Estate Planning: How to Get Going and Why You Shouldn’t to Do It Yourself

Slide1Courtesy of the ABA, here’s a link to an on-demand webinar that should answer a lot of your questions about estate planning. As the brief description of the webinar says, “The program is intended for the general public and does not require a background in the law of wills or trusts or tax.” Click on the link near the bottom of the page, enter your e-mail address and a few other details, and you’re set.

The webinar is 1 hour long and covers a lot of issues. If you have any questions, feel free to contact me.

By the way, access to the webinar ends in October 2015, so take advantage of access now.

 

5 Reasons You Might Need a Trust

Virtually everyone should have a will. To see why, go here. But most people would do well to have a trust. Get that? You don’t have to be Bill Gates to need a trust. Here are five reasons why:

1. Avoid probate. Probate is the word we use to describe the legal process, the court proceedings, that virtually all wills must go through, so that your property goes where you want it to go, so that the court can decide whether the guardian you chose for your children is the best person for the job, so that . . . the list goes on and on. A revocable trust saves you from all that. Rather than passing your property via your will, set up a revocable trust, then title your bank accounts, your home, and your other property in the name of the trustee–you–and you can avoid probate, at least for all the property in the trust. A by product of that process is that you can . . .

2. Preserve your privacy. Hand in hand with probate is the loss of your privacy. What do you think “the public record” means if it doesn’t mean the record of what goes on inside a court room? Go down to your local clerk of court’s office and ask for the court file for a recent probate, and you’ll see what I mean. Revocable trusts? They don’t go through probate; hence, your maintain your privacy.

3. Keep control. If you’ve ever seen Brewster’s Millions or Easy Money, you know all about control. In Brewster, Richard Pryor must spend $30 million in 30 days in order to inherit a larger estate. In Easy Money, Rodger Dangerfield has to turn his vices into virtues before he can inherit. Control. In some cases, it might come in handy. A trust can give it to you–even when you’re long gone.

4. Protect your property. Protect it, that is, until your intended beneficiaries are old enough or mature enough to take care of it on their own. Trusts can do that. Wills can’t.

5. Take care of you should you become incapacitated. Coupled with what is called a durable power of attorney, the trustee of your living trust can step in an manage your estate should you become incapacitated. With the power of attorney and the trust powers, he or she will essentially walk in your shoes and speak in your voice–be you . . . essentially.

Bonus: Reduce or eliminate your estate tax. Of course, if you have a lot of money, that is, if you have $5,430,000 or you and your spouse together have twice that amount–$10,860,000–you can use a trust to avoid or delay the estate tax on amounts over those sums. It gets complicated, so we’ll stop here.

Trusts 101

Slide1A trust is a fiduciary relationship between a trustee and beneficiaries of the trust. Trusts can be implied and express. Implied trusts are court created in order to prevent unjust enrichment (a constructive trust) or to carry out what the parties intended, but failed to do properly.

In estate planning, we concerned almost entirely with express trusts, trusts set up intentionally to achieve some goal or purpose, to avoid taxes or direct money to a charity, for example. To set up such a trust, a person–the settlor–must have the intent to do so and then must comply with three formalities:

1. There must be a res or property, a bank account, a piece of real estate, a life insurance policy, or some such.

2. The trust must have ascertainable beneficiaries. Why have a trust if there are no beneficiaries, right?

3. Finally, the trusts must have a trustee, though a court can appoint the trustee if the trust document doesn’t name one.

Express trusts are almost always laid out in a trust document that names the res, the beneficiaries, and the trust. Those documents also explain the trust’s purpose, list the trustee’s powers, and the like.

Express trusts can be testamentary, that is they come into existence upon death. Such trusts are generally established in a will and must always comply with the formal requirements of a will, In Wyoming that means the testator or maker of the will must sign the written/typewritten document and that at least two disinterested people must witness the testator’s signature. Though testamentary trusts are irrevocable upon death, the testator can change the terms of the trust while he is still alive.

Express trusts can also be established during the settlor’s lifetime. They are called inter-vivo trusts. People often set up revocable inter-vivos trusts, so they can test drive them before they die. Revocable trusts are not separate taxable entities. Thus, if you have a revocable trust with an investment account as part of the trust property, you will have to report the trust’s taxable income on your 1040 form. Upon the settlor’s death, that revocable trust become irrevocable.

Intervivos trusts can also be irrevocable from the beginning, but by doing so, you may also create a taxable event because, remember, the trust has to have a res, and if that res is large enough, you will have to transfer that property from your pocket to the trust’s pocket, if you will. We call that a gift, and a large enough gift will be subject to the federal gift tax system. Why? Because a revocable trust is a separate taxable entity, a separate person. But that’s enough on that subject for now.

Though the wealthy often use trusts to save estate taxes, they can also be a valuable estate planning tool for the middle class. But more on that later, in another place on this site.

Guardians 101

Slide1A guardian is a person appointed by another person or a court to care for another person or their property. That other person will be either a minor or a legally incompetent adult and is referred to as the “ward.” Guardians of the ward’s person are always called guardians. Sometimes guardians of the estate or property are referred to as conservators. In either case, they are fiduciaries; that is, they must act with special care towards the ward or their property.

If you have minor children or have responsibility for an incapacitated adult, you should consider making provision in your will for a guardian. But take care to choose someone with the ability and wherewithal to do the job. Fail to do that, and you may find the court re-doing what you didn’t do properly.

Elective Share

As we discussed in 5 Reasons You Need a Will, a valid will controls where your money goes when you die–except when it doesn’t. In some states for instance, the maker of a will–the testator–can’t disinherit a spouse.  In Wyoming for example, a disinherited spouse can “elect” to take 1/4 to 1/2 of the property disposed of by the will (reduced by certain items), depending on whether there are children and whether the disinherited spouse is a “parent of any surviving issue of the decedent.” In other words, the will won’t control where all the money goes in this circumstance.

Once again, whether the disinherited spouse has an elective share and how much that share is, depends on where the decedent is domiciled. If the decedent is domiciled in Utah, the surviving spouse’s elective share is 1/3 of the augmented estate–essentially the property disposed of by the will, reduced by funeral and administrative expenses, certain exemptions, and the like.

 

Wills 101

Slide1When a person leaves a will, we say that he died testate as opposed to intestateBlackstone defined a will as “The legal declaration of a man’s intention which he wills to be performed after his death,” a definition that maybe gives us some idea of where the legal term “will” comes from. Thomas Atkinson’s Handbook on the Law of Wills is a little more expansive and a lot more helpful (all emphasis in these quotes is mine):

A will is a person’s declaration of what is to be done after his death, which declaration is (1) revocable during his lifetime, (2) operative for no purpose until his death, and (3) applicable to the situation which exists at his death. Usually a will relates to the disposition of the maker’s property.

In other words, a will only functions after the maker, or testator, dies. Until then, the testator can change her will when she wants, willy nilly, if you will. (I’m sorry.) That is, while she’s alive, her will is revocable.

A person who receives money or property as directed by a will is called a beneficiary. Often a will names more than one beneficiary or classes of beneficiaries. For example, a testator might name her son James and daughter Julie beneficiaries, or she might simply refer to them as a class, as in “all my children, share and share alike.”

To make sure her wishes are carried out, the testator generally names an executor, the person who acts on behalf of the testator after she dies. (A quick note on terminology: If someone dies intestate {without a will}, the court appoints an “administrator.” If someone dies testate {with a will}, the will names an “executor.” Both the terms administrator and executor are included within the meaning of the term “personal representative.” Sometimes people use the terms executor and personal representative interchangeably.)

5 Reasons You Need a Will

No matter your economic circumstances, you should probably have a will, especially if you have a spouse, even more so if the two of you have children. Here are five reasons why:

1. You can use that new will to revoke the one you already have. That’s right: you already have a “will,” the one your state legislature drafted for you. Say, for example, that you live in Wyoming and you and your spouse have two children. And say that you die without having an attorney draft a will for you, that is, you die “intestate.” The Wyoming laws of intestacy–that “will” you didn’t think you had–direct that 1/2 of your estate goes to your spouse and the other 1/2 goes to your two children to share equally, regardless of whether that’s what you wanted to happen.

A state’s laws of intestacy cover all sorts of contingencies: Spouses with no children. Surviving children and no spouse. Deceased children who leave grandchildren. Etc. etc. etc. The problem is, of course, that the law probably doesn’t cover the situation the way you would want it covered. A properly drafted, valid will does.

2. A valid will is portable. Now suppose you’re fine with Wyoming’s law of intestacy. You love your spouse and both of your children. You’re okay with the “will” the Wyoming legislature drafted for you. In fact, you’re glad that your two children will share in your estate when you die. But suppose that you and your family decide to move to Utah, so you can take a new job. And suppose that you suffer a massive heart attack the first day on your new job. Guess what? Your children get nothing from your estate. Your spouse gets it all. Why? Because the Utah legislature says so, that’s why. Utah’s laws of intestacy are different than Wyoming’s, and because you moved to Utah, its laws govern. That doesn’t happen with actual wills because they’re portable; they go where you go, live where you live. (By the way, this discussion ignores a surviving spouse’s so-called “elective share,” which is a matter for another post.)

3. You can use your will to name a guardian for your minor children. If you don’t, the state will step in and do the job for you. Truth be told, the state will probably step in anyway if you nominate dud as guardian–the state takes the welfare of children seriously. However, if you are of sound mind when you name a guardian and if that person is a stand-up person, the court will generally approve your decision. Best practice, then, is to nominate a guardian in your will.

4. Your will is the place to name your personal representative (or executor). A personal representative or executor is charge with carrying out the instructions in your will about how to handle your property. Again, if you don’t name your personal representative, the state will.

5. Your will makes sure all your property makes it into your trust–if you have a trust. Such a will is called a pour-over will; that is, it “pours” the residue of your estate–the odds and ends, small accounts and expensive vases, you may have overlooked as you planned your estate–into a trust. If you have a trust. A subject for another 5 Reasons post, perhaps?

BONUS reason. Setting an appointment with an attorney to prepare a will that carries out your wishes will cause you to give serious thought to your family and your estate and to focus on the things that matter in a way that few other exercises will. Trust me. That’s an exercise well worth doing.

You need a will, one you had drafted, not one the state drafted for you.

Personal Representatives and Executors 101

Slide1Navigating the terminology of wills and trusts can get complicated. Take the terms personal representative and executor, for example. Many people use them interchangeably, but strictly speaking, they’re not. Wyoming law, for instance, says the term “‘Personal representative’ includes executor and administrator.” Great, but what do “executor” and “administrator” mean? Well, the Wyoming code defines those words as well:

“‘Executor’ means any person appointed by the court to administer the estate of a testate decedent.”

“‘Administrator’ means any person appointed by the court to administer an intestate estate.”

As you can see, which term we use depends on whether the deceased died testate–with a will–or intestate–without a will. Typically, the maker of the will–the testator–will name an executor in the will. In such cases, the court will almost always agree and appoint that person to be the executor, though in some circumstances the court may do otherwise.

The executor exercises authority granted or defined in the will. That authority may be greater or lesser than any powers provided by statute, depending on the objectives of the testator. In other words, as a testator, you want to be sure you grant your executor the authority necessary to do what you want him or her to do.

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