Ultimate Guide for Estate Planning: Probate, Trusts, Last Will and Testaments
A Last Will and Testament (a “will”) is not only for the wealthy and it is not only for the elderly. Everyone needs a will because it is the legal means by which you can tell the world how you want your assets distributed at your death.
Without a will and Testament, you will die what is called intestate. This means that state statutes will dictate how your individually owned assets are distributed at your death and this may not be in accordance with your wishes. In California, if you die without a will but with a spouse and children, all of your community property assets will pass to your spouse. However, your separate property will be divided among your spouse and children, in a proportion dependent on the number of children you have. If you have no spouse or children it starts to get a little more complicated and your estate may be distributed to your living parents, siblings, or more distant relatives.
These default provisions may cause a problem for some people. Many, if not most people prefer to leave the entirety of their estate to their surviving spouse. However, state law dictates that a significant portion of a person’s assets would go straight to their children. Additionally, those without a spouse or children who die intestate may have had no intentions of leaving their assets to their parents or siblings, preferring instead to leave their assets to friends, a significant other, or even to their preferred charities. Taking the time to express your wishes in a will can prevent such unintended outcomes.
“In California, if you die without a will but with a spouse and children,
all of your community property assets will pass to your spouse.”
A will not only gives you the ability to decide who should receive how much of your assets at your death, but it can also give you the ability to determine how and when your beneficiaries spend their inheritance. You can set up Testamentary Trusts inside your Last Will and Testament for minor and adult children alike, setting parameters for when funds can be distributed and for what purpose and naming a third party to manage the funds on the child’s behalf. This can be especially useful if you are planning to leave assets to someone who is disabled. By placing their inheritance in trust for them, it becomes possible to allow them to enjoy the funds without disrupting any government benefits they might be receiving.
In addition to allowing you to control what happens to your assets at your death, for those with minor children, your will is where you can name guardians for your children after your death. If you have no will and therefore no legally documented wishes, it will be up to the courts to decide the best place for your children and you might not agree with the outcome.
There are many good reasons to have a will, not the least of which is the ability to make your own decisions about the distribution of your estate when you pass away.
An alternative, or often, a supplement, to a Last Will and Testament is something called a Trust. Trusts come in many varied forms. There are Living Trusts which are created and funded during your lifetime. There are also so-called Testamentary Trusts which, as mentioned earlier, are those created under your Last Will and Testament and do not come into effect until after your death.
As previously discussed, many people will include Testamentary Trusts for their minor children in their wills. This will allow you to dictate who will be in charge of investing and spending your children’s money until they reach an age of legal majority or, in some cases, some older specified age when you feel your children will be mature enough to capably and responsibly make their own financial decisions. You may also include Testamentary Trusts in your will to leave bequests to disabled beneficiaries.
If you have a child, friend, or sibling that you plan to leave a monetary bequest to, but they are the recipient of government benefits due to a disability, you can create a Testamentary Trust that will be funded at your death and that will allow your intended recipient to continue to receive their means tested government benefits but at the same time, receive financial support that will supplement those benefits.
Living Trusts, as previously explained, are created and funded by you while you are still alive. Sometimes they are done in an effort to avoid using a Last Will and Testament, as in the case of a Revocable Trust. This type of Living Trust is commonly used when a person does not wish their Last Will and Testament to become part of the public record, as it would if it were probated (the process by which the court system validates the last will and testament and empowers your executor to distribute your assets to your beneficiaries).
When you use a Revocable Trust in lieu of a will, you create the trust, transfer title to your home and your other assets to the trust, and then when you ultimately pass away, there is no need to go to court or engage in the probate process.
Your assets will simply pass automatically to the beneficiaries listed in the Revocable Trust. While Revocable Trusts are useful for this purpose, it is always recommended that creators of Revocable Trusts also have a Last Will and Testament in place because it is possible to forget or fail to re-title an asset into the Revocable Trust and any individually owned assets that do not contain a beneficiary designation will need an instrument to dictate its ownership after your death. If you do not have a Last Will and Testament to “catch” this asset or assets, they will, despite your estate planning efforts, pass to your heirs according to state intestacy laws.
Revocable Trusts are also very commonly used by those who own real estate in multiple states. The reason for this is that each state where you own real property will require that your last will and testament be probated there, resulting in going through the timely and sometimes costly process twice. If you place your second home into a Revocable Trust, there will be no need to endure a second probate process in a second state.
Irrevocable Living Trusts are another type of trust that are created for several different reasons. Sometimes they are established to qualify the Donor, or the person creating the Trust, for Medicaid benefits. When done for this purpose, a person will transfer ownership of certain assets to an Irrevocable Medicaid Trust which will effectively divest them of these assets and allow them to qualify for the means tested Medicaid program.
Irrevocable Living Trusts are also commonly created for estate tax reasons. For example, it is possible to transfer life insurance policies to Irrevocable Life Insurance Trusts and remove their value from your taxable estate, thereby reducing the potential amount of estate taxes your future beneficiaries will owe.
Theses are only some of the possible uses of Trusts. Trusts are powerful and flexible documents and their purposes and functions can be as varied as your imagination will allow. Speak to an estate planning attorney to discuss which estate planning tools are right for you.