[This post is the second in a two-part series titled "Is an Estate Plan Even Necessary." Part One of this series took an in-depth look at the Last Will and Testament and the benefits thereof. Some of the information contained in Part One will be referred to herein. To read Part One, click here.]
To pick up where we left off, two of the major advantages of the Last Will and Testament are that it allows its creator to specify to whom or what his or her assets are distributed upon his or her death (instead of relying on a complicated statutory distribution scheme), and it allows that person to choose a Personal Representative who will be in charge of all the creator's worldly possessions during the probate process. This is a giant leap above merely (and perhaps naively) relying on the complicated distributive and administrative laws of probate. However, depending on individual factors and the nature of one's estate, the Last Will and Testament may not be the best or more cost-effective choice for disposing of one's assets after his or her death, and it is certainly not the best choice (or even a choice at all) for managing one's estate prior to his or her death.
For all of the Last Will and Testament's advantages, it does have certain drawbacks. First, even though the Last Will and Testament is executed while its creator is alive, the instrument itself only becomes effective at the death of its creator, to ensure that the creator’s assets (i.e., his or her estate) are managed and distributed as he or she has specified in his or her Last Will and Testament. That is to say, the Last Will and Testament has no control over its creator's assets while he or she is still alive. This lack of control can be problematic. For example, in the event a person is alive but incapacitated or financially incapable to such an extent that he or she cannot make decisions about his or her care or finances, that person's Last Will and Testament cannot control how that person's assets are used (because he or she is still alive). This means that, in the absence of other estate planning, in order for the incapacitated or financially incapable person's assets to be used for his or her benefit, a guardianship or conservatorship, or both, must be established. Guardianship and conservatorship proceedings, as will be discussed below, are time-consuming, expensive, and fairly intrusive.
Second, although not an onerous burden, the original Last Will and Testament must be preserved, as the probate court will, in the normal course, accept only the original Last Will and Testament as the "word" of its creator. If the original Last Will and Testament cannot be found, the court may not follow the creator's wishes with respect to the management and disposition of his or her estate, and may instead apply the complicated laws of "intestate succession," which the Last Will and Testament has sought to avoid. See Part One for a discussion of the laws of "intestate succession." Similarly, if the original Last Will and Testament is marked up, for example, with pen or pencil (including, but not limited to, notes in the margins, lines crossed out, or words replaced), the court may consider the Last Will and Testament to be "revoked" and may, likewise, refuse to follow its creator's wishes with respect to the management and disposition of his or her estate. In other words, to ensure that the court will actually honor it, a Last Will and Testament must generally be kept in its original, immaculate condition and must be kept in a place easily accessible to the Personal Representative (so that it may be "probated"). That is not to say that one cannot amend his or her current Last Will and Testament, or create an entirely new Last Will and Testament; the point is simply that whatever the document is (the Last Will and Testament or an amendment), the original thereof must be available to the court and must be undisturbed. Obviously, this puts somewhat of a burden on the creator, to ensure that the Last Will and Testament is unaltered, protected, and accessible, and on the Personal Representative, to actually find and present the original Last Will and Testament to the court when the time comes.
Third, as noted in Part One, the creation of a Last Will and Testament does not, in and of itself, obviate the need for probate. The Last Will and Testament, while certainly simplifying the probate process and giving its creator greater control over his or her estate, must still be "probated" - i.e., go through the probate process. Unfortunately, the probate process is extremely time consuming and expensive. On average, probate takes 6 months to complete. This length of time is extended if the probate is complicated due to, for example, numerous claims against the decedent's estate. This means that from the time the decedent's estate is brought before the probate court, which is usually not immediately after he or she has died, it may take up to 6 months, or more, for the probate to be closed and for the decedent's assets to be distributed to those rightfully entitled to them. In other words, it could take 6 or more months for a beneficiary to receive his or her share of the decedent's estate. Moreover, probate is expensive, and during the lengthy probate process, the decedent's estate will continuously rack up numerous fees, potentially including court costs, bond, Personal Representative fees, and attorney fees. On average, the total fees for probate amount to 5 - 15% of the value of the decedent's estate. For example, if the decedent's estate is worth $100,000, his or her estate could end up spending up to $15,000 in probate-related fees. That’s $15,000 that goes to someone or something other than the decedent's heirs or beneficiaries. Additionally, as a public court proceeding, anyone, and I do mean anyone, can look into the decedent's probate and learn about his or her estate, who his or her heirs or devisees are, and other private information.
Given the drawbacks of the Last Will and Testament, particularly that it cannot control the creator's assets while he or she is alive and that it must still be probated, what other estate planning option does one have? The best answer is the "Trust Agreement."
A Trust Agreement, also known as a "Revocable Living Trust," or simply a "Living Trust," is an arrangement created by a person, called a “Trustor,” which is set forth in a legal document, that allows a third party, called a “Trustee,” to hold the trustor’s assets on behalf of and for the benefit of a beneficiary or beneficiaries, including the trustor. Unlike a Last Will and Testament, which becomes effective only upon its creator’s death, the Trust Agreement controls the management and distribution of its creator’s assets both while the creator is alive and upon his or her death. As such, the Trust Agreement is effective immediately upon its creation.
Given the complicated definition of a Trust Agreement, it will be beneficial to consider how the Trust Agreement (or "Trust") actually works. For most purposes, the Trust Agreement itself is considered an entity separate and apart from its creator, the Trustor. When the Trust Agreement is created, its creator transfers all of his or her assets to the Trust (except for certain assets that cannot or should not be transferred to the Trust). For example, if the creator of the Trust owns a home in his or her individual name, he or she will convey the home to the Tust, and the home will then be titled in the name of the Trust. The same is true for bank, stock, brokerage, and most other financial accounts. The Trust, then, as an entity separate from its creator, owns the creator’s assets. Because the Trust owns the assets, how those assets are used is controlled by the Trust Agreement, which specifies the creator’s wishes with respect to the management and disposition of his or assets held by the Trust. The person in charge of the management, administration, and disposition of Trust assets, that is, the creator’s assets, is called the “Trustee.” The Trustee may be the creator him-or herself, or any other person or entity designated by the creator. Whoever the Trustee is, he or she is in charge of the Trust assets and how to manage and use them, both during the creator’s life and after his or her death.
At this point, you may be asking why you would want to “give” your assets to a separate entity called a Trust Agreement. The answer, in short, is that there are a number of reasons why a Trust Agreement is beneficial, especially over a Last Will and Testament, and why it is considered by many to be the pinnacle of estate planning. Consider the following.
First, the creator of a Trust Agreement has almost absolute authority when it comes to drafting the terms and conditions of his or her Trust. Through a Trust Agreement, its creator may specify exactly how his or her assets, that is, the Trust’s assets, are to be used and distributed during his or her lifetime, may specify to whom or what, and under what conditions, the assets are to be distributed upon his or her death, and may include as many separate trusts within the Trust Agreement itself as he or she pleases. This a big step up from the Last Will and Testament, especially when it comes to lifetime planning, which the Last Will and Testament cannot address (because it is only effective on its creator's death).
With respect to lifetime planning, the Trust Agreement can specify how Trust assets are to be used both while the creator is alive and competent and while the creator is alive but "incapacitated" or "financially incapable." See below. In the normal course, the Trust Agreement will provide that, while the creator is alive and "competent," all trust assets may be used by him or her, in any manner he or she pleases. This is really no different from the what the creator could do in the absence of a Trust. But where the Trust Agreement shines is that it can also plan and provide for how assets are to be used, and how the creator is to be treated, in the event the creator is incapacitated or financially incapable. In that regard, the Trust Agreement can contain provisions specifying that, in such an event, the Trust assets be used for specific purposes, like in-home care, facility care, additional hospital or medical services, and the like. Of import, unlike a Last Will and Testament, the creator’s ability to plan and provide in the Trust Agreement for what will happen in the event of his or her incapacity or financial incapability avoids the need for a conservatorship and grants the creator greater control in the event of a guardianship. That said, what a conservatorship, and its counterpart, the guardianship, are, and when they are imposed, ought to be considered.
A guardianship proceeding is a court proceeding by a which a person, called a “Guardian,” is appointed by the court to make certain important decisions about the care and well-being of another person, called the “Protected Person.” A Guardian may be given authority to decide where the Protected Person lives, provide for the Protective Person's care, comfort, and maintenance, make health care decisions for the Protected Person, make funeral and burial arrangements for the Protected Person, and receive and spend the Protected Person’s money for that person’s support, care, or otherwise. A Guardian may be appointed by the court when a person is “incapacitated,” that is, unable to manage his or her physical health or safety or to manage his or her financial resources.
Generally speaking, a guardianship proceeding is expensive and time consuming. Moreover, and perhaps more importantly, the imposition of a guardianship seriously impairs the personal liberties of the incapacitated person. Given the authority that may be granted to a Guardian, a guardianship may result in the incapacitated person’s loss of independence and decision-making in such areas as where to live, what medical treatment to receive or refuse, and how his or her money or property is used. Furthermore, as the a Guardian is essentially charged with the total and complete care of the Protected Person, the Guardian selected by the court shoulders a heavy burden that the Protected Person may not want the Guardian to shoulder. This is why the Trust Agreement is such an important estate planning tool.
As noted above, the Trust Agreement allows its creator to specifically provide for how he or she wants to be treated, and how his or her assets, that is, the Trust assets, are to be used in the event of his or her incapacity. Because the creator can make such specifications before becoming incapacitated, the Trust Agreement ensures that the creator retains his or her independence in certain important decision-making areas (even post-incapacity), and ensures that his or her wishes with respect to certain items, like where to live (e.g., in his or her home or a retirement community) or how his or her money is used, are honored.
Similar to a guardianship, a conservatorship is a court proceeding by which a person, called a “Conservator,” is appointed by the court to manage the finances and make financial decisions for another person, called the “Protected Person” (as in a guardianship). Unlike a Guardian, however, a Conservator deals only with the Protected Person’s personal property and does not make decisions about, for example, the Protected Person’s living situation or medical care. A Conservator may be appointed by the court when a person is “financially incapable,” that is, unable to manage his or her financial resources - his or her property - for reasons including, but not limited to, mental illness, mental deficiency, physical illness, or physical disability.
Like a guardianship proceeding, a conservatorship proceeding is time-consuming and expensive. Although not as invasive as a guardianship, a conservatorship strips the protected person of his or her right to manage his or her own finances, that is, his or her own property. As does a Guardian, a Conservator shoulders a heavy burden; the Conservator is charged with taking control of and safeguarding the Protected Person’s property, filing taxes on behalf of the Protected Person, obtaining permission from the court before acting on behalf of the Protected Person, and periodically reporting to the court with respect to his or her duties as a Conservator, to name a few. A Trust Agreement can avoid all that.
The Trust Agreement allows its creator to specifically provide for how his or her assets or financial resources, that is, the Trust assets, are to be used in the event of his or her “financial incapability.” By specifying in the Trust Agreement how his or her assets are to be used in the event of his or her financial incapability, the creator can ensure that his or her “financial resources” are used according to his or her wishes in the event of such incapability. Through a Trust Agreement, then, the creator can retain control of his or her assets even after he or she would otherwise be unable to do so. Moreover, provided the Trust is properly "funded," because it is the Trust, and not the creator individually, that owns the creator’s property, whether or not the creator is “financially incapable,” that is, unable to manage the financial resources in his or her own name, is immaterial, and a conservatorship proceeding is unnecessary.
A Trust Agreement can also provide other benefits to its creator, especially to one who is married. In certain circumstances, and in certain forms, a Trust Agreement can serve to reduce or eliminate the amount of estate tax that is due upon the creator’s death. How this is accomplished is fairly technical and will not be discussed here, but suffice it to say, it can be done - it is informally called "tax planning" and is a major benefit for estates in excess of $1,000,000.
Finally, a major benefit of a Trust Agreement is the avoidance of probate. Because probate is concerned only with those assets of a decedent that are not held jointly, are not held in the name of another person or entity, or that do not automatically pass to someone else upon the decedent's death, the creation of a Trust Agreement, and the proper “funding” of the trust agreement (i.e., the transfer of ownership into the name of the Trust), avoids the need for probate. This is because all of the creator’s assets, with certain few exceptions, are in the name of the Trust, not the creator’s individual name. Such assets are, therefore, not considered part of the creator’s “probate estate” because the Trust, not the creator, owns them. This means that, assuming all assets are in the name of the Trust, there is no need for a probate proceeding, and the Trust Agreement, as opposed to the court or the creator’s Last Will and Testament, determines how the creator’s assets are to be distributed upon his or her death. This avoidance of probate is important. While there are still expenses associated with administering the Trust, the high cost of probate is avoided by a properly funded Trust Agreement. Additionally, because the creator’s estate does not have to be probated, the distribution of the creator’s assets to the beneficiaries named in the Trust Agreement will take much less time; instead of waiting 6 or more months, as one would in probate, Trust property can normally be distributed within 4 - 6 weeks after the creators death. Furthermore, because the Trust Agreement is essentially a private contact, and the Trust Agreement is not probated, private information, including information about the creator’s assets and beneficiaries, is kept confidential. That is to say, the only persons who will know such information are those whom the creator selects to know.
Having thus considered what a Trust Agreement is, and the benefits of creating one, it is important to consider when a Trust Agreement might be needed. Not all estates need a Trust Agreement, and as Trusts are moderately expensive, such consideration is necessary. There are many factors to look at when determining whether a Trust is needed; for the sake of time, I will note what I consider to be the top four. First, for the person over 50 years of age and interested in avoiding a potential guardianship or conservatorship in the future, the Trust ia a good investment. Unfortunately, as time marches on, we tend to experience more physical and, perhaps, mental ailments. In this regard, the Trust provides a nice safety net, ensuring that its creator retains control over his or her well-being and finances when a guardianship or conservatorship would otherwise be necessary. Second, if one's entire estate, which includes financial assets, real property, and personal property, is worth over $150,000, a Trust Agreement is a smart choice. As previously noted, probate can cost up to 15% of the value of a decedent's estate. If an estate is at the $150,000 mark and must be probated, up to approximately $22,000 of the estate may be lost to probate-related costs, and that number only gets higher the more valuable the estate is. A Trust Agreement can avoid that loss. Third, for the person interested in avoiding the time, expense, and lack of privacy generally associated with probate, a Trust Agreement can help him or her do so. Finally, if one has complex objectives that he or she wants to accomplish with his or her estate planning, for example, different trusts for children and grandchildren, distributions to multiple beneficiaries in varying percentages or amounts, or complex contingent plans, a Trust Agreement is a must because it will likely be the only estate planning tool that can completely and comprehensively effectuate complex lifetime and postmortem plans.
The benefits a Trust Agreement has over a Last Will and Testament are plain: To name a few, the Trust Agreement gives its creator greater flexibility when it comes to using and distributing his or her estate, both during life and after his or her death; the Trust Agreement gives its creator the ability to retain control over his or her assets when he or she would otherwise be unable to do so because of incapacity or financial incapability; and the Trust Agreement avoids the time, expense, and complicated nature of probate. If the choice is between creating a Last Will and Testament or a Trust Agreement, and the creator has even the slightest inkling that a Trust Agreement will better suit his or her needs, creating a Trust Agreement is worth the expense.
If you are interested in learning more about the Trust Agreement (or Last Will and Testament), or are interested in having a Trust Agreement (or Last Will and Testament) prepared, please do not hesitate to contact me. I will be more than happy to speak with you and prepare your estate planning documents.