Preparing an estate plan is often considered an arduous task. It challenges us to contemplate our own mortality by planning for our loved one’s lives without us. Estate planning can also feel a little daunting knowing you’ll be working on “legal documents,” and that often gives us the unsteady feeling of navigating the unknown. When I discuss estate planning with couples, even in broad form, I can sense some form of hesitation in the concept that if a plan is executed, mortality becomes reality, and that’s a difficult situation to consider. While I feel it’s beneficial to understand some of the basics of wills, trusts, and other available legal documents, I think it’s even more powerful to understand the consequences of not having any estate planning in place.
When someone dies without any creating legal documents, e.g., a will, trust, etc., their estate (or all the assets they have accumulated during their lifetime) typically gets reviewed by the probate court. The probate court is synonymous with death court. The purpose of the probate court is to account for and retitle all assets transferring from a decedent to an heir. During this process, taxes and fees can be assessed to transfer assets to their new owners.
Not every asset gets passed through the probate court system. Some assets pass by title. These assets are usually titled jointly with someone else, like a joint bank account. Other assets can pass by beneficiary designation, such as life insurance policies and retirement plans. Assets that don’t pass through title or beneficiary are studied by the probate court to determine who gets what inheritance. That’s where creating a Last Will and Testament (or just a will, for short) becomes important. A will can help direct the probate court where to direct assets after someone dies. It’s important to note that assets passing through title and beneficiary law still get counted during the probate process.
The result of the probate court is generally a good thing, as it certifies all assets as being free and clear from taxes and liens, yet the probate process can be time consuming, expensive, and confusing. The expense of probate can range from about 5% of probated assets to more than 50% of assets. Once all fees and taxes are paid to transfer and retitle all assets, the probate court publishes the list of newly titled assets as public record with the county clerk. This leads to one of the more painful consequences of the probate court process: all the information is public record. This includes the decedent’s will. The will is read out loud during the probate court hearing, and it is available to the public. So while the goal of transitioning assets through the probate court is intended to provide a positive outcome, it can be painful to reach the end of this goal.
Since the previous owner of all the assets in question is now deceased, both the court and the heirs are often left wondering what assets are even available. Leaving heirs without clear directions about what to do with assets can ultimately be the sting that tarnishes a legacy altogether. The probate proceeding is essentially the family’s last experience of the decedent, so this process can shape feelings of how the decent handled their lives with respect to their loved ones.
What is an estate plan? Essentially, an estate plan doesn’t really have a firm definition. You could effectively review beneficiaries of a life insurance policy and be involved in estate planning. An estate plan is just the process of selecting personalized decisions regarding your assets after death. Without an estate plan, each state must sort through assets and make decisions on your behalf, and all the decision-making from the state’s perspective are “rubber stamp” decisions, meaning the rules are effectively the same for everyone. With an estate plan in place, you make your own decisions.
For various stages of life, there are different degrees of estate planning. For a young professional in training (or just out of training), a very basic plan might be most suitable due to both simplicity and affordability. For an established professional or business owner, a comprehensive plan guided by a qualified attorney might be most suitable. The main difference between basic plan and a comprehensive plan is often the presence of a trust.
A trust is a legal document that acts as an entity to hold assets and eventually pass them to one or more beneficiaries. There are many types of trusts, some much more complicated than others, but I am referencing a family trust, living trust, or grantor trust, all of which essentially have similar meanings (unless you talk with an attorney). This type of trust is much like a storage box, and it gets filled up with accounts and property. The lid of the box remains open during the lifetime of the grantor, or person who creates the trust. Once the grantor dies, the lid closes and locks, and only the beneficiaries are allowed access to its contents; however, the creator of the trust can mandate the beneficiaries must abide by certain rules, established by the grantor, to get access to the contents. Some examples of these rules might be to graduate college, get married, start a business, or reach a certain age. These rules often keep the beneficiaries motivated to work hard or carry familial values if the trust assets carry significant assets.
When a trust is created, it needs to be funded. Funding a trust is the process of retitling assets and accounts into the trust, so the assets are owned by trust instead of individuals. This can feel a little disconcerting, but in a grantor trust, the owner and beneficiary are often the same person or people. In this case, if the trust has ownership of assets, it’s no different than owning the assets personally. The owner can still benefit from these assets, make changes, or withdraw funds.
The trust essentially organizes all these assets, and when the beneficiaries receive the assets, they get to skip the probate process altogether. Probate, as we just discussed, can be painful, public, and expensive. Pretty much every asset can get pulled into the probate courts, except those assets that are stored in a trust. A trust can bypass that process altogether if the trust is funded! It’s important to mention that a trust of this kind won’t avoid estate taxes, if applicable.
Ideally, who should have a trust? There’s a stigma about trusts that suggests only mega wealth warrants the need for trusts, yet that’s not the case. I believe anyone who wants to effectively pass assets to their kids or other beneficiaries should create a trust. A trust makes the inheritance process easy for the beneficiaries. For someone with young children, a trust can be very powerful. Individuals who have yet to reach the age of majority cannot legally accept ownership of assets, so if a parent dies and leaves money to children outright, it can create confusion in the probate system, and it can ultimately lead to mismanagement of funds, so the children don’t get the chance to receive the money or assets in the end. A trust can receive money, and a trust can distribute money as a fiduciary for the benefit of minors. Having a trust in place is really the only way to make sure minors are truly taken care of during their young years. There’s no confusion, no probate, and there’s no publicity in the inheritance.
A trust itself is not a holistic plan; it is a component of an estate plan, and it’s typically accompanied by a will, among other documents. Trusts can be both beneficial and intrusive, so it’s best to find a qualified attorney who specializes in creating trusts. The reality is that trusts are complicated, so you want to make sure you have counsel in navigating the decisions around your estate plan. A good attorney will take time to understand your perspective and vision for your family to help you construct an estate plan that could positively impact generation after generation.
While estate planning can take some time and effort, it’s nothing compared to the complexity of the probate process your heirs will need to navigate should you forgo an estate plan altogether. Considering your family’s lives beyond your own life can certainly be a difficult idea, but it’s such a worthy cause to leave your children in a positive place. Creating an estate plan is a selfless act in that it eases the burden of our beneficiaries to shore up our own loose ends. An estate plan is true “adulting” at its core, and having a valid estate plan is an essential component to leaving a lasting legacy.