Types of estate plans are not created equal. There are benefits and disadvantages to the kind of planning. There is no one size fits all. The best plans are customized to the person or family. The estate planner needs to understand the family unit as a whole, how the estate currently functions, and how the estate should function based on certain contingencies.
1. “What is a Will?”
Answer: A formal written declaration of your last desires. When the sovereign determined people had property rights that could be passed on, a will could be used to attempt to enforce that right.
2. “What is a Trust?”
Answer: Conceptually, very simple. A trust is a contract between the giver of a piece of property (grantor) and the receiver of a piece of property (trustee)about the rights of a benefactor (beneficiary) to that piece of property. “Trust”describes the nature of the arrangement. You trust the trustee to do what you told them with the property for the beneficiary. Depositing money in a bank is a trust-type contract. Oral trusts happen all the time: “Will you hold my seat for me until I get back?” Written trusts are best because they can with all of the details of the arrangement.
3. “Which is better, a will or a trust?”
Answer: The best answer depends on the desired outcome for the estate plan. This surprises many people, but depending on the kind of estate and for a large portion of the population, a will may be more expensive than a trust. In our opinion, trusts are very often preferable for clients because they provide real control.
Practical Example: Joe Average owns a very large parcel of farmland which he desires to be used to grow crops to feed his large family after he dies. Joe Average tells his oldest son, Jim Average, privately that’s what he wants done with the land, and names Jim as the owner of the land in his will. After Joe Average dies, Jim acquires the land and produces crops that feed Joe’s family for four years Jim grows tired of farming. When an investor offers to buy Jim’s farmland at a premium price, Jim sells the farmland for a significant profit, and moves to Rio with the money. Joe’s large family goes hungry, and is very likely to lose a very costly legal battle which attempts to void the sale.
4.“Can I create a trust in my will?”
Answer: Yes, but it often makes very little sense to do so. If used, a will goes through Probate Court with the associated time and expenses. A Trust can be created privately without involving a court. Why go to court to officially create something later that you can create today without ever involving a court.
5.“If I have a trust, do I need a will?”
Answer: Yes, but it’s a very different kind of will. It is a will that leaves all property to the trust. It is a back-up, just-in-case-only type of document. If a piece of property is owned by a person that is deceased, that property is legally owned by that person’s estate. Personal estates are governed by the last will and testament. This is why it is important for the will to name the trust as sole inheritor/owner because, if there is no will or the trust is not the next owner, the property will pass to the new owners outside of the plan.
Practical Example: Joe Average creates a Trust estate plan with an attorney. Joe’s children are the beneficiaries of Trust. He transfers his bank account and home to the trust with attorney’s help.Fifteen years later, Joe Average divorced, still owns bank account, and now owns a different house in his name. Girlfriend gets Joe to make a will naming her as the sole inheritor. When Joe dies, girlfriend inherits house through the will, and Joe’s Children inherit bank account through the trust.
6. “Can I use the power of attorney for my deceased parent to take care of their estate?”
Answer: No. A power of attorney for another is only valid while that person is alive. Upon death, their estate governs property unless the new owner obtains title to a particular piece of property directly through an on-death transfer.
Practical Example: Jane Senior signed a will ten years ago that named her son as personal representative of her estate. Daughter now lives with Jane in Jane’s house. They use both their incomes to support themselves. Daughter takes care of Jane so Jane signed a power of attorney naming daughter as her power of attorney. Daughter and son have never gotten along well.
After Jane’s death, Daughter’s power of attorney is useless. Son takes over Jane’s bank account and house in probate. Son transfers house to Daughter and himself to end probate. Son obtains home equity line of credit on house with daughter’s consent because she wants to stay in house. Son loses credit money, and defaults on line of credit because daughter also cannot afford payment. Daughter is evicted in foreclosure and struggles to find new rental due to damaged credit score.
7.“What else do I need?”
Answer: Everyone needs durable powers of attorney, financial, healthcare, and sometimes mental healthcare. The power of attorney appoints a surrogate to make decision in your place. Without that simple document, court costs and fees can be very expensive.
Further Questions? Call Us At 480-505-7044
Practice Tip: It is easy for clients to take for granted how complex their personal affairs are. If a key player is removed from the game, what usually happens? Estates are no different. Life insurance funds help, but money only goes far and it is only as effective as the person directing the grand plan. Throwing money at a bad plan usually amplifies harm. Complex life situations or complex asset structure dictate a detailed planning need.
*Watch for big “life”events. Birth, marriage, death, divorce&disability, trigger these kinds of questions.
*The information provided in this article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, does not create an attorney-client relationship, and you should not act upon it without seeking independent legal counsel.