Do you have children or elderly parents? What about savings or a home?
If you answered “yes” to either question, here’s another: Do you have an estate plan in place?
If you think that estate planning is only for wealthy individuals with millions in assets, think again.
Even though you may not have died yet, research shows that everybody, even you, eventually will die. And yet, over 55% of Americans don’t even have a will, leaving their loved ones vulnerable to costly court fees and legal battles. Estate planning helps to protect your family when the inevitable happens, and will also protect you and your family if you become unable to manage your own affairs.
Even though estate planning is predicated on incapacitation or death, it doesn’t have to be morbid. In fact, it can actually be life-affirming, because the process will allow you to take a closer look at the people you care most about in life—and ensure their future security.
If you have minor children, a will is the proper document in which to appoint a guardian. If you don’t have a will designating who you want to take care of your kids, the state will decide for you.
A will also shows how you want your property divided after you die, names a personal representative to manage your affairs, provides a caretaker for your pet, and importantly provides a backup for your living trust—it will direct distribution of any property that you forgot to transfer into your living trust.
Your intended beneficiaries may be too young to take title to real estate, or to handle a lump-sum inheritance. And minor children aren’t the only ones who might squander an inheritance—some folks worry about their young adult children quitting school, buying expensive cars or running away to Bali.
Of course, many people over the age of 25 shouldn’t receive chunks of money either. Some are spendthrifts at heart; others are in not-so-good marriages or going through bankruptcy. Then there are those who are just too frail or incapacitated to manage property on their own. Giving money or property directly to any of these people is never a good idea.
That’s when a trust becomes a vital part of your estate planning. A trust allows you to give your hard-earned money and property to those you care about while protecting it for them at the same time. It is one of the most important reasons for a revocable living trust.
Some folks are more concerned about living too long than dying. We see it all around us—we worry about our parents living in their own home, about their bills being paid and whether someone will walk off with their money. Without prior planning, the only way to help them would be to petition the probate court to have a guardian appointed. In probate, all personal and financial affairs will become part of the public record, and your parents will be forced to suffer the indignity of being declared incompetent.
Ways to avoid this include putting properties and financial accounts in joint name with a son or daughter. This enables the son or daughter to pay bills, but it may create more problems when the parent dies—those assets pass automatically to the son or daughter, leaving all other beneficiaries out in the cold. Also, the children’s creditors would have access to all assets held in the kid’s name.
A durable power of attorney is a better solution, in which you can designate certain people to help manage your finances after you are unable to do it yourself. However, it does have some shortcomings, like the fact that the power of attorney becomes invalid upon death of the principal.
The best option may be a revocable living trust, which allows your successor to take over when you resign or become incapacitated. There is no interruption in the management of your property when you die, and no court intervention. Revocable living trusts are greatly accepted throughout the legal and financial community nationwide. Although a living trust isn’t effective unless your property is in the trust, a durable power of attorney will enable your attorney-in-fact to transfer property into your trust if you can’t do it on your own.
If you don’t have a trust, or if you own property which is not included in your trust, probate is the route your heirs will need to take to administer your assets. Even if nobody contests the will (or absence of will), a probate always takes time and costs money. Probate can tie up estate property for months or even years in some cases, and can be unnecessarily expensive. On the other hand, property held in your trust will not have to be probated.
A will is far more likely to be contested than a revocable living trust, mostly because a will goes into effect upon a person’s death, whereas a revocable living trust goes into effect as soon as the trust instrument is signed and lasts for some time after the owner’s death. To contest a will, one must show that the testator was either incompetent or under undue influence at the precise moment the will was signed. To contest a revocable living trust, it must be proven that the grantor was incompetent or under undue influence not only when the trust instrument was signed, but also when each property was transferred to the trust, when each investment decision was made, and when each and every distribution was made to the owner or anyone else.
Moreover, it costs nothing to contest a will. A disgruntled family member simply objects when the will is presented for probate, hires an attorney on a contingency, and then waits for the final outcome. However, contesting a revocable living trust generally involves a substantial commitment of time and money.
A will contest puts a hold on the final settlement of the estate. Most will contests take two or more years to complete, and during that period no distributions will be made to anyone. Also, defending a will contest involves attorney time which equals attorney fees. Even unsuccessful will contests may end up costing $50,000 or more in attorney’s fees, which come out of the estate, which then results in less money for the beneficiaries. Even if a contest is settled, the estate will pay the settlement. All this is easily avoidable by setting up a revocable living trust.
Theoretically, anyone can go into probate court when a person dies and look at the estate file. They can read the will, find out who the relatives and beneficiaries are, look through the claims of creditors and the list of assets, and find the phone numbers and addresses of estate beneficiaries. Sales people often go through estate files to locate grieving heirs to prey on. Disgruntled would-be heirs and nosy neighbors can look at an estate file to see what’s there, and they can do it from the comfort of their home computer. Not only that, but probate courts regularly post all events associated with the settlement of an estate on the internet for anyone to see in real time.
A revocable living trust, however, is private; it doesn’t get filed with the probate court, and no one gets to look at the trust unless the grantor or the trustee allows it. Often problems are anticipated with a certain family member or some other person regarding the estate. In those cases, privacy becomes very important.
Many say that a revocable living trust doesn’t save estate taxes. Technically, they’re right. There are no provisions in the federal tax laws that exempt revocable living trusts from estate taxes. However, living trusts are often used by individuals and families to take advantage of certain deductions and credits that are allowed under the tax laws.
These are 6 good reasons why you should have a revocable living trust. If one or more of these reasons apply to you, I’m happy to set up a personalized estate plan including a revocable living trust, wills, powers of attorney, and every other document beneficial to your overall estate plan.