Caring.com has been conducting annual surveys to measure the estate planning preparedness of American adults. They consistently find that about one-third of the people they question have wills or trusts in place.
When they asked those without wills and trusts why they have not taken action, many said that they simply don’t know where to begin. This is understandable, and in this post, we provide an overview to demystify this important process.
Simple Will
A simple will is a document that can facilitate asset transfers after you die. However, there are some things to understand about the administration process when a will is used.
When you create a will, you name an executor to administer your estate after you pass away. Upon your passing, the executor cannot just act independently. They are required to admit the will to probate, which is a court supervised process.
Probate Drawbacks
There are some significant drawbacks that go along with the probate process, one being the cost factor. The court charges a filing fee, and the executor will typically bring in a probate lawyer, and both of them may receive statutory remuneration for their time and effort.
An accountant may be a part of the equation as well, and there can be appraisal and liquidation charges. When you add it all together, a relatively significant amount of money can be spent during probate. This essentially comes out of the pockets of the beneficiaries.
No distributions are made while the estate is being probated by the court. It typically takes at least nine months even when there are no particular complications. Some complex cases have stalled in probate for multiple years.
Finally, there is a loss of privacy when an estate goes through probate. Interested parties can access the records of the court to find out what transpired. This is generally disconcerting, and the information could cause hard feelings among people that were close to you.
Revocable Living Trust
A revocable living trust is a commonly used estate planning document that is a good alternative to a will for asset transfers. First, it is important to note that you would be the trustee while you are living. As a result, you would have complete control of the assets at all times.
You can change the terms of the trust along the way, and it is revocable. If you ever choose to dissolve the trust entirely, you may do so.
When you establish the trust, you name a successor trustee to assume the role after your death. This trustee will administer the trust outside of probate. There is no court involvement, so the drawbacks of a will are avoided.
Secondly, the trust becomes irrevocable after your death. The principal is protected from the beneficiary’s creditors, if there are any.
Plus, you can instruct the trustee to provide limited distributions over an extended period of time to include guardrails, as it were. This is not a necessity, but it is an option that you have if you use a trust.
Other Types of Trusts
The revocable living trust is ideal for a wide range of people. However, there are other types of trusts that can satisfy targeted objectives. Let’s look at a few examples.
Incentive Trust
As the name indicates, with an incentive trust, you include incentives that must be satisfied by the beneficiary. Someone might use this type of trust to guide a young beneficiary toward higher education. The trust would pick up the expenses as long as the beneficiary remains in school, for example
To instill a work ethic, the trust could provide a dollar-for-dollar match of money earned on the job after graduation. These trusts can also be used to steer someone away from self-destructive behavior.
Supplemental Needs Trust
A lot of people with disabilities rely on Medi-Cal as a source of health insurance, and they receive Supplemental Security Income as well. These are need-based programs that are only available to people with very limited financial resources.
An inheritance could catapult a benefit recipient into a different financial stratosphere. This could result in a loss of benefit eligibility. To avoid this, you can establish a supplemental needs trust if you are leaving an inheritance to a person with a disability.
The trustee that you name would manage the assets after your death, and they would never become the property of the beneficiary. Because of this arrangement, eligibility for benefits would not be impacted. However, the trustee would be able to use the assets to satisfy the unmet needs of the beneficiary.
QTIP Trust
Let’s say that you have adult children, and you’re divorced from their other parent. After a number of years, you decide to get remarried, and you have estate planning concerns.
You want to provide for your new spouse without jeopardizing the inheritances that you intend to leave to your children. In a situation like this, you could establish a qualified terminable interest property (QTIP) trust.
Assuming you predecease your spouse, the trustee you designate will distribute the earnings from the trust’s invested assets to your spouse for the rest of their life. However, they would have no direct access to the principal, and they would not be able to change the terms.
After the death of your spouse, your children inherit the assets that remain in the trust in the manner that you chose.
These are just a handful of the types of trusts that can be used to address specific situations.
Incapacity Planning
Your plan should address eventualities that you may face toward the end of your life. Unfortunately, incapacity is all too common, and Alzheimer’s disease is the leading culprit.
If you don’t do anything to prepare for incapacity, the state could appoint a conservator to act for you if you become unable to make your own decisions. This is not a very pleasant prospect, but it is one that you can avoid with the proper preparation.
Your incapacity plan should include advance healthcare directives. One type is a living will, which is used to assert your life-support preferences. For decision-making that is not related to life-support utilization, you can name a representative in a durable power of attorney.
If you have a living trust, you can designate a disability trustee to manage the trust if you become unable to do so. To account for assets that are not held by a trust, you can name an agent in a durable power of attorney for property.
Take Action Today!
When you work with our firm, we will answer all of your questions and learn about your legacy goals. Recommendations will be made, and at the end of the process, you will emerge with a tailor-made plan that is ideal for you and your family.
To get started on the core essentials for estate planning, send us a message or call our Chico, California, estate planning office at 530-343-3454.