I'm not an alarmist, but like you, loyal readers, I'm a little freaked by all the economic news. On the TV last night I watched esteemed economics professors using phrases like "classic bank run." And this was on News Hour on PBS!
So, what does this have to do with estate planning? Well, during times like this, you might be inclined to put your estate plan on the back burner. Don't. Here's why: your need for an estate plan doesn't go away because of economic uncertainty. If you don't have a plan, you should still get one. If you do have a plan that is out of date, you should still get it updated.
The fact is that estate plans can be expensive, and during times like these, you probably want to hang on to as much cash as you can for security. Here are some tips for keeping as much of that cash as possible, while still getting a plan in place:
Get a Will Instead of a Trust
Estate planning attorneys like to recommend trusts because they are more flexible than wills, they avoid probate (which can be expensive, time consuming, and is a public court record), and they can be set up to assist you if you become incapacitated. Because they can do so much more than a will, they are much more complicated documents. Because they are much more complicated documents, they are more expensive to prepare. If you want an estate plan, but cannot afford a living trust, a will might do for now. Let's look at the following scenario:
A married couple in their late 30s with two children under the age of 5. They own their own home worth about $550,000 (titled as community property), each have about $100,000 in separate 410(k) plans from current and previous employers, and each have $500,000 life insurance policies with 30-year terms naming the other as beneficiaries. They also have about $35,000 in checking and savings accounts. All of their assets are in California and are community property.
In a perfect world, an estate planner would recommend a living trust that is split into two trusts on the death of the first spouse (one for the surviving spouse, and another funded with the deceased spouse's estate that bypasses the surviving spouse to ensure something for the children), and trust for the children that will pay the money outright to them when they turn 25 or graduate from college. Such a plan would avoid probate, would ensure that there is some money to be inherited by the children when the surviving spouse dies, and would ensure that they children don't get the money before they are ready to handle it. In the world of living trusts, this is a more simple plan, but it is still a pretty complex document. It can also be very expensive to prepare.
Can you achieve the same result with a will? Not really, but you can come close. With the wills, you can create a trust with your estate, but you cannot split the estate into two trusts on the death of the first spouse. Because the assets are all community property each spouse's estate is half of each asset. That becomes tough to split when it is not held in cash (like the house). Although each spouse could leave their estate to their children in trust (rather than to each other), it would likely result in the liquidating of the estate assets in order to properly fund the trust. Since the surviving spouse would probably want to stay in the house, each spouse should give their estate to the other spouse. The house would automatically transfer to the surviving spouse because it is titled as community property. The surviving spouse would receive the insurance proceeds and 401(k) as beneficiary.
Their might not necessarily be a probate on the death of the first spouse. Assets held jointly (like the house) do not go through probate. Assets with beneficiary designations (like the life insurance and the 401(k)s) also don't go through probate. If a person's probate estate is less than $100,000, then probate can be avoided. Here, the actual assets subject to probate are less than $100,000, so probate can be avoided on the death of the first spouse. (The surviving spouse will probably not be able to avoid probate because the house will no longer be held jointly, and the proceeds from the life insurance will be held by the surviving spouse alone.)
To keep the will-based plan as simple as possible, they could leave their estates to each other, and if their spouse does not survive them to their children in a California Uniform Transfers to Minors Act (CUTMA) account. This holds the money in an account, and distributes the money to them outright when they reach an age between 18 and 25. The will can also name guardians for their children while they are still minors. They can execute durable powers of attorney for financial decisions in the event they become incapacitated, and advance health care directives for their medical decisions.
This is much more simple, and less expensive, to prepare than a living trust. It has some drawbacks, but it is far better than no plan at all.
If you are considering an estate plan, but are uncomfortable with the expense of getting a living trust, a will may be a good alternative. Once the ecomony picks up, and you feel better about spending the money on your estate plan, it can always be amended to include a trust.
Don't let economic uncertainty keep you from putting together that you know you should have.
Showing posts with label living trusts. Show all posts
Showing posts with label living trusts. Show all posts
Tuesday, October 7, 2008
Monday, June 23, 2008
"Spending It All" is Not an Estate Plan
Last Saturday there was an interesting article in the New York Times about how increasing costs and other factors may reduce the potential inheritances of heirs. The article talks about how increased life expectancy, changes in social security and medicare laws, the decline of pensions, increases in health care costs, divorce, declining home equity, lifetime transfers of wealth, and other factors will deplete most estates, leaving little or nothing for the children.
One of the biggest obstacles I come across as an estate planner is "I don't need an estate plan. I plan on spending it all." This is a close cousin to the ever-popular "I don't have anything. Why do I need a will?"
My mantra about estate planning is "Control, Control, Control." The most important thing that an estate plan gives you is control. Control not only over who gets your money when you die, but over who makes decisions about your health care and personal care if you are incapacitated, who administers your estate when you die, who will take care of your children if they are under 18 and you are unable to take care of them, and on and on. Most of the control you get over your estate plan has little or nothing to do with how much money you have.
The problem with the "I intend to spend it all" philosophy is that presupposes that you know exactly when you will die, and have planned your spending accordingly. Most people don't know exactly when they are going to die. This goes for healthy young people as well as the terminally ill. I have talked to people who were told they had six months to live - 10 years ago. People on death row don't even know exactly when they are going to die. They just know, like everyone else, that it's going to happen some day. It has happened where death row inmates have died from natural causes while awaiting execution (just type "death from natural causes while on death row" into Google). It is because of this uncertainty that you should have an estate plan in the first place.
The concerns in Ron Lieber's column are real. Many people don't have a ton of money, and assuming they live long enough, we can only hope that they have enough to meet their needs as they get older. But don't construe this as a reason for not needing a living trust, durable power of attorney for personal care, or advance health care directive, among other things. The fact is that, if you live long enough, and are no longer able to take care of yourself, you will need someone to make the decisions relating to the concern in Mr. Lieber's article. A complete estate plan gives you control over your estate and affairs. That control is not dependent on how much money you have to give away (or even if you have any money to give away).
One of the biggest obstacles I come across as an estate planner is "I don't need an estate plan. I plan on spending it all." This is a close cousin to the ever-popular "I don't have anything. Why do I need a will?"
My mantra about estate planning is "Control, Control, Control." The most important thing that an estate plan gives you is control. Control not only over who gets your money when you die, but over who makes decisions about your health care and personal care if you are incapacitated, who administers your estate when you die, who will take care of your children if they are under 18 and you are unable to take care of them, and on and on. Most of the control you get over your estate plan has little or nothing to do with how much money you have.
The problem with the "I intend to spend it all" philosophy is that presupposes that you know exactly when you will die, and have planned your spending accordingly. Most people don't know exactly when they are going to die. This goes for healthy young people as well as the terminally ill. I have talked to people who were told they had six months to live - 10 years ago. People on death row don't even know exactly when they are going to die. They just know, like everyone else, that it's going to happen some day. It has happened where death row inmates have died from natural causes while awaiting execution (just type "death from natural causes while on death row" into Google). It is because of this uncertainty that you should have an estate plan in the first place.
The concerns in Ron Lieber's column are real. Many people don't have a ton of money, and assuming they live long enough, we can only hope that they have enough to meet their needs as they get older. But don't construe this as a reason for not needing a living trust, durable power of attorney for personal care, or advance health care directive, among other things. The fact is that, if you live long enough, and are no longer able to take care of yourself, you will need someone to make the decisions relating to the concern in Mr. Lieber's article. A complete estate plan gives you control over your estate and affairs. That control is not dependent on how much money you have to give away (or even if you have any money to give away).
Tuesday, January 22, 2008
Living Trusts
S0-called living trusts are in vogue as will substitutes these days. In legal speak, they are known as inter vivos trusts, but they are also known as grantor trusts and revocable trusts. Since the purpose of this blog is to discuss estate planning issues in plain language, we'll just call them living trusts.
So just what is a living trust?
A trust is a set of instructions among three parties related to the use of property for a period of time. The person who places the property into (or "funds") the trust is known as the grantor, or trustor. The person who administers the trust, i.e., who carries out the instructions of the trust, is the trustee. The person who gets the benefit of the trust is the beneficiary.
In a living trust, these three roles are usually played by the same person. By doing this, you could place your assets into the living trust, carry out the instructions of the trust (including selling the assets in the trust or adding new assets, or revoking the trust entirely) and enjoy the use of the assets. In other words, after funding the trust with your assets, life pretty much goes on as it did before.
So why would anyone want a living trust?
What happens to the living trust during your lifetime is only the first half of story. The second half is related to what happens when you die. The living trust document contains instructions for what to do with the property in the trust when you die. This includes naming someone to carry out the instructions (known as the successor trustee) of the living trust, and a new beneficiary (or beneficiaries) who get to use the trust property (known as successor beneficiaries).
If that sounds a little like what a will does, it is. The big difference between a living trust and a will is that a living trust does not go through probate. Probate is a court-supervised proceeding where your estate is gathered and distributed among your heirs. Since it is a court proceeding, it is public, and all documents, including your will, become public record. A living trust, on the other hand, does not go through probate. It is administered by the successor trustee, and the assets in the trust are distributed per your instructions. Since a trust doesn't go through the probate process, it does not incur the fees involved in a probate. Probate fees and attorney's fees are set by statute, and depend on the amount of your estate. In California, probate fees are four percent of the first $100,000; then three percent of the next $100,000; two percent of the next $800,000; one percent of the next $9,000,000; one-half of one percent of the next $15,000,000; and a reasonable amount determined by the court for amounts above $25,000,000. Attorney's fees are based on the same schedule and are in addition to the probate fees.
If you have a large estate, your probate fees could be pretty high. For example, if you had a $400,000 estate, the probate and attorney's fees would be $22,000. In contrast, a relatively simple living trust would still incur costs to administer after your death, but they should be much less than $22,000.
Another issue is time. Probate is subject to the timing of the court, which can take six months to a year or longer depending on the court's backlog and the complexity of administering the estate. The relatively simple $400,000 trust should be administered in six months or less.
So Why Would Anyone Not Want a Living Trust?
If you have a small estate, say less than $100,000, then a living trust may not be advantageous. California law allows for summary procedures for estates valued at less than $100,000, and in some cases, probate can be avoided altogether. So if your estate is less than $100,000, the only potential disadvantage to going to through probate is its public nature. If you are OK with that, then there really is no need for a living trust.
Living Trusts are something everyone should consider, particularly if you have a large estate that would result in an expensive, lengthy probate proceeding. If, on the other hand, your estate is $100,000 or less, and you're not concerned about it becoming public record, a living trust is probably unnecessary.
In my next post, I will talk about wills, and why you need one in your estate plan even if you do have a living trust.
So just what is a living trust?
A trust is a set of instructions among three parties related to the use of property for a period of time. The person who places the property into (or "funds") the trust is known as the grantor, or trustor. The person who administers the trust, i.e., who carries out the instructions of the trust, is the trustee. The person who gets the benefit of the trust is the beneficiary.
In a living trust, these three roles are usually played by the same person. By doing this, you could place your assets into the living trust, carry out the instructions of the trust (including selling the assets in the trust or adding new assets, or revoking the trust entirely) and enjoy the use of the assets. In other words, after funding the trust with your assets, life pretty much goes on as it did before.
So why would anyone want a living trust?
What happens to the living trust during your lifetime is only the first half of story. The second half is related to what happens when you die. The living trust document contains instructions for what to do with the property in the trust when you die. This includes naming someone to carry out the instructions (known as the successor trustee) of the living trust, and a new beneficiary (or beneficiaries) who get to use the trust property (known as successor beneficiaries).
If that sounds a little like what a will does, it is. The big difference between a living trust and a will is that a living trust does not go through probate. Probate is a court-supervised proceeding where your estate is gathered and distributed among your heirs. Since it is a court proceeding, it is public, and all documents, including your will, become public record. A living trust, on the other hand, does not go through probate. It is administered by the successor trustee, and the assets in the trust are distributed per your instructions. Since a trust doesn't go through the probate process, it does not incur the fees involved in a probate. Probate fees and attorney's fees are set by statute, and depend on the amount of your estate. In California, probate fees are four percent of the first $100,000; then three percent of the next $100,000; two percent of the next $800,000; one percent of the next $9,000,000; one-half of one percent of the next $15,000,000; and a reasonable amount determined by the court for amounts above $25,000,000. Attorney's fees are based on the same schedule and are in addition to the probate fees.
If you have a large estate, your probate fees could be pretty high. For example, if you had a $400,000 estate, the probate and attorney's fees would be $22,000. In contrast, a relatively simple living trust would still incur costs to administer after your death, but they should be much less than $22,000.
Another issue is time. Probate is subject to the timing of the court, which can take six months to a year or longer depending on the court's backlog and the complexity of administering the estate. The relatively simple $400,000 trust should be administered in six months or less.
So Why Would Anyone Not Want a Living Trust?
If you have a small estate, say less than $100,000, then a living trust may not be advantageous. California law allows for summary procedures for estates valued at less than $100,000, and in some cases, probate can be avoided altogether. So if your estate is less than $100,000, the only potential disadvantage to going to through probate is its public nature. If you are OK with that, then there really is no need for a living trust.
Living Trusts are something everyone should consider, particularly if you have a large estate that would result in an expensive, lengthy probate proceeding. If, on the other hand, your estate is $100,000 or less, and you're not concerned about it becoming public record, a living trust is probably unnecessary.
In my next post, I will talk about wills, and why you need one in your estate plan even if you do have a living trust.
Subscribe to:
Posts (Atom)