Estate Planning: Wills and Trusts

Though easy to do, it's a mistake to take the security of an estate for granted. A sudden accident or an unexpected death can bring about a cascade of legal proceedings. Without adequate preparation, surviving loved ones may find themselves overwhelmed by unforeseen taxes and legal expenses. A carefully prepared will or living trust can help to minimize such responsibilities. Additionally, drafting a will can be a far less difficult process than you might expect. This section of SevenPonds will attempt to aid you in the process.

What is a will or testament? What is a living trust? What are the benefits of a will? How much does an estate tax account for? How do you prepare a will? Do you need an attorney to prepare a will?

DISCLAIMER: This page contains general information about issues and should not be construed as legal advice. Every case must be analyzed independently, based on the specific facts of the case. If you have questions or concerns about your particular situation, please consult an attorney.

• If you die without a will, some or all of your possessions go into probate and may be dispersed according to the laws of your state.
  
  
• Not everyone needs a living trust. Whether a living trust makes sense for you depends on what assets you own, the size of your estate, your estate planning goals, and the laws of your state.
  
  
• Ordinary living trusts do not provide protection from creditors. If you wish to set up a creditor-protected trust, please consult with an attorney.
  
  
• If you have a living trust, you still need a will — but a much simpler will, called a “pour-over” will.
  
  
• Whether your estate will be subject to estate tax depends on the applicable federal and state estate tax exemptions in the year in which you pass away and the size of your taxable estate.

Your last will and testament serves two key functions. First, it names the beneficiaries you wish to inherit your property after death. Second, it nominates who you want to serve as your Executor, the person who will administer your estate.

If you're wondering who needs a will, the short answer is: just about everyone. If you pass away without a will, your estate will be distributed according to the “intestate succession” laws of the state where you reside at the time of death. These rules set forth which of your family members will receive your property. In other words, state law will choose your beneficiaries for you.

In your will, you can choose your own beneficiaries. You can decide how much you would like to leave to whom, and you can stipulate your choice for charities or institutional donations that your family members may not have been aware of otherwise.

To find a lawyer who can draft your will, you can begin by asking friends for referrals or by referencing our Local Resources section. You can make your initial visit to a lawyer more productive by bringing along a completed will worksheet, such as this one, prepared by EDU Tax Advisors.

If you cannot afford an attorney’s legal fees, contact the local bar association in the state or county where you live. Ask for referrals to attorneys who can prepare wills at a reduced cost or on a “pro bono” (for free) basis.

Drafting your own will may sound like a daunting process, but there are a wide variety of so-called “will kits” and state-issued forms to direct the process. If you are able to do this correctly, you can save yourself a considerable amount of money in attorney fees. However, you MUST be sure that your will is in accordance with state law.

If you decide to draft your own will, you have a few options. Some states issue “statutory form” wills. If you print out the form, fill in the blanks, and execute the form in accordance with state law, such state-issued forms should be recognized as valid wills at the time of death. 

Another source of form wills are off-the-shelf sources like Nolo Press will kits, which can be purchased at book stores or office supply stores. These will kits are similar to statutory forms, except that they are prepared by private companies.

Whether your state will recognize an off-the-shelf will kit depends on the laws of the state. Even if you are using a form will, it must be properly executed in the state where you live in order to be recognized as valid.

After you have drafted your will, ask an attorney to review it for you. If you do not have it reviewed, and you have failed to include some important provision, no one will notice the problem until after you have passed and your will has gone into effect. At that point it will be too late to remedy. This could lead to litigation and conflict among your loved ones.

An attorney can also help you decide if further estate planning is necessary, such as the establishment of a living trust, special needs planning for people on public benefits, planning for minor children, or advanced estate tax planning. Be advised, if you choose to draft your own will, and an attorney alerts you to crucial issues that you missed, you may end up having an attorney revise or draft your will anyway. Therefore, follow any instructions in your will forms or statutory forms very carefully.

Yes. However, note that leaving lifetime gifts or testamentary bequests to charity raises unique tax and estate planning issues. For more information about charitable donations, reference our upcoming article on Preplanning a Legacy Donation.

Once your will is drafted and properly executed, it is important to keep the original in a safe, secure place. If the original cannot be found after your death, a copy of the will may not be recognized, depending on your state's law.

Some law offices store original estate plan documents on behalf of their clients, but some return the originals. One option is to store the will in your safe deposit box. Another option is to keep it in your home in a locked safe or filing cabinet, preferably one that is fireproof and waterproof.

Whatever you choose to do with your will, be sure that your loved ones are aware of your decision. Make sure that they know the following: (a) that you have a will; (b) where you keep it; (c) how to get access (e.g., where you keep the key); and (d) if you worked with an attorney on any part of the will, how to reach that attorney.

Your will is effective immediately, but it only governs what happens at the time of your death. Until you pass away, you may re-write or amend your will at any time. 

Keep in mind that to be valid, a new will or an amendment to your will (also called a “codicil”) must meet the execution formalities of state law. Never mark up your existing will. Depending on state law, such markings may not be recognized. To make matters worse, they could actually invalidate your will.

Probate is the court process for administering your estate after you pass away. The probate process is handled by the “probate court.”  The probate process can take anywhere from a few months to a few years, depending on state law and the size of your estate. Unfortunately, it can be expensive and time-consuming.

After death, the will has to be lodged with the probate court of the county where you were residing at the time of death. The probate court appoints an Executor (usually the person nominated in the will) and oversees the administration of the estate by the Executor. 

The main purpose of probate is to make sure that the people whom you intend to receive your property actually receive it. Another goal of probate is to notify potential creditors of your death. The Executor is responsible for filing final tax returns, identifying and notifying creditors, paying final debts and taxes from the assets of your estate, and finally, distributing your assets to your beneficiaries.

If you have property in states other than where you live, typically there also has to be an “ancillary probate” proceeding in the state where the property is located.

A living trust is an agreement, set up and in effect while you are still alive, where you (as the “Grantor,” the person creating the trust), give property to yourself (as Trustee, the person who manages the trust), for the benefit of the trust beneficiaries (including you during your lifetime). 

Property held in a living trust, at the time of death, typically avoids probate court, depending on state law. In this way, a living trust can save the beneficiaries thousands of dollars (in some states, tens of thousands) in legal expenses and more quickly expedite the distribution of assets.

As the Trustee of your own living trust, you can continue to use and control all of the trust assets for your own benefit. You may revoke or amend the living trust at any time, which is why these trusts are sometimes called revocable living trusts. While you are living, income generated in the trust would be reportable on your personal income tax returns; no separate tax return for the trust is generally required.

In the event that you become incapacitated, a successor trustee whom you name would take over, and administer the trust assets for you while you are still living. After your death, the successor trustee would then distribute the trust assets to your beneficiaries.

Married couples can set up joint trusts for their assets. However, same-sex couples who are married or have entered into a marriage-equivalent status in their home states could face additional taxes by setting up joint trusts, because same-sex relationships are not currently recognized by the federal government, under the federal Defense of Marriage Act. If you have a same-sex partner, please consult with an attorney for advice on your estate planning.

Whether you need a trust or not depends on what assets you own, the total size of your “probate” estate, state law, and the unique circumstances of your family. A trust can be beneficial for people in a variety of situations. People who should at least consider setting up a living trust include:

• Parents with minor children;
• People who own real property (house, condo, land);
• People who have accounts over $50,000 or $100,000 (depending on the what triggers a probate in your state);
• People in states where the probate process is more complex or time-consuming;
• Married couples, either same sex or opposite sex, who have total assets, including proceeds of life insurance, over $2 million;
• If you have family or beneficiaries on public benefits, or with creditor problems;
• If you want to protect the assets inherited by your children or beneficiaries from their current or future spouses or future lawsuits.

Consider consulting a lawyer who specializes in wills and trusts to find out whether or not a living trust makes sense for you.

No. Ordinary living trusts do not provide protection against creditors. 

Some types of irrevocable trusts (trusts that cannot be amended once completed) can provide creditor protection, but setting up such a trust must be done very carefully to comply with tax regulations and laws against fraudulent conveyances (i.e., laws that prevent debtors from defrauding creditors). If you have questions about setting up creditor-protected trusts, please consult with an attorney.

Yes. When you have a trust, you still need a special type of will, called a “pour-over” will. Essentially, a pour-over will is a safety net, and is simpler and shorter than an ordinary will. If any of your property is accidentally left out of your trust at the time of your death, the pour-over will states that it should be delivered to your trust. Your trustee can then administer it along with all of your other property.

When you set up your living trust, you are typically the “Trustee,” or the person who is in charge of managing everything in the Trust. This responsibility is similar to the one you have in managing all of your personal accounts when you do not have a trust.

Your living trust should also name someone as “successor Trustee”, usually a spouse, another relative, a close friend, or a professional, such as a fiduciary or an attorney.

At the time of your death, the successor Trustee acts like the Executor under a will. The Trustee collects trust assets, pays debts and taxes, and distributes the remaining trust assets to the trust beneficiaries. The Trustee does all of this without the cost and expense typically associated with a full-scale probate proceeding.

If anyone tries to “hard sell” your need for a living trust by overstating the cost or delay of probate fees or making other claims that are hard to verify, please consult with an attorney and ask whether a trust is right for you. 

The most common type of “scam” are people who undersell, e.g. people who offer to set up a trust at a fraction of what a law office would charge. Whereas a professional attorney may charge $2,000, these salesmen offer their service for only $800. Such trusts are often drafted by non-attorneys and reviewed by attorneys in other states. Attorneys call these “trust mills.” They will draft trusts based on templates that are sometimes applicable to your situation – and sometimes not applicable. And they usually do not help transfer any of your property into your trust. 

To avoid falling prey to a trust “scam”, you can follow some of the tips listed in this blog post.

An “AB” trust can help reduce exposure to estate taxes for federally-recognized married couples with joint trusts. Upon the death of the first spouse, the estate’s assets would be allocated to two separate trusts. The first trust, sometimes referred to as the “A trust” or the “survivor's trust,” remains revocable, and the assets are controlled by the surviving spouse. The second trust, sometimes referred to as the “B trust,” “decedent’s trust,” “bypass trust,” or the “credit shelter trust,” becomes irrevocable after the death of the first spouse.

The assets of the B trust can typically be used by the surviving spouse during his or her lifetime, although sometimes the B trust only benefits other people, like the children from the first marriage, instead of the spouse of the second marriage. After the surviving spouse later passes away, the assets of the B trust would then be distributed to third-party beneficiaries, such as the couple’s children.  

The assets of the bypass trust are not considered part of the surviving spouse's estate. They pass to the third-party beneficiaries free of estate tax by using the estate tax exemption of the first spouse.

Whether you will have to pay an estate tax depends on the size of your estate. 

As of January 1, 2011 (pursuant to the law signed by President Obama on December 17, 2010), the federal estate tax exemption was set at $5 million. Thus, if you passed away in 2011 with a taxable estate of less than $5 million, you would not owe an estate tax. If the taxable estate is greater than $5 million, estate tax would be due at a maximum rate of 35% for the amount above $5 million. 

IMPORTANT NOTE: The $5 million exemption is only in effect for 2011-2012.  On January 1, 2013, the federal estate tax exemption will return to $1 million, and the maximum tax rate will increase to 55%. Congress could change the law before 2013, but if not, many more people will end up with taxable estates.

Your estate may also be affected by the estate taxes of your state: some states "piggyback" on the federal estate tax law, and some states levy estate taxes independently of the federal law. Therefore, it is possible for an estate to be exempt from the federal estate tax but still be subject to state estate tax.

If you have questions about whether your estate will be subject to federal or state estate taxes or whether you should set up an “AB” trust to make full use your and your spouse’s estate tax exemptions, please consult with an attorney.

You will need a financial power of attorney. A will provides for the distribution of your estate to your beneficiaries after your death. If you become temporarily or permanently unable to manage your financial affairs before your death, a financial power of attorney, also called a durable power of attorney for finances, will designate someone to manage your financial assets in your place.  

Your financial power of attorney designee, called an agent, can pay your bills, collect your income, and manage your personal investments. If you are a business owner, you may authorize this person to manage your business if you are unable to do so.

If you have a trust, assets in your trust are managed by your trustee in the event that you become incapacitated. However, you still need a durable power of attorney for finances, because assets outside of your trust (such as life insurance policies and retirement accounts) could only be managed by the designated agent in a durable power of attorney for finances document.

A financial power of attorney is useful even if you are married. If you are incapacitated, depending on state law, your spouse may be unable to sell or refinance joint property or otherwise manage your property without a power of attorney.

To ensure that the durable power of attorney meets your needs and complies with state law, consult an attorney licensed to practice law in the state where you live.

If you decide to draft your own power of attorney, your public library may have books with forms and instructions on how to prepare your own financial power of attorney document. Office supply stores and financial institutions may have preprinted forms available, typically designed for a standard power of attorney to be used in the event that you become incapacitated.

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