We all know that you can’t take it with you, but too many people have not taken the time to properly consider an appropriate estate plan. Many people are like Fred and Sally Smith. Fred and Sally have been delaying getting an estate plan. They don’t like thinking about dying and what the world will be like when they are no longer in it. Unfortunately, death, as Benjamin Franklin pointed out, is one of the two great certainties in life (the other, of course, being taxes.) It is not a question of if Fred and Sally will die. It is simply a matter of when. When they die, whatever worldly possessions they may have acquired in their lifetime—a lot or a little—must pass to someone else.
If they fail to establish a good estate plan, it will place a heavy burden on their loved ones, possibly lead to ugly battles within their family, and can even tarnish their memories. Those left behind wonder why a mess has been left for them to clean up. The Smiths know that they should make plans for their two children—John and Jane—but they just have not gotten around to it.
What Happens if There is No Plan
If the Smiths don’t make any plans at all, the law has made one for them, but they probably won’t like it. Every state has some form of intestate succession statute which provides for the distribution of assets upon death. To die “intestate” is to die without a Last Will and Testament in place. Reliance upon the statute—particularly for those who are not familiar with it—is unwise. Application of the intestacy laws can lead to unexpected and sometimes inequitable results. Perhaps the biggest issue with reliance upon the statute is that no one is named as an executor—the person who would be responsible for carrying out the wishes that would otherwise be set forth in a will. With no executor in place, any number of different people might qualify as the “personal representative” of the estate. This can lead to arguments within families about who will be responsible for the handling of the estate and disputes and accusations about how the estate has been handled. Without a will there is no clear guidance. It is even a possibility that a creditor of the deceased—someone to whom money is owed but who is of no relation—might end up in charge of the estate.
Sally definitely wants to move forward with an estate plan but Fred is not so certain. He was told by a friend that if nothing is done it will all probably go to Sally when Fred dies anyway. That is probably true. Many assets automatically go to someone else upon death, and accordingly, are not impacted by a will. Fred’s life insurance policy, for example, has Sally named as a beneficiary and her policy has him named as the beneficiary. The insurance company will pay the death benefit directly to the surviving spouse when the other dies. The Smiths’ house is in both of their names and their bank accounts are held jointly with provisions to pay to the survivor upon death. If Fred were to die, virtually everything that he owns will belong to Sally automatically anyway, and vice versa if she were to die first.
Sally wisely notes, however, that is not really a plan because there are no provisions for the children. Waiting just places the entire task of estate planning on the surviving spouse with no input or assistance from the spouse who had already passed away. If the Smiths are lucky and they both live to be very old, the thought of an estate plan may be forgotten or forever pushed aside, leaving John and Jane to deal with the intestacy statute. Sally also wants to make sure that their estate plan provides for someone to care for the children if something happens to both Fred and Sally. She convinces Fred that the responsible thing for them to do is to get an estate plan in place together now rather than just keep kicking that can down the road for another day.
The Last Will and Testament
The Smiths know that they definitely do not want to rely on the intestacy law, so their first thought is for each to have a Last Will and Testament prepared. Like many married couples with children, they want to leave everything to each other, and then have everything go in equal shares to their kids. They want to name a guardian for the children, who are in their mid-teens, and they also want everything to be made as simple as possible for the kids when the parents die. Although this seems like a simple idea, a will may not be the best estate planning tool to accomplish these goals.
A will, simply put, is akin to a deed that transfers ownership of assets to someone else upon death. These transfers—called bequests—can consist of all of the estate’s assets, or a percentage of it, or sometimes particular items of significance. The executor, named in the will, is responsible for paying for funeral arrangements, paying off debts, and paying any outstanding taxes. After those items are handled, the executor then distributes the balance of the estate property per the directions contained in the will. Wills can also contain other provisions, such as a guardian for minor children upon the death of the parents.
Wills might not work well for the Smiths for several reasons. First, each of them must have their own individual will and either of them can make changes to their will at any time. There is not one estate plan for the two of them, and this can create issues later. A valid will does not need to be prepared by an attorney. Will forms (which are often poorly written or inconsistent with the law of the state they are being used in) are easily obtained on the internet. Under certain circumstances, a handwritten will is valid. Most significantly, the level of mental capacity required to make a new will is very low. The result is that one spouse might pass away, leaving everything to the other spouse, who might thereafter make changes to the will which impact what the children will receive. Sometimes these changes are well thought out, but all too often older individuals become subject to the undue influence of others and make changes to a will which they otherwise would never have considered. The ease with which a will can be altered or changed makes it easy for an unscrupulous person to take advantage of someone.
Probate and Guardianship
Wills also require probate and the Smiths have heard some bad things about that even though they are not entirely sure what it is. Probate is the process utilized by the courts for insuring the terms of a will are complied with, or if there is no will, of insuring that the provisions of the intestate succession statute are followed. The process can impose a very significant burden on an executor. The executor will be required to pay fees, post bonds, notify heirs, provide an inventory of the estate and provide accountings to the Commissioner of Accounts until the estate has been closed. Failure to timely meet deadlines can result in additional fees or even a summons to appear in court. Even in the best-case scenario, it is not unusual for the process to last for over a year and a half, during which time the executor is paying multiple fees and often incurring the wrath of others who want to know why the process is taking so long and why they have not yet received their entire share of the estate. While it is true that there may not be any probate when the first spouse dies (because everything will pass automatically to the second spouse) the burden of probate will be left on their children when the second spouse dies.
The Smiths are very concerned about putting the burden of probate on their children. Fred’s good friend, Bill, recently was the executor of his father’s estate and told Fred that it was a terrible experience. Bill really wished that his parents had made a better estate plan, especially after his mother died and a short time thereafter his father had to be placed in an assisted care facility because of dementia. Bill told Fred about the long, expensive, and difficult process he had to go through in court to have his father declared incompetent and be appointed his father’s guardian which required two lawyers and two doctors—and paying their bills. Bill incurred all that expense just so he could get access to his father’s assets to help pay other bills and provide for appropriate care. The cost of the guardianship really ate into the funds available for his father. Bill also described the burdensome paperwork he had to file with the Commissioner of Accounts while he was the guardian. Then when his father died, he had to start all over again with the process of probate as the executor of his father’s will.
The Smiths are beginning to realize that estate planning is not only about making sure your loved ones are taken care of after you die. It is also about trying to avoid being a burden on your loved ones both before and after your death. The Smiths very much want to do an estate plan now, but the will does not seem like a good option, and it certainly won’t alleviate any burden placed on their kids if they end up needing assistance with their daily affairs. The will won’t even go into effect until after they are dead.
The Revocable Living Trust
The Smiths realize they need to consult with an expert because every option they consider seems like a poor fit. This surprises them because what they want seems so simple and obvious. That is when they schedule an appointment with an estate planning attorney who tells them they need a Revocable Living Trust.
The Smiths are skeptical because they have always believed that a trust is something that is only used by wealthy people. The attorney explains that is not the case and that, in fact, a trust is one of the best and most flexible estate planning tools available and is well suited for almost anyone. The attorney explains that a trust is like a box made out of words. The estate plan for the Smiths will be to create a trust box and then place the Smith’s assets into that box. The box will now own the assets, and the Smiths no longer will. Nonetheless, the Smiths will retain complete control over the items in the box. That is because the Smiths have been designated as the Trustees of the Trust (meaning they are in charge of everything in the box) as well as the Beneficiaries of the Trust (meaning that everything in the box will be used for their benefit). It will look and feel essentially like they still own the assets in the box even though they will not.
The Smiths will also designate Successor Trustees and Secondary Beneficiaries. The Successor Trustees will take over management of the trust if neither of the Smiths are capable of continuing in that role, due to either death or incapacity. The Secondary Beneficiaries will receive the assets remaining in the box after the Smiths have passed. The trust is revocable, so the Smiths can modify it as they wish so long as they both are alive and competent, and so long as they both agree.
After the attorney explains how the Trust will meet their needs, the Smiths are satisfied, and have the appropriate documents prepared. A trust does cost more than a simple will, but the peace of mind of knowing that they have prepared documents that will address their concerns is well worth it.
The years go by. Tragically, Fred is hit by a meteor at the age of 72 and is killed. At the time of his death, he owns nothing because everything had been placed into the trust, so there is no need for probate. The trust continues, with only Sally as Trustee and Beneficiary. Sally lives to a much older age. Unfortunately, she begins to develop some issues after she turns 88 and is no longer capable of managing her personal affairs. She has gone into an assisted living facility but her bills and accounts still need to be handled. Due to her mother’s incapacity, Jane takes over the role of Trustee, with Sally remaining as the Beneficiary. Accordingly, Jane has full access to the assets in the box, but for the sole purpose of taking care of her mother. The trust makes this easy and John and Jane are both grateful that they did not need to go to court and incur great expense seeking guardianship of their mother.
During her stay in the assisted living facility, Sally meets Mr. Jones, who is several years younger than she is. She becomes smitten and in a surprising development the two get married. Mr. Jones has wills prepared for himself and his new wife leaving everything to each other. Sally has the capacity to sign the will despite her diminished faculties and the new will is valid. She lives for a few more years until her passing.
Upon her death, the new will does nothing because although it was valid, she did not own anything. Her assets were already in the trust. The remaining assets in the trust are distributed by Jane in equal shares to both John and Jane, as Fred and Sally had originally intended and planned for together, and there is no need for probate. No one needs to qualify as an executor, no inventory needs to be filed with the court and no accounting needs to be submitted to the Commissioner. John and Jane are grateful that their parents took the time to have such an excellent estate plan prepared.
This is an over-simplified example of how a revocable living trust works but it gives an illustration of how the trust avoids both the burden of probate and of a guardianship. It also shows how a trust can protect the Grantors’ joint intentions from inappropriate decisions that might be the result of undue influence or simply made at a time when one’s mind is not as sharp as it once was. There are many more benefits to a trust, too many to discuss in this article. For example, a trust can permit distributions to a minor, to be held in trust without the need for a court-appointed guardian; or it could delay the distribution to a young beneficiary until they have obtained a slightly more mature age than 18. Provisions can be made for a special needs trust, which can maximize government benefits available to a beneficiary of the trust. The rules which govern a trust are largely determined by the Grantors, so there is tremendous flexibility as to what can be accomplished.