As estate planning and business attorneys, we are often tasked with anticipating and planning for our clients’ various life event and business situations. When asking our clients about potential life/business events, we are often met with the understandable response, “Well, I haven’t thought about that, but it sounds important.”
The purpose of this article is both to briefly identify common questions and concerns and to articulate available answers and solutions. While reading this, we ask that you keep in mind that you control the plan – it’s your stuff after all – and you may have perfectly legitimate alternative solutions (yes, you can leave it all to ransom the kidnapped prince, though we generally do not recommend this particular approach).
Question 1: “Do I need an estate plan?”
Answer: ABSOLUTELY! Well, ok, technically you might not “need” an estate plan, but a sound estate plan can prevent a lot of avoidable headaches, heartaches and expenses down the road:
A Few Potential Yet Avoidable “Headaches”:
• If you have not prepared a plan, how can anyone know what they can do with your stuff when you die? Since you did not plan, someone else will have to try to sort out who gets what, when they get it and how they get it. This might be avoided on the death of a spouse by a surviving spouse, but even in this case, the problem is simply being kicked down the road, at best, until the survivor passes away.
• If you do not have a plan, how can anyone know what they can do with YOU while you are alive but unable to make decisions? Disabilities are very common and healthcare providers, financial institutions and a host of others need your consent to administer your financial accounts, transfer property, pay bills, and/or render medical assistance.
• Powers of attorney for healthcare decisions and powers of attorney for financial decisions can authorize another to make decisions on your behalf when you are unable to do so. Likewise, a trust can provide similar administrative instructions for the property it holds.
A Few Potential Yet Avoidable “Heartaches”:
• In a blended marriage situation, the decedent spouse’s children might not get anything depending on the plan or lack thereof. In a second (or next) marriage, your stuff may go to the tennis pro or exotic dancer your spouse marries after you die.
• If the surviving spouse and/or children have significant creditors, unstable marriages, irresponsible spending habits or other undesirable situations, then the spouse/children can lose/spend the unplanned estate very quickly.
• Both a will and a trust can provide planning that guarantees the decedent’s children will ultimately receive something after his or her death. Quite often, the married testator, in the case of a will, or the married grantor, in the case of a trust, will include instructions that direct that his or her share of the community property and his or her share of the separate property be placed in a separate trust. This trust is usually set up so that the surviving spouse will receive the income generated by the assets and can also receive distributions of the underlying assets for certain needs.
A Few Potential Yet Avoidable “Expenses”:
• As mentioned previously, if you are disabled and unable to make healthcare or financial decisions, then someone will have to be legally authorized to make those decisions on your behalf. This process is more formally known as a guardianship and is extremely expensive as it requires extensive court supervision and can last for years.
• Once your survivor’s throw up their hands in exasperation over not knowing what you currently own or owned when you died or what to do with it, they will almost certainly hire an attorney and/or a CPA to help solve these questions. If you have not planned, the advisor will also not know what you own(ed) but will gladly bill you for his or her time to track down and administer your assets.
• As mentioned previously, when you do the work of planning your estate through the use of powers of attorney, a will and/or a trust, then your heirs or beneficiaries are less likely going to need to pay an outside adviser to sort out your estate.
Question 2: “Should I (we) get a will or a trust?”
Answer: it depends. Both wills and trusts are excellent planning tools that have their “pros” and “cons” –
• Lower initial cost – when you sign your will, you are signing a legal document that directs where your stuff goes after you die. The attorney is not tasked with re-titling assets prior to the testator’s death.
• Familiarity – while trusts are not a new planning technique (the technique has been in use for centuries), more people are familiar with wills.
• Less “startup” work – unlike a trust that requires assets to be transferred into it to have any value, the will is the transfer document. That said, we often encourage our clients who choose to execute wills to designate their estate as the beneficiary of various financial accounts and life insurance so that the instructions in the will will control as intended.
• Higher costs at death – because your stuff was not legally transferred when you signed the will and because the will has to be validated by a court, your heirs will likely want to hire an attorney to probate the estate. At a minimum, this requires paying an attorney to present the will to the court, represent the executor (the person named in the will to gather the assets, pay final bills, and distribute the remaining property to the named beneficiaries) during the probate hearing, draft various legal documents necessary for transferring the decedent’s assets, notify potential creditors, notify beneficiaries of the will and prepare an inventory of the decedent’s assets and their respective values which will be provided to the court and/or the will beneficiaries.
• Lack of motivation and/or understanding – in a marriage situation, when the first spouse dies, the surviving spouse often experiences significant grief and simply does not want to deal with probate. While this is completely understandable, this can lead to additional legal problems and costs both during the survivor’s lifetime and following their deaths. Likewise, when the survivor passes away, the beneficiaries, who also may be grieving and who also often have not been involved in the administration of the couple’s stuff are left to identify what the couple owned, gain access to and secure the property, deal with creditors and potential creditors and see that the remaining property in the estate is properly distributed to the appropriate beneficiaries.
• Multiple probates which multiply costs – in many cases, the clients will have to pay for multiple probates. The most common instance of this involves married couples. When the first spouse dies, his or her will has to be probated to have any legal effect. But this only affects the decedent’s share of the marital property. The surviving spouse’s will will also have to be probated to dispose of their respective property when they die. Similarly, if the decedent owns real estate in another state (for example, the summer cabin in Colorado or the condominium in Florida), then the decedent’s will will often have to be probated in the other state in order to facilitate subsequent transfers of the out of state property.
• The work has been done – a major benefit to using a trust is that when the trust is properly implemented, the administration and distribution of most, if not all, of your property has been or will be taken care of in the event of your disability or death. In other words, you have given instructions and legal authority for the use and disposition of your property while you are living and the subsequent distribution following your death. As the maker of the trust, or “Grantor”, you retain control over your property, and, since you are the primary beneficiary of your trust, the trust property is to be used for your benefit even when you are unable to make decisions for yourself. After your death, the trust, similar to a will, will direct how your property is to be distributed.
• Little or no legal fees for dying – since your trust can continue after your death, the property controlled by the trust will be administered pursuant to your directions. This can simplify or eliminate the probate process assuming all of your property is held by or payable to the trust. While fairly straightforward, the probate process in Texas almost always involves far more attorney hours (hence, legal fees and expenses) in order to validate the decedent’s will.
• Higher “startup” cost – a properly drafted and implemented trust typically costs more because it requires additional attorney work to transfer assets into the trust.
• More “startup” homework – for the trust to be of any benefit, you have to transfer property into it. This process is referred to as “funding the trust.” Funding can include a number of activities such as deeding property into the trust, assigning personal property into the trust, opening a trust checking account and changing beneficiary designations for financial accounts.
• If you have not planned for your potential disability or death, then perhaps now is the time to consider.
• If you have planned but would like to take advantage of our complimentary review to make sure your planning still says what you want it to, then please call or email the firm.
By: Alan W. Meeks, JD, LLM (Tax), June 8, 2021