Trusts, Wills, and Estate Planning: Facts You Should Know
Estate planning conjures images of conniving lawyers and bankers discussing million-dollar trusts for many people, and considering which conditions to place on a bequest to a ne’er-do-well relative. But that’s not usually the case. Even people of modest means can spare their loved ones serious headaches by creating an estate plan and will to dictate what happens to their property at the time of their deaths.
What Makes Up Your Estate?
Your "estate" is everything you own—all your property and property rights, even assets with loans against them. They don't die when you do. They have to move into the ownership of a living beneficiary, because a decedent can't own property.
How your property is managed and distributed after your death depends on whether you die "testate" with a valid will, or "intestate" without a will.
The Statistics on Who Has a Will
The number of people who have wills has been steadily declining in the millennium, according to a 2020 survey by Caring.com. Almost 25% fewer American adults had wills in 2020 compared to 2017. Even older adults are less likely to have wills. Their number dropped by 20% in 2019, and 25% fewer middle-aged adults had wills in that time frame.
When You Die With a Will
Leaving a will ensures that your wishes are carried out if at all possible and your property is distributed in the way you choose. It can also make probate of your estate much easier.
Probate is the legal process by which ownership of your property is transferred to living beneficiaries. The court also uses the probate process to establish the validity of a will when the deceased left one.
You would designate an executor in your will, someone to manage your estate through the probate process and see to it that your wishes are carried out.
A Will vs. No Will
Dying intestate—without a will—doesn’t mean that your loved ones will avoid a court proceeding. Intestate estates still require probate, but state law gets involved to determine who gets your property because you didn't outline your wishes in a will.
Each state has its own legislative code for intestate succession: who gets to inherit first and in what percentages, and who won't inherit unless everyone in line ahead of them is also deceased.
The hierarchy in most states places surviving spouses first in line, followed by the decedent's children, then parents, siblings and finally more distant relatives. Individuals who aren't related to the decedent are left out entirely.
Intestate Probate Administration
Every state has a scheme that will dictate the steps of intestate administration, but the typical process goes something like this:
- Someone initiates a case in probate court.
- The court determines that there is no will and appoints an administrator rather than an executor, usually a family member or heir.
- The administrator gathers the deceased's assets, identifies the heirs, and notifies the deceased's creditors.
- The administrator liquidates estate assets to the extent necessary to pay the deceased's debts, taxes, and the costs of estate administration, such as attorney’s and accountant’s fees.
- The administrator distributes the remaining proceeds and assets according to the intestate succession schedule set out in state statutes.
Intestate administration is often a lengthy, inefficient, and expensive proceeding because the administrator is usually required to seek permission from the court for each of these actions. The administrator will spend much time requesting court orders and attending hearings. An intestate administration often takes two years or longer.
Some assets can pass directly to an heir if there's no need to officially pass title to the property. Personal property like furniture and jewelry usually won't have documentation to establish ownership.
There may be no need to go to court if your estate is comprised entirely of untitled assets unless your heirs can't agree among themselves on how to distribute this property.
Assets That Pass Outside Probate
Some assets will pass directly to your heirs outside the probate process even if you do leave a will.
- Your spouse will take sole ownership of at least their share of community property if you're married and live in one of the community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Wisconsin, and Washington.
- Some assets transfer automatically because they're contractual in nature—you designated a beneficiary who will take ownership when you die. They include life insurance proceeds, annuities with death benefits, and many retirement accounts.
- Bank accounts often have “payable-on-death” provisions that allow you to designate a successor.
In each case, there's no need for the intervention of a probate court because the account already has a legal means by which to transfer to your beneficiary or successor.
The Role of Trusts in Estate Planning
A trust is an entity or an agreement that allows you, as the grantor or donor, to transfer property to someone known as the trustee for the benefit of a third party, called the beneficiary.
Trusts are often used in estate planning to take advantage of favorable tax treatment, to place conditions on the use or distribution of assets, or to allow the heirs to take possession of assets without a probate proceeding.
The trustee holds the assets in a fiduciary capacity. They have a high responsibility to see that the assets are preserved for the beneficiaries.
A living trust is created during your lifetime, and it provides a way for you to preserve and retain control over your assets even if you should become incapacitated. It can alleviate the need for a guardianship or conservatorship if you're unable to make decisions on your own.
A testamentary trust is one that's formed according to terms contained in your will. It doesn't exist until you die. Your executor would then create the trust, transferring some or all of your property into it.
Revocable vs. Irrevocable Living Trusts
Living trusts are either revocable and irrevocable.
You can name yourself as the trustee of a revocable trust, retaining control over the assets you transfer into it during your lifetime. This type of trust can provide a lot of flexibility during your lifetime, including the ability to revoke or dissolve the trust as your needs change. You can provide for a successor trustee to take over upon your incapacity or death.
Irrevocable trusts can't be changed once assets have been transferred into them. They can't be revoked or undone—the transfer of assets is permanent. But irrevocable trusts generally allow for the best estate tax consequences.
A revocable trust will become irrevocable upon your death because you're no longer available to amend or revoke it.
Trusts for Specific Purposes
There are many different types of trusts, and state law will determine which of them are recognized in your state. Trusts are also subject to some federal laws, particularly with regard to how they're treated for estate tax purposes. Federal estate taxes can be assessed if the property exceeds a certain minimum value.
- A spendthrift trust can be used to preserve your assets, allotting bequests incrementally and under certain terms, for beneficiaries who are less than responsible with money.
- A special needs trust ensures that an heir with special needs will have sufficient assets to provide for those needs without jeopardizing their government benefits.
- A life insurance trust collects insurance on the grantor's life and administers it to beneficiaries. It's irrevocable and can be used to avoid estate taxes.
- A QTIP trust provides income for a spouse, then passes the remainder of the assets to other heirs.
Wills and trusts can be used to accomplish many goals, and they can be as flexible as your needs and wishes require. Ensuring that those needs and wishes are carried out requires careful planning in choosing the best trusts or the best provisions for your will.