Everybody already knows what I want to happen." OR
"In my office there’s a list of my stuff, and the people I want them to go to." OR
"I don’t have much. The kids can just come in and divide it among themselves however they decide." OR
"I put sticky tags on the bottom of all my stuff so they’ll know who gets it." OR
"I put all my money into a joint account with my oldest child. After I die, she knows to split it with her brother."
All these "reasons" above (and any others you might add) promise for trouble down the road. There is no way for anybody to enforce your intended wishes if it is not contained in a Will. Nothing divides a family quicker or more harshly than a petty fight over gramma’s knick knacks.
Many people acknowledge the pitfalls - for others - of not having a Will. But their kids, so they say, would respect the parents’ wishes and never stoop to fighting over the estate. Even if these folks are right, what about the kids’ spouses? In-laws (sons and daughters, particularly) can be a problem. Whether it is well intentioned or not, meddling is a specialty with some of these people. Unless you spell out your wishes in a Will, the door may be open, for example, for your pushy son-in-law to have his say about things, or to pressure your daughter. Never mind that the issue is absolutely none of his business!
Do you want to choose who will handle the estate after you are gone? Someone must be given the responsibility to divide your estate, pay bills, in accordance with the law of the state, or in accordance with your written plan.
If you die intestate, the court will choose the person responsible for finalizing your matters. This person is called an Administrator, and might not be the person you would have chosen. Sometimes, further family squabbles erupt over who should be appointed by the judge. Often, a neutral lawyer is appointed, who is paid with estate funds. One very important part of an estate plan is who will finalize things for you. This person if chosen by you, would be your Executor (male) or Executrix (female).
What is a will?
To qualify as a Will, it must appear to the court - looking only at the document itself - that it was intended to be the final expression of the Testator's wishes as to the disposition of his/her property to take effect upon death. That is why a general letter stating one’s desires, or a list of property with beneficiaries names usually won’t work.
Most importantly, the Will maker must have "testamentary capacity." Under the law of most states, this requires that the Testator be of "sound mind," which might be unclear. He must only be aware of the nature and extent of his property, and of the "natural objects of his bounty." He must understand, for example, that he has one child and two grandchildren, who would "naturally" be those to whom a person would leave his/her estate. (But that does not mean this Testator must do so.) Additionally, the Testator must be aware that by signing the Will, he is making a final disposition of his property.
It is significant to point out that the Testator is not required to be mentally "sharp" or reasonable or fair. He must only know what he is doing, to the extent described above. If he does, the law will respect whatever disposition he cares to make, subject to lawful claims that must be paid first, and the rights, if any, of the surviving spouse.
Most Wills recite that the Testator is of "sound mind." That standard clause would not settle the matter, however, if somebody complained that the Testator was mentally weak and under "undue influence" or duress from another party. But the law "bends over backwards" to reject such claims, and uphold Wills that appear to be valid. Never mind if the Testator had been acting quite "funny" in his last months during which the Will was written. Never mind if the Will is unfair and one child is favored over the rest. By themselves, those kinds of facts would virtually never be enough to convince a judge to declare a Will invalid. (If a Will is thrown out, the estate is handled as if there had never been one to begin with.)
Attorneys are frequently consulted by adult children, concerned because their parents have no Will. Often, the mental condition of the parent in question is deteriorating rapidly, but there are still "good days." The law makes it perfectly proper for the Testator to execute a Will during such a "lucid interval," if testamentary capacity truly exists at the moment of signing.
If typed, the Will must be signed in the presence of two (in most states) witnesses, who must sign in the presence of the Testator and each other. Such a Will may be self-proving if it contains notarized clauses in which the Testator and the witnesses make certain formal recitals. In a nutshell, the parties affirm that all of them are within sight of each other, that the Testator is of sound mind, knows he is signing his Will, and has asked the witnesses to so attest. No witnesses would then have to appear in court to verify the document.
Some states allow holographic Wills - in which the significant portions must be entirely written in the handwriting of the Testator - with no witnesses required. Contrary to popular belief, however, many states do not permit such Wills.
"Codicils" are amendments to an earlier Will. No written additions or changes should ever be made on the original document, however. Instead, a separate page should be prepared, referring specifically to the original Will, and executed with the same formalities required of a Will in your state. Keep the codicil with the Will, and keep it simple. If the desired changes are at all complicated, subject to more than one interpretation, or potentially in conflict with other provisions of the Will, better to just start from scratch and do another Will. (Remember to destroy the old one to avoid any confusion.)
A very important factor is to READ YOUR WILL! If the signature line says "Mickedus Mousetur," and that is not your name, do not sign it! (This advice is based on an actual Will we reviewed for a grandpa, who is not named Mickedus.) It is no secret that all law offices use "form" documents, such as Wills they have previously drafted, as models for subsequent clients. It would be foolishly inefficient to reinvent the wheel every day; you are paying the attorney for guidance in formulating and implementing a plan, not for typing. Obviously, however, editing mistakes can occur. If something is not right, or if you have any concerns, do not be afraid to speak up!
Community Property Planning:
The term "community property" often comes up in discussions about estate planning (and divorce). It is a form of property ownership derived from Spanish law -solely between husband and wife - recognized in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. (The other states are "common law" states, regarding their marital property ownership system. American common law originated in England.)
Specifics in law differ in significant details from state to state, but the defining feature of community property is this: Irrespective of the name(s) on title documents, ownership of (almost) ALL property - including income from wages and self-employment - acquired during marriage by either spouse is automatically split, so that each spouse owns a separate, undivided one-half interest. (An "undivided" interest is one in which each spouse has half ownership of the whole "pie," rather than full ownership of only the "left half" or the "right half.")
In community property states, property acquired by a spouse separately and brought into the marriage remains separate. In these states, too, property acquired by gift or inheritance, or in exchange for separate property or money, also remains separate. The income, if any, the separate property produces is treated differently among the community property states. In California, for example, separate property income remains separate property. In Texas, however, income produced by the separate property of one spouse becomes community property. As a practical matter, commingling of assets can obscure separate property ownership, until it finally becomes community property. This often happens with checking and other financial accounts.
Since the two equal interests of the spouses in community property are separate, each spouse is free to dispose of his/her half of community property in a Will. It does not automatically pass to the survivor, as it would if owned jointly, with right of survivorship. Of course, the deceased spouse’s federal taxable estate contains his/her half of the couple's community property.
The subject of community property deserves the attention of three groups of readers: Spouses who now live in a community property jurisdiction, those who now live in a common law state, but who acquired money or property while living in a community property state previously, and those who now live in a community property state, but who acquired money or property while living in a common law state previously. State laws vary, and these issues can be complex, so be aware that special attention needs to be given to the issue of community property, if you are affected by it. If so, it is important to see a lawyer for guidance in understanding the extent of each spouse's property rights - before attempting to give it away by gift, in a Will or in Trust.
BEWARE ! If the Will of a deceased spouse attempts to dispose of both halves of an item of community property, the survivor might have to go to court to prevent the transfer of the half interest the decedent had no right to give away.
F.Y.I. It is possible in some community property states for the spouses to change their respective ownership rights in an asset, from community property to separate property and vice-versa, simply by written agreement between them.
People who do not live in community property states are sometimes puzzled to learn the definition. It sounds just like the law of property, as they understand it, in their own (common-law) states. After all, most of us know couples in divorce proceedings, in which the court split everything right down the middle. Today, the law everywhere regards marriage as a "50-50" proposition, right? Well, sort of. Divorce law is probably a good way to study the question.
In common law states, the "50-50" outcome that frequently occurs in divorce settlements is not automatic. The goal of the court in these states is simply to be fair. Today, the enormous economic value of the wife’s historical role as homemaker is finally recognized by divorce courts, at least in theory. Very often, therefore, being "fair" does, indeed, boil down to making a "50-50" property split. But there is no requirement that marital property be equally divided in common law states. If, for example, a wife has a thriving medical practice during marriage, while her husband is a lazy bum, he would probably not be deemed entitled to half the money and property acquired during marriage - in a common law state. In a community property state, however, the husband’s actual contribution to the marriage, and to the couple’s marital property is largely irrelevant. He is, by law, entitled to half.
BEWARE ! If either or both spouses is, or ever was a legal resident of a community property state, records should be maintained pertaining to the estate of each spouse prior to marriage, the state of the current marriage, the identity, value and source of funds used to buy property during marriage, as well as the legal residence at the time of acquisition. These are all significant factors in identifying the respective property rights of the spouses, and the situation can get complicated. For example, property acquired separately by a spouse in a common law state is treated like community property (i.e., "quasi-community property") if the couple moves to some of the community property states (e.g., California), even though only one spouse’s funds paid for the asset.
This is a topic that doesn't fit neatly anywhere, but many people ask about it. When a person has a "life estate" in a piece of property (most commonly, a house and the contents within it), he/she enjoys almost the same rights in that property as would an "absolute" owner - but only for his/her life. The idea is best illustrated with a typical example, the "subsequent marriage" situation:
Assume that a widow who owns a home wishes to remarry later in life. It is decided that her new husband will sell his own house, and the couple will live in the wife's home. The new bride wants to ensure that her children, not the new husband or his family, ultimately inherit her property. BUT she also wants to be sure that her husband will still have a place to live, if she dies before he does. So the newlyweds agree that the husband will have a life estate in the house. He can live there until he dies, then the property goes to the woman's children (or to whomever she specifies). As a "life tenant," the husband could do pretty much as he pleased with the house, but would be responsible for maintaining the property in good condition. Of course, he could not sell it.
A life estate can be created in a property deed, a will, a trust, or a pre-nuptial agreement. The best choice depends on the individual situation. But the devil is in the details, and this general explanation leaves many unanswered questions. So if you have a life estate and want to know your rights, or - especially - if you want to give somebody a life estate in property you own, please see a lawyer. There is obviously a lot at stake in seeing that this arrangement works as planned, and it is very easy to foul things up badly trying to "do-it-yourself."
The Probate Process:
It is here that final debts are settled, and legal title to property is formally passed from the decedent to his/her heirs. It is initiated in the county of the decedent's legal residence at death. Usually, the first step is taken by the person named as Executor, or other interested person who has the original Will.
This person should file (with or without the help of a lawyer) a Petition for Probate of Will and Appointment of Executor, or something similar. Some states give out pre-printed forms for this, so people can do at least that much themselves. If there is no Will, somebody must come forward and ask the court to be appointed as Administrator, instead of an Executor. Most often, this is the surviving spouse or an adult child, although it might also be another interested party.
The "probate estate" simply refers to any property subject to the authority of the probate court. Assets disposed of outside the probate process are part of the "non-probate estate."
"Probate Court" is a lower level court in the state system, but it might be referred to by another name, e.g., "surrogate court." The clerk of your county court system can help you find the right office. If the estate is small, keep in mind that most states have streamlined procedures that can save the Executor time and legal fees. Details of the probate process vary greatly by locality, but the following explanation should be helpful.
After the document's genuineness and validity are established, the court issues an order "admitting the Will to probate," or some similar proclamation that the Will is "official." It is then recorded by the County Clerk. Usually, this is a routine matter. State law might then require public notice of the probate proceeding by the publication of newspaper ads.
Occasionally, however, there might be an objection. For example, somebody might claim that the document being offered to the court is actually a forgery. Or, more commonly, the document being objected to has been revoked in a later Will. Whatever the objection or claim, it must be brought to the judge's attention. The FBI does not investigate these cases; whoever has a gripe must go to court.
As a general rule of law - in all areas - if you snooze very long before asserting your claim or rights, they may be lost.
The judge's order also formally appoints the Executor. This appointment confers on him full authority to handle the decedent's accounts. The Executor is given a certified court document that will be recognized by financial institutions and others. This is often called the "Letters of Administration," or "Letters Testamentary."
Once probated, a Will is a public record, and so is the final settlement and inventory of estate property. As such, these papers may be viewed by anyone. This is a fact of great concern to some, but to others, none at all.
There is a common misconception that a Will can be drafted in a manner to completely avoid the probate process. This is not possible - but read on. As mentioned above, there are usually streamlined - and in some places highly expedited - procedures set up by the local court system to handle the settlement of small estates, or even larger ones, if uncomplicated. In a few states, the procedure for small estates is so "expedited" that a trip to probate court might not even be needed - but that is because of the small size of the estate, not because of anything about the way the Will was written. Although there are other ways to avoid probate (discussed later), all Wills in almost every state are subject to probate. But if the situation is not complicated, and people are not protesting and fighting with each other, the process is simply not as bad as many people fear.
The procedure involves three steps:
1. Collection, inventory and appraisal of all assets that are subject to probate;
2. Payment of taxes and creditors;
3. Formal transfer of estate property according to the Will, or by the state laws of intestate succession, if there is no Will.
The surviving spouse and/or children are generally allowed a set-aside under state law, as discussed earlier, whether or not there is a Will. Generally, that comes "off the top" first. After that, the order of payment of claims against the estate is usually:
1. Costs/expenses of Administration (i.e., the lawyer gets paid first)
2. Funeral expenses
3. Debts and taxes
4. All other claims
What remains of the estate after these payments are made is available for distribution to heirs and beneficiaries.
The selection of the Executrix
Your Executor (Executrix, if a woman) should be a trustworthy person (or bank, or other financial institution) with common sense, good judgment and the fairness of a referee. The latter role is one the Executor is often called upon to play, and your choice should not be intimidated by this possibity. Certainly, geographical proximity to the probate court and the decedent's property (especially real estate) should be considered.
The Executor may hire lawyers, accountants and other professionals with estate funds for assistance, but fees and other costs can be saved if the Executor or family members are available and able to do some of the "legwork" themselves. The Executor should generally not act, however, until the Will is probated, because he has not been officially given authority till then. But he should, of course, pay for the funeral and take care of estate property before appointment, if necessary, e.g., maintain real estate or continue to operate a business.
BEWARE ! If you own a business that depends heavily on YOU, do not allow it to be dropped in the Executor's lap. The value of the enterprise could be ruined literally overnight if no plan exists to replace you or carry on day to day operations.
All family members should regard the Executor's job realistically. Yes, it is an honor to be considered worthy of this trust. But there is time and work involved. Even though entitled to compensation, most Executors would agree the position is more of a "pain in the neck" than anything else, especially if there are any difficulties or disputes. This might be an important point to discuss in advance. Some parents worry that naming one child as Executor would cause hurt feelings among the children not chosen. Realistically, they should be grateful.
If this is a potential problem in your situation, the solution is usually not the naming of multiple children as co-executors. To do so is to complicate matters at best, and invite costly disagreement or even bitter personal disputes, at worst. Instead, consider using a trusted family friend or attorney. Better yet, choose the qualified person you want, then sit down with everyone and discuss it.
If the Executor is also a beneficiary, he cannot give himself preferential treatment. Try to think ahead and not put him/her in a difficult situation. It is essential to keeping the family peace that the Executor's fairness is acknowledged by all the beneficiaries. Most Wills give the Executor very wide discretion in handling property and the affairs of the estate, and the law permits this. But the intention of the Testator in writing the Will, and the desires of the beneficiaries should always be considered.
One of the Executor's first and most important duties after appointment is to take an inventory of Estate assets. The detail required in the inventory of tangible, household personal property varies, depending largely on its value, and on the distributional scheme. In a large house, full of valuable antiques to be distributed among suspicious siblings, an item by item, professional appraisal is called for, at estate expense. But why bother, for example, if the contents of a modest home all go to the surviving spouse? In that case, the Executor's honest, best reasonable estimate would probably be acceptable.
Family members and prior tax returns can be a big help in identifying assets and account numbers, but it is essential to look through the decedent's personal papers carefully. Insurance policy and retirement account information, for example, might be difficult to gather from the tax returns. Private debts to the decedent and accounts receivable are also assets that may be hard to find. Remember the obvious, too: Is there a final paycheck and/or death benefit(s) due from the decedent's employer?
The Executor must also act immediately to preserve and protect the assets, according to the "Prudent Person Rule." Obeying this rule is part of a fiduciary duty imposed by law on Executors (and Trustees) to act cautiously, as though dealing with their own affairs. If this duty is violated and a loss of assets results, the Executor might be ordered to pay compensation personally (or as an institution) to the beneficiaries. For example, if estate funds were available, but the Executor neglected to pay a theft insurance bill covering property owned by the estate, and a theft loss resulted, he might well be held liable to the beneficiaries. (But suppose the Executor lacks sufficient personal funds to pay for the loss his negligence created? That is a consideration favoring the use of a bank as Executor.)
Although the job entails effort and serious responsibilities, the personal difficulties and liabilities of the Executor should not be overblown, either. Note that - absent his own negligence or wrongdoing - the individual wearing the hat of Executor is never personally liable on claims or lawsuits against the decedent or the estate itself.
He is not liable, either, for a poor return on estate investments - as long as those, if any, chosen by the Executor are appropriate. For example, if a general economic downturn decreases the value of a "blue chip" estate portfolio of stocks and bonds, the law would not hold the Executor responsible. That could happen to anyone. On the other hand, if the Executor invested in small, speculative, companies with no good track record, that would be unnecessarily risky and inappropriate. True, fortunes can be made with such investments, and they are perfectly appropriate for some individuals. These are not investments a fiduciary should make, however, because the risk of losing everything is also significant
Many simple Wills have a "standard" clause directing the Executor to pay "all debts and taxes." In some situations, this can produce an unintended and very unfair result. We will see later that some of the decedent's money and property might be OUTSIDE the probate process, and, therefore, not under the control of his Will (or the Executor). For example, a bank Certificate of Deposit might be "Payable On Death" and go directly to a particular child, designated on a bank form when the decedent bought the CD. Meanwhile, the decedent's other kids might be getting their share of his wealth by inheriting assets that DO go through probate. The result could be that the Executor would have to pay all the decedent's final debts without taking anything out of the "CD child's" hide. After all, the Will told the Executor to, "Pay ALL debts and taxes." So the children getting money from the probate pot might have to give up more than their fair share of their inheritance paying debts, while the "CD child" gives up nothing.
Such a blanket instruction to "pay all debts and taxes" might also oblige the Executor to pay off real estate mortgage loans. Unfortunately, it is often to the survivor's advantage to use estate cash for other purposes, and to continue making house payments, especially since mortgage interest payments are tax deductible. So it is wise to give the Executor discretion to pay or not pay off real estate debts.
If protecting the family home is a concern, adequate traditional life insurance (either term or whole life) should be purchased to allow the mortgage pay off, while leaving enough funds for other needs. Some people buy a specific life insurance policy to pay-off a mortgage loan in case of premature death. Sometimes, coverage is limited to accidental death. Such policies offer what is called "credit life protection," but they are usually bad values, giving little "bang" for the buck, compared to traditional life insurance. These policies are often offered by lenders in a manner suggesting that one has little choice but to accept. Decline the coverage, if possible, unless you feel it necessary because traditional life insurance is not practical.
The Executor may sell real estate - only after the legally mandated waiting period - and only if the Will so provides, or gives him discretionary power to sell it (most Wills give this discretion). The Executor usually may sell personal property any time after his appointment, but may not begin final distribution of property or sale proceeds until after a waiting period specified by state law (e.g., six months). He should not sell any property specifically bequeathed or devised, unless that sale is necessary to pay estate debts.
F.Y.I. "Personal property" (or, "personalty") is a specific legal term referring to anything that is not real estate (e.g., a chair; a boat; a brokerage account; cash). In a Will, personal property is disposed of by a "bequest;" real estate, by a "devise."
If you have an interest in a decedent's estate, consider filing with the court and the Executor a "demand for prior notice" of any action regarding the estate, such as property sales. That way, nothing important should be able to happen "behind your back." The Executor would have a duty to inform demanding parties that a sale was planned, for example. This would give them a chance to object or take other action before it was a "done deal."
The waiting period before distribution of property, even if not required by law, is a very practical idea. Creditors of the decedent then have a chance to present their claims. If claims are not made in writing to the Executor within this period they may be barred forever by law. In fairness, the law requires that for such a bar to be effective, the world must have been put on notice of the death. That is why the Executor should publish in the newspaper legal notice that the estate is in probate.
The Executor reviews the claims and supporting proof, pays those he deems valid, and rejects the rest. The Executor may hire an attorney with estate funds for advice, or to defend or settle any claims. Examples of such claims might include a request by the decedent's associate for repayment of a loan he had made to the decedent. In other cases, someone might demand payment for injuries received in a car accident caused by the decedent a few months before his death.
A rejected claimant then has a limited time to file a lawsuit against the estate. If that time limit expires, the claim is dead. The certainty of that "cut off" is an often overlooked argument in favor of going through probate.
There is, however, an additional option to creditors in some states that could be important: It might be permissible for a creditor of the decedent to wait until after probate proceedings, then try to collect his money by suing those to whom the estate has been distributed. This is an unsettling prospect. But if they have been given notice, most creditors will not wait till later, even if it is allowed. Common sense dictates to the creditor that the chances of payment are better (and easier) if he "gets his name in the hat" at once, during probate. If a creditor does so, however, he/she is then stuck with probate court rules and time limits for filing a suit if no agreement is reached on the claim. In other words, the creditor usually cannot take one "shot" using the probate process, then, if not satisfied, come back much later with the same claim in a separate lawsuit outside the probate process.
When all claims, debts and expenses have been paid, the remainder of the property is distributed by the Executor, as the Will directs. (At this point, if there is no Will, the Administrator distributes property according to the state law of intestacy, discussed earlier.) The Executor generally has the discretion to distribute the beneficiaries' shares in cash or in kind, but the Will can specify otherwise. Finally, the Executor or Administrator submits a report or final accounting for approval by the court.
At this time, if not before, beneficiaries or other interested parties (e.g., creditors) can file objections to the final report, and ask that the judge not approve it. A hearing might be necessary to settle the objections. This might happen, for example, if a beneficiary felt he did not, in fact, receive all to which he was entitled under the Will.
The Executor is entitled to reasonable compensation, often limited to a certain percentage (e.g., 5%) of the property in the probate estate. (Extra compensation, related to handling some special matter, may be allowed by the court.) That does not mean the Executor automatically gets that much. The fee taken is usually listed on the final report, and is, therefore, subject to approval by the court. As with anything else, an objection can be raised if the fee appears excessive, considering the time and effort actually expended by the Executor. Professional fees (lawyers, accountants, appraisers) will also be allowed. These fees, too, must be reasonable, but are not subject to a set limit.
F.Y.I. Common Question: "I've recently been appointed as Executor, and also a beneficiary under Grampa’s Will. Am I better off, tax-wise, taking my fee or not?" The answer will vary, but the factors to consider are as follows:
From the beneficiary's standpoint, inheritance money is free from federal income tax. (The federal levy - if any - is an estate tax, taken "off the top" before the beneficiary gets his/her share.) The fee to an Executor, however, is ordinary, taxable income to him. These facts weigh in favor of the beneficiary/Executor not taking his fee, and obtaining a slightly larger (income tax free) inheritance. So if the only beneficiaries are you and your spouse, for example, then it makes sense to skip the fee, for this reason.
On the other hand, if there are other beneficiaries, then not taking your Executor's fee means this money is left in the estate to be shared with the others. Depending on how many other beneficiaries there are, and on the distributions provided by the Will, you might end up with more money after all, by taking an appropriate Executor's fee and paying income tax.
There are two other factors that sometimes must be considered in the decision to take or not take the fee. First, the Executor's fee is a deductible expense in calculating federal estate tax. That tax only applies to estates over $1 million ($1.5 million in 2004), but the rates are so high that the Executor might be duty-bound (to the other beneficiaries, if any) to reduce federal estate tax by taking his fee, in larger estates where the tax is applicable. Secondly, some states have an estate or inheritance tax of their own, but they are not considered here. These tax rates are much lower than either the federal income or estate tax rates. For this reason, planners focus their attention almost entirely on federal taxes.
The practical response to questions regarding the Executor's compensation and overall handling of things is often, "Is anybody involved going to complain?" Judges review probate inventories and final distributions routinely, but do not have time to scrutinize every transaction. They rely on other interested parties to point out true inequities and improper dealing.
A few more facts:
1. In many states, if a witness to a Will is also a beneficiary, and the Will cannot be proved without this witness, the Will can be void as to that beneficiary/witness. Avoid this situation.
2. The birth of a child, unborn when one's Will is made, serves to revoke that Will, in many states. In others, an after-born child receives a share equal to what he/she would have received if the Testator had died without a Will (i.e., intestate) unless: It appears that the omission was intentional, OR the Testator already did have one or more children and left substantially all to the surviving parent of the omitted child, OR the Testator provided for the omitted child by gifts outside the Will. The share-splitting arithmetic in such situations can get complicated. This formula does not necessarily result in equal treatment of the omitted child, so it is wise to have your Will revised after the birth of a child.
3. In some states, a "no contest" clause can be used in a Will to automatically exclude anyone who challenges the Will in court. This can be a very useful tool if your state allows it. It is unlikely, however, that any state would enforce the exclusion of a beneficiary presenting a legitimate claim of outright fraud or other significant impropriety against the Executor.
4. Marriage generally revokes a person's Will automatically, unless the Will expressly states that it is not to be revoked. A divorce and final property settlement bar all claims of the divorced survivor to the estate of the ex-spouse. The same may be true if a spouse abandons the household, even if there is no formal divorce.
5. Regarding access to safe deposit boxes and joint accounts after death: Unfortunately, not much general advice can be offered on this important concern. State laws vary, and experience shows that procedures differ among banks. (All banks have a person in charge of deceased customers' accounts, and he/she should have the details you need.) The following observations may be helpful.
Many banks check death records daily, and you might have a legal duty to inform the bank of the death of a customer before attempting to access funds. If the bank is aware of the death, accounts and lock boxes will often be frozen, at least briefly. Under one sensible approach, a deceased customer's safe deposit box can be opened, only so the Will can be retrieved, after the state taxing authority's agent is notified to be there. The contents are not available till after probate.
The "joint" bank accounts most people speak of are owned "jointly with right of survivorship." Therefore, they do not have to wait for distribution through probate court. Unfortunately, the account might still be frozen by the state to secure payment of state death (or other) taxes, if any. If the surviving joint tenant of an account is the spouse, the funds should be much easier to get, partly because few states impose death taxes on transfers to spouses. If the surviving tenant is not the spouse, a tax release might be necessary.
6. In some states it is possible for a surviving spouse to obtain emergency money from a bank account that has been temporarily frozen because of the decedent's death. To avoid hardship, he/she might be able to get an immediate court order permitting the withdrawal of a small sum for living expenses (e.g., $1,000) until the local tax authorities release the account.
A Trust is a creature of the law in which one party - the Trustee - has legal ownership of any form of property that has been transferred to him/her or "it" (e.g., a bank) by the person establishing the Trust. That "establishing" person is called the Grantor (or Settlor, or Trustor). The property is known as the Trust "principal," or "corpus". These Trust assets are invested and/or managed for the benefit of one or more beneficiaries. Sometimes, the Grantor also wears the hats of Trustee and beneficiary. Generally, however, if the Grantor is the Trustee, he/she cannot be the only beneficiary.
Think of a Trust as an empty vessel into which the Grantor "pours" property. Like an Executor, a Trustee has the highest of legal obligations - a fiduciary duty - to manage the property, and see that it is used only in a manner, and for the purposes established by the Grantor in the Trust document.
In many cases, the Trust can remain empty (unfunded) for quite a while after its creation. In some states, however, some nominal funding (e.g., $100 in a bank account) is required. This is a good idea anyway. It shows that the Trust is more than a piece of paper, and that can be important in many situations.
Trusts can be "living" - established during the Grantor's lifetime - or testamentary -established in a Will. A living Trust can be revocable - subject to termination or modification at any time by the Grantor for any reason - or irrevocable. As for testamentary Trusts, of course, a deceased Grantor is unable to change the terms of a Trust created under his/her Will, so these Trusts are always irrevocable. (Before death, however, the Grantor is certainly free to change his/her Will, including any testamentary Trust that is to be created.) If the Trust is irrevocable, the Grantor can never change or terminate it, or withdraw assets, even in an emergency. An irrevocable Trust is an independent entity under the law.
Although an empty Trust can exist, in order to function at all, a Trust must have assets formally transferred to the Trustee, with this title used in the documents of ownership. Even when husband and wife serve as their own Trustees, real estate deeds and financial accounts must be re-titled in order to be owned by the Trust. For a living Trust, legal title is transferred, during life, to: "John and Jane Smith, Co-Trustees of the Smith Family Trust, under declaration of Trust dated ____." Financial institutions will also require authorization, in the form of the Trust document, before they will accept instructions from a Trustee.
It is important to note that testamentary Trusts require that the Will be probated. Moreover, these Trusts might then be accountable and have to report to the court, under state law - unlike living Trusts. These are significant drawbacks, without offsetting advantages. Yet many people choose the testamentary over the living Trust, maybe because it is more familiar.
Perhaps, too, the popularity of the testamentary Trust is due to people's desire to avoid making any kind of property transfer presently, as should be done if a living Trust is created. The re-titling of assets into the Trustee's name, discussed above, does not occur until after death and probate, if the Trust is established in a Will.
True, lifetime property transfers into a living Trust inevitably involve "paper work," and the process might be a bit discomforting, even if folks understand the situation. This sentiment is perfectly reasonable. The "catch," however, is that a testamentary Trust only delays the property transfers until somebody else has to bother with them, after your death. We suspect, too, that the other disadvantages mentioned are often not recognized.
F.Y.I. If you live in a community property state, and use such property to fund a living Trust, the Trust becomes the owner of the property, and it is "community" no longer. But the property should be clearly identified as having been community, and the Trust should specify that the property will revert to its community character if the Trust is revoked. Otherwise, the character of the property might become unclear. (The character of the property can be important in case of divorce, and it might also have tax implications.)
II. COMPARING SIMPLE LIVING TRUSTS and WILLS
Neither document resolves all of your issues:
Be realistic; when a person dies, certain matters have to be taken care of by somebody - lawyer or not - whether there's a Will, Trust or neither one. First, there is the funeral. Then, bills have to be paid; personal business and insurance matters must be concluded. Final personal income tax and inheritance tax returns must be filed, as well as a federal estate tax return, if necessary. The dwelling might have to be vacated. All sorts of property must be accounted for, secured, divided appropriately and formally transferred as required. None of these chores can be avoided. A certain amount of time -free or paid - is inevitably involved. Obviously, leaving all these details to an attorney can be expensive, but it is usually not necessary if the Executor and heirs can help.
Whatever your choice, here are some things to consider in comparing the Will and the simple living Trust:
The benefits, to most people, of the simple living Trust have been greatly exaggerated, as have the problems experienced in probate. Remember, the simple living Trust will not save taxes - fees, maybe, but not taxes. When people talk about using a Trust to avoid probate and its "costs," they are referring primarily to attorneys’ fees, which have traditionally been based on a percentage of the probate estate's value. This very often results in unreasonably large fees for handling even simple estates. Such fees may be permitted, but they are never required by law.
Keep in mind, too, that if you use a lawyer to prepare a living Trust - which you certainly should - the up-front cost is greater than for preparing a simple Will. Also, most property should be transferred, so you will probably need at least one deed prepared, and financial accounts also must be changed to name the Trustee as legal owner. If you need the attorney's time on these matters, it will probably cost extra. Finally, you should have a pour-over Will done with the living Trust anyway, so that any omitted or subsequently acquired assets are "poured over" into the Trust at death. This Will should be included in the cost of drafting any living Trust.
The possibility of leaving assets outright to minor children may be the greatest disadvantage of the simple Will. Many simple Wills call for everything to go to the surviving spouse - which might be fine, IF there is a survivor. The potential problem is that most of these documents name the children as secondary beneficiaries, upon the death of the second parent, or in the event of a simultaneous death. If the parents die while the children are minors, a guardian must be appointed over the children's inherited assets (and over the kids themselves), and this is a cumbersome form of property ownership. E.g., the law might require division of an asset, such as real estate, among the children, rather than holding it intact. Remember, too, that guardianship usually ends at age 18 and assets must then be distributed outright.
A Trust, on the other hand, might provide for distributions only at a later age, once more maturity and financial responsibility have been developed. Until then, almost unlimited flexibility can be achieved in the management of estate assets with a Trust. This flexibility is desirable in dealing appropriately with the unique abilities and opportunities (or disabilities or illness) of each child, without requiring rigid equality of spending over the years. This is the approach most parents take while alive. (This ongoing, discretionary power to "sprinkle" or "spray" money as needed can be useful, too, in providing income for a surviving spouse, while protecting the principal of the estate for your children from a previous marriage.)
BEWARE! But watch out if your Trustee might also a beneficiary!
E.g., Oldest daughter becomes Successor Trustee, after Dad becomes disabled. If the Trust gives the Trustee broad discretion to "sprinkle" income, ALL that income might be taxable to her, personally - even if she never actually "sprinkles" herself a dollar!
TIP: The Trustee should be specifically empowered to "assist" a child’s guardian, e.g., by adding a bedroom to the guardian’s house, or buying a bigger car. These are things that, obviously, benefit the guardian, in addition to the child. Therefore, without this authority, the Trustee might be uncertain about whether such reasonable expenditures were, in fact, permitted by the Trust document.
With a Will, in contrast to a Trust, the Executor’s management ends with his final report to the court, soon after completion of his legal duties. So, many simple Wills provide that when both parents are gone, everything is distributed outright, equally among the children. Never mind about their actual needs. With a Will, the way to be "fair" is usually to just be "equal," because it is written in stone. Unfortunately, though, nobody can tell what the future might bring.
Probate court supervision over sales, investments and accounting after death can be reduced or eliminated if, at the time of death, assets are already held in a living Trust. This factor can save time and expense, too. Note that a testamentary Trust does not help you in this regard; probate court is Square One, since this kind of Trust is created in a Will. Only after probate of the Will does a testamentary Trust come into being, and it often must be registered under state law. Testamentary Trust transactions may be subject to court review.
Planning for Disability:
A Will, of course, is of no help in this regard, because it has no effect at all until death. When disability planning is appropriate, the Trust can be a useful tool. Since assets in a living Trust are already under the control of a Trustee, who can make financial decisions, the estate owner's resources can be managed and used for his/her benefit even in the event of sudden incapacity. Therefore, it is imperative that a back-up Trustee be named, especially if the Grantor initially serves as his/her own Trustee. When two spouses are serving as their own Trustees, the Trust document should be worded to allow either to act independently. In all cases, if the disability is temporary, the Grantor can resume the role of Trustee, if desired.
The living Trust can thus avoid months in a legal disability proceeding to have a guardian appointed by the court. Ongoing court supervision over financial decisions is also avoided. A testamentary Trust, by definition, does not exist during lifetime and cannot offer this benefit.
Ownership of Property in other states:
Consider a living Trust if you own out-of-state vacation or rental real estate. This would allow for immediate distribution of the property after death, and avoid probate of your Will in each state in which property is owned.
Probate of a Will takes time - at least six months. (It can also take up to six years.) The Trustee of a Trust, however, can begin distributing property according to your wishes immediately after death. Probate records are open, but a Trust document is private.
Very often, neither of these factors is of practical concern to the survivors, but sometimes they are, and can cut both ways. There is a potential advantage to the delay and publicity of probate court: It purposely puts the world on legal notice that the time is now to come forward with claims against the deceased. Creditors generally must, by law, present their claims against the estate to the Executor within a limited period (six months is common) or they may be barred forever. That rigid statutory cut-off period might not apply to claims against your Trust. It almost certainly would not apply if legal notice had not been published, as happens during the probate of a Will. This could be important if you are involved in a profession or business that might leave potential claims against you "out there" when you die. On the other hand, a potential disadvantage of probate court's public records is that the financial problems of a family business might be revealed to competitors and/or customers - if they look.
Taxes: PLEASE SEE AN ACCOUNTANT OR A TAX ATTORNEY THESE ISSUES ARE EXCEEDINGLY COMPLEX!!!!!
There are many other elements to your estate plan. Durable Powers of Attorney, Guardianship provisions, Living Wills and Advance Medical Directives, Life Insurance, Marital Deductions, Charitable Remainder Trusts and More…
This is NOT intended to be everything you need to know. Not by any stretch. Hopefully, it will answer some questions and get you started on the path to making the decision that is right for you and your family.