CHAPTER 2:
WILLS AND TRUSTS – CHOOSING THE RIGHT TOOLS TO MAKE YOUR ESTATE PLAN WORK
Here we’ll examine the most basic features of wills and trusts. Later, we’ll explore how wills and trusts can help address some common life situations.
Meanwhile, don’t forget the non-probate (i.e., non-will) transfer techniques mentioned previously. The various techniques we’re examining are not automatically either-or tools; they can often be used to complement each other in putting together your complete plan.
First, determine your needs.
Plenty of attorneys act as if anyone without a trust is crazy – and in some states and situations, they’re probably right.
On the other side are those who say that a will is almost always adequate and that a trust is usually a waste of time and money because few people benefit from one. Common sense tells you that the truth lies somewhere between those extremes.
Virtually everyone should have a will. For many, that’s all they need, even if they have a very large estate. Many other families, however, even of relatively modest means, could benefit greatly from a trust. (We’ll look at trusts shortly in more detail.)
Rather than worry about what documents you “should” have, focus on your situation:
What people and tasks would need to be taken care of if you died tomorrow? What are your family goals and concerns regarding your property? If you own a business, who would open the door and turn on the lights?
Wills and trusts are just tools and nothing more. They are not unrelated or mutually exclusive options.
And other documents and agreements might be called for. If you own a business with others, have you made arrangements for it to continue? Is there a realistic, written plan to have your co-owners buy out your share?
If not, you risk losing perhaps the lion’s share of your wealth in a few days as your business grinds to a halt.
Business owners or not, an issue we all share is that our affairs will have to be wrapped up. This requires some degree of time, effort, and skill. So if you care who your “wrapper-upper” is, you’d be wise to name that person as the executor of your will. (The executor is often referred to as your “personal representative.”)
If you have a trust, your successor trustee (your backup) will be the person in charge and can be the “wrapper-upper.”
(Note that if you see a reference to “the trustee” anywhere in this guide, we are referring to whoever is serving at the time – either you as the original trustee or the successor trustee you have named as a backup. )
The executor has a fiduciary responsibility to you and the will beneficiaries. This is the highest duty under the law to “do things right.” (We also call anyone who has a fiduciary responsibility “a fiduciary.”) The executor must manage estate property and keep it safe. Secondly, the executor must see that the estate is distributed only as directed in your will.
Note that it is common – and perfectly okay – for the executor to be one of your children who is also entitled to a share of your estate under the will. But they are strictly forbidden from giving themselves preferential treatment or taking advantage of their position.
As for trusts, in the typical family trust, Mom and Dad are still alive – they’re the ones who set up the trust. So they are the initial beneficiaries of their own property, of course. Usually – but not always – they are also serving as their own trustees. So, as a practical matter, they can deal freely with the property they have transferred into the trust.
They don’t have to be concerned about giving themselves “preferential treatment;” it was their money to begin with.
If you name someone else (a financial professional or a bank, for example) as trustee, they have exactly the same fiduciary duty discussed above. So it’s obviously wise to make sure they are trustworthy – the same as with your executor.
You want someone you can rely on to act prudently and reliably, as you would. After all, a trustee – like an executor – is in a position to rob you blind. And if misconduct occurs, don’t expect the police to rush to your rescue.
Complaints against executors and trustees are generally regarded as civil, not criminal matters. (Some police departments, however, do have a unit dedicated to investigating financial exploitation of elders.)
Many people choose a close relative as executor or backup trustee who can consult with your financial advisors or lawyer if necessary. Remember, it’s your backup trustee who will manage the trust after you are gone. (We’ll often use “backup” trustee rather than “successor” trustee just to avoid legalese.)
Choose somebody willing and reliable – and explain your choice to everyone. Maybe somebody won’t like it, but at least they’ll know it was your choice and why.
Choosing your “wrapper-upper” is probably the most important planning choice you will make.
Anyway, those not chosen by you should probably feel grateful. Even if they are paid a reasonable fee, most people find that handling a decedent’s post-death affairs is more of a family duty – a pain in the neck – than a great honor.
No matter who gets chosen, everyone should be realistic. When a person dies, rich or poor, certain matters must be taken care of by somebody, whether there is a will, a trust, or neither one. First, there is the funeral.
Then final bills have to be paid. Personal business matters must be concluded. A life insurance claim might have to be submitted. Other insurance policies must be changed or cancelled.
A variety of parties usually must be notified, such as the Social Security Administration and the employee benefit offices of government employers, military services, or private sector companies paying benefits to the decedent. The list usually goes on, depending on the decedent’s circumstances.
Final income tax and state tax returns usually must be filed, even if no tax is due. A dwelling might have to be vacated and cleaned up in anticipation of a sale or lease termination. All kinds of property, from bank accounts to cars to coin collections must be accounted for, secured, divided appropriately and formally transferred as required.
Even if you’ve arranged your affairs well, a certain amount of time – free or paid – is inevitably involved. There are chores that cannot be avoided as your estate is wrapped up.
Obviously, leaving all these details to an attorney and other professionals could be very expensive. But you can save money if you have named an executor or trustee to handle things for you. They can be paid fairly and can hire people – even family members – to handle some tasks, although they often work for free. Even if they get paid, they’ll (hopefully) work at a reduced rate.
Make Life Easier for Those You Leave Behind
Whoever you choose to wrap up your affairs, give them a break by getting organized. Gather all relevant information and put it in one central location, then be sure that person knows where it is.
But warn everyone not to attempt to log into any accounts that are in your name alone using your password. Doing so will risk security systems locking down the account due to suspicious activity. It can also be technically against the law unless proper procedures have been followed.
If your executor is a joint account owner – not just an “authorized agent” or “trusted contact” like a spouse or child – they should log in using their own username and password.
If you have named such trusted third parties, but they are NOT actual account owners, they should follow a financial institution’s formal legal procedures to access any of your individual accounts. They should not use your password, even with your permission.
Your executor will need some or all of the following information:
- Your Social Security number
- List all financial institutions where you have account(s) and identify the type of accounts. Be thorough; list all banks, credit unions, brokerage firms, loan providers, and insurance companies.
- Key contact people: Provide the names and phone numbers of your financial advisor, accountant, insurance agent, estate attorney, or anyone else your executor would need to communicate or deal with.
- If you hold cryptocurrency in a self-custody wallet, private keys and other access information are also vital to avoid losing those assets forever. Keep in mind that your executor might not be a crypto expert. If not, instruct them to seek expert advice in dealing with your cryptocurrency wallet. A mistake here could result in an irreversible, total loss of these assets.
- Prepaid funeral or cemetery plot details
- Auto and property insurance policies
- Life insurance policies (Check to see if the beneficiary designations are still as you want them!)
- Any other insurance policies – health insurance, for example, might cover expenses of your final illness
- Safe deposit box location and any password or key needed to access it
- Check register and other important information for all bank and financial accounts, including pensions, IRAs and other retirement plans (again, double check the beneficiary designations).
- Real estate deeds and mortgage loan statements
- Recent tax returns
- Prenuptial agreement
- Divorce or separation agreement, and
- Finally, of course, a copy of your will or trus
Will Basics
“I just need a simple will,” is the first thing many clients tell their lawyer. Often the client is correct, but usually a so-called “simple” will – without a trust or the formal non-probate tools described in Chapter One – is not the best option. So . . .
Before deciding on your will – and any other documents you need – it’s a good idea to think through some “what if” scenarios that could unfold after your death.
Ideally, your attorney will help with that process. But lawyers are not psychics, so your active input is essential. (I have actually had a few clients who thought that part of the lawyer’s job is to pick their will beneficiaries for them. That is not going to happen with me or any other attorney.)
If a simple will covers your situation, fine. (E.g., “Everything to my children in equal shares.”) Don’t assume, however, that thorny matters such as family relationship issues will simply disappear when you die.
Address them head-on. For example, if you know that certain items have great sentimental value to particular children, consider specifically mentioning them in your will. A family meeting to discuss this is usually a very good idea to be fair and avoid hard feelings after you are gone.
Let’s take a look at the following clause-by-clause analysis of a very basic will. With one exception, highlighted below, the order in which these clauses appear is not important. The exact language used by different attorneys can vary widely. That’s why people’s wills often look very different, even though they are perfectly okay and identical in what they do:
Name Your Executor
In the wills I draft, this clause appears near the beginning, but it can be included anywhere in the document. The executor should be given broad authority to pay your debts and taxes, sell your property (specifically grant power to sell real estate, or your executor will have to go back to court for permission every time they need to do so).
Keep in mind that “debts” includes money due under any contract you had signed; contracts remain valid after death and are enforceable against your estate. This runs both ways. If somebody owes you money, property or services under a contract, their obligation to pay or deliver does not disappear upon your death – your executor steps into your shoes and can sue or defend against a suit on behalf of your estate, if necessary.
In a nutshell, make sure your executor is given full authority to distribute your estate as directed in the will and generally “settle your affairs.”
This includes dealing with your digital assets and social media accounts. Most states have laws allowing the executor some authority over these accounts. But to grant your executor full access and control, you must explicitly state that in your will for it to work.
Again, your executor is your “wrapper-upper,” so they should be chosen carefully. For married couples, the executor is typically the surviving spouse, but almost any trusted person or firm (such as a financial institution) can fill the role if they agree. An alternate or backup executor should also be named in case your first choice becomes unable or unwilling to do the job.
Make Specific Bequests to Beneficiaries
A “bequest” – if you care to make one or more – is just a specific gift of money or any other property to a specific person or charity. For example: “My best friend, Joe Dokes, gets my fishing rod and tackle box; My daughter, Ava, gets my antique car; the American Red Cross gets $1,000; My cousin, Jethro, gets my Shakespeare collection.”
Here is the one exception mentioned above: The “Specific Bequest” clause must always come before the “Rest and Residue” clause.
I use one will clause and list each person and their bequest. Other lawyers name each person and bequest in a separately numbered clause. So, depending upon who drafts a will, the documents might look quite different from each other but do exactly the same things. Just make sure it’s clear.
Making a bequest doesn’t bind you in any way. If you decide to sell or give away an item, the named beneficiary is usually out of luck, unless you’ve made other arrangements for them in the will. If there isn’t enough money to satisfy all bequests of money fully, special state rules kick in, but we won’t get into them here
Give Away the “Rest and Residue” of Your Property
“Residue” is an ancient legal term used in estate planning, as in, “the rest and residue of my property” or “my residuary estate.” This consists of anything and everything that remains in your probate estate after the payment of your legal obligations and the distribution of specific bequests. So it’s important that this clause appears after the “specific bequest” clause mentioned above.
Because the exact value and makeup of your estate at the time of your death can usually not be foreseen, there is no point in being too specific here.
For example, couples married for many years commonly use language that says (usually in mumbo-jumbo), “If I die first, everything goes to my spouse. If my spouse has already died, everything goes to my descendants, in equal shares, per stirpes.” (This is a Latin term that means, in effect, “If, God forbid, my child dies before me, that child’s children – my grandchildren – split their share.”)
Note, however, that a parent is under no obligation to leave anything to a child in a will, unless this has been otherwise agreed to.
Set Up a “Testamentary” Trust (If You Need One)
The above-referenced clause calls for the distribution of the “rest and residue” of your probate property directly to one or more parties as soon as your state’s probate process allows it. Alternatively, the will can state that some or all of your property is to be placed in a trust to be managed for the benefit of your loved ones. Such a trust is “testamentary” because it is established by your “Last Will and Testament.”
A trust is especially useful if your loved ones include young children or grandchildren, or others who you don’t think can manage their inheritance wisely.
The terms of the trust are then set forth along with the name of the trustee and the powers the trustee is to be given. Since a testamentary trust is created in your Last Will and Testament, it does not exist until you die, and the will is taken to Probate Court.
Precisely because they require going to court, I disfavor testamentary trusts for most common family situations. I prefer living trusts, which we will examine shortly. But there are advantages to a testamentary trust in a variety of situations, and some clients feel more comfortable with them. Many lawyers routinely use them.
A lot depends on your state and circumstances. This is yet another example of when individual legal advice is so important.
Name a Guardian(s) for Your Children
When there are children under age 18, a will should always be used to nominate a guardian of their person and of their property. To be safe, this should not be attempted any other way.
If you feel it is necessary or appropriate, two guardians may be appointed – one for the child him or herself, and a second guardian (presumably financially savvy and responsible) over the child’s property. Of course, if a surviving parent is living in the same household, they remain the sole guardian of any children.
When a surviving parent does not have custody (or joint custody), however, they have priority as custodians and guardians of their children – unless they have been found unfit. This is true even if you have tried to nominate someone else as the children’s guardian.
In every situation – but especially if the other parent is likely to be unable or unfit to take custody of the children and manage their property – at least one alternate guardian should be “nominated.” That is the more precise term, because the court eventually must approve any guardian you propose.
Also keep in mind when leaving money to children that guardianship usually ends at the age of 18. The child will then have full access to any money you have left them. (We will see that a trust is a good way to avoid this.)
Legal Formalities and Requirements of Wills
No special format or magic words are required for a valid will, but it must be in writing and signed by the testator (That’s the will-maker. I use “testator” and “will-maker” interchangeably.) A typed or printed will must be signed in the presence of two witnesses.
Such a will is said to be “self-proving” if it contains a notarized blurb (a “Self-Proving Affidavit”) at the end in which the testator and the witnesses make certain formal recitals. It is always a good idea to make sure your will is self-proving.
That way, the probate judge can simply look at the will and say, “Okay, this will is self-proving. You’re good to go without further ado.” Nobody has to go to court to prove it was validly signed. Almost every state has a statute that sets forth the exact legal words you can use. Minor variations are permissible as long as they say substantially the same thing as the law.
In the blurb, the parties affirm that all of them are within the sight and hearing of the testator and each other, and that the testator appears to be of sound mind, and knows he or she is signing their will.
A beneficiary under the will should absolutely not be one of the witnesses. In many states, if a beneficiary acts as a witness, their gift under the will is legally voided.
The witnesses must sign in the presence of the testator and one another, but they don’t read the will; They just watch you signing it.
But YOU should read your will carefully before signing!! If the signature line says “Gustav Balch” – and that is not your name – don’t sign it!
Decades ago my Aunt Elena asked my father if I’d review her will. Later, before reading it himself, he handed me the document and asked me to take a look. It was fine, but Mr. Balch’s name appeared beneath the signature line, not “Aunt Elena.” Maybe my aunt thought that was some kind of legal jargon, but she was planning to sign it.
As a businessman, my dad had read plenty of legal documents and gasped at the mistake as soon as I pointed it out. But he beamed with pride, slapped me on the back and said, “Good thing we have a lawyer in the family!” Really? Any time, Dad.
It’s no secret that law offices use document libraries, including clauses from wills they have previously drafted, as models for subsequent clients. It would be foolishly inefficient to reinvent the wheel every day; you are paying the attorney for guidance in formulating and implementing a plan, not for typing.
Obviously, however, misunderstandings or drafting mistakes can occur. If something is not right, or if you have any concerns or questions at all, do not be afraid to speak up.
There are plenty of stupid answers out there, but no “stupid” questions. Don’t sign any legal document without thoroughly understanding it!
Mental Competence to Make a Will
The will-maker must have testamentary capacity. Broadly speaking, this requires that the testator be of “sound mind” when drawing up and signing the document. The testator must be aware – generally – of the nature and extent of their property, and of the “natural objects of their bounty.”
What does that mean? It means the testator must understand, for example, that he or she has three children who would “naturally” be those to whom a parent would leave their estate. This does not mean that a parent must leave their estate to the children.
The testator is absolutely not required to be mentally sharp or reasonable. There is certainly no requirement that the testator be fair at all. A perfectly valid and legally ironclad will can be made by a testator who is eccentric, unfair, stupid, or just plain mean.
Most importantly, the testator must be aware that by signing the will they are directing a final disposition of their property. So the will-maker must only know what they are doing to the extent described above. If the testator does, the law respects whatever disposition they care to make, subject to lawful claims that must be paid first.
If you leave a child out of your will, definitely indicate that the omission was intentional.
You don’t have to state a lengthy reason or go into great detail. But otherwise, a disinherited child is likely to argue, “Mom was obviously not in her right mind. She totally forgot about me!” Even if this argument fails in court, it is wise to nip any controversy and litigation in the bud by making your decision clear.
“Undue Influence” and Challenging a Will
Contrary to what many believe, it is very difficult to successfully challenge a will. This is especially true if you have an attorney-drafted will that invariably includes the self-proving clause mentioned earlier. But even that standard clause might not settle the matter if somebody complained that the will-maker (testator) was mentally weak and under the undue influence or duress from another party.
“Influence” exists when someone in a close relationship with the testator “persuades” them to leave property in a manner they would not have done without the “persuasion.” The influence rises to the level of “undue” only when it becomes a form of mental coercion – taking advantage of the circumstances.
Such claims can be very difficult to resolve and often result in extreme family bitterness. Consider the following fairly common scenario:
One person in particular steps up – sometimes for years – to go way beyond the call of duty to be kind, compassionate, and take care of the testator. This person might be related to the testator or be an unrelated caregiver. Sadly, perhaps the testator’s own children had ignored them. The testator might respond by giving all or a large portion of their estate to their caretaker – to the dismay and anger of the children.
In such a situation, questions often arise after death. With the testator no longer around to resolve these issues, a court is put in a very difficult position. Disgruntled children very often challenge the will, forcing a judge to ask several key questions:
- Did the testator make their will with a sound mind to repay the kindness of their caretaker, or were they mentally coerced and “unduly influenced”?
- Did the relationship between the testator and the person accused of undue influence develop only recently, or was it long-standing?
- Did this person try to limit or obstruct contact and communication between the testator and others, especially family members?
- Was this person directly involved in the actual arranging or writing of the will?
But anyone challenging a will that appears valid on its face is in for a tough (and expensive and nasty) lawsuit.
If the testator is planning on leaving a larger portion of their estate to one child or an unrelated caretaker, an explanatory statement – both in the will and separate from it – is wise. It’s a very good idea to talk to an attorney in preparing your will if this is the situation in your family.
Some attorneys include a “no-contest” or clause in a will. Such a clause attempts to leave out any beneficiary who challenges the will.
But whether such a clause is enforceable — and under what circumstances — varies enormously by state and by the specific facts of the situation. This is a topic to raise with your attorney, particularly if you anticipate that your will might be challenged.
Allegations of undue influence are among the most common bases of court challenges to wills. The law bends over backward to reject such claims and uphold wills that appear to be valid on the surface.
True, if you explain your plans, you might instigate family tension, hurt feelings or resentments. This might make your life a bit unpleasant. Ignoring any issues will not make them disappear, however.
If your attitude is, “I’ll be gone, so it won’t be my problem,” so be it. But most people prefer not to leave a family courtroom war as their final legacy.
So I generally advise avoiding surprises. Deal with foreseeable problems – of whatever nature – while you’re still around to manage the fallout of your decisions. And who knows – maybe someone has a point of view that would change your thinking. At least there’s probably less chance that anyone will waste time going to court if your reasoning has been explained clearly.
Handwritten Wills
These are called “holographic” wills – written and signed entirely in the handwriting of the testator. They require no witnesses. About half the states allow them, but I consider them a very bad idea as a practical matter. They are often not clear or fail to cover everything. Lengthy and expensive legal battles can arise over whether a letter or some other piece of writing by the decedent constitutes a valid will.
Modifying a Will – Codicils
These are amendments to an earlier will. No written additions or changes should ever be made on the original document, however. Instead, a separate page should be prepared, referring specifically to the original will, and signed with the same formalities required of a will in your state.
Keep the codicil with the will and keep it simple. If the desired changes are at all complicated, subject to more than one interpretation, or potentially in conflict with other provisions of the will, it’s better to just start from scratch and do another will. (Remember to destroy the old one to avoid any confusion.)
A Spouse’s Right to an “Elective Share”
Nobody can force you to leave anything to anybody in your will. But in most states you still can’t “disinherit” your husband or wife – unless they agree to it in writing as part of the family estate plan.
If a surviving spouse is dissatisfied with the inheritance specified in a deceased mate’s will, they have the legal right to reject it. Instead of accepting a small inheritance, or none at all, the surviving spouse can instead choose to take a set portion of the estate guaranteed by state law—a process known as renouncing the will, or “taking an elective share“ of the estate.
In many states, this share is approximately equal to a spouse’s intestate share of the estate – what the surviving spouse would have gotten had there been no will at all.
State laws vary widely, but one-third to one-half the estate is the usual range. In the majority of states, a spouse cannot get around this requirement simply by having all assets in their name and transferring them to someone else. If they try this, the spouse who is shortchanged would generally win a legal challenge and eventually get their share. But, of course, that involves a bitter court battle.
The parties can, however, agree to change these rules by agreement either before or even after marriage. That’s what pre-nups are for. (More later.) It would be foolish, however, to try to do this without a lawyer. Likewise, if you feel you have been treated unfairly upon the death of a spouse, the services of a lawyer are indispensable.
(Note that the nine community property states have their own, very different rules on property distribution. All states do, however, offer the surviving spouse some measure of protection against being left impoverished.)
Again, unlike spouses, your children have no legal right to anything under your will. You are under no obligation to treat all your children equally or fairly. Children – or anybody else – can be disinherited entirely.
It is not possible, however, for a deceased parent’s estate to avoid the duty to support their minor children until they reach legal adulthood.
Understanding Trusts
What Is a Trust? Introducing the Roles That Make It Work
We can understand a trust by looking at the roles of the people associated with it and the assets it holds.
A trust is a formal legal relationship involving three distinct roles. Note that while the roles are distinct, the same person can serve in more than one role. Indeed, that is the case in the typical family trust.
- The Grantor (also called the settlor) establishes the trust.
- The Trustee holds and manages the trust property.
- The Beneficiary (or beneficiaries) receives the benefits.
The grantor establishes the trust, and the trustee manages the property for the benefit of the beneficiaries. (Note: For simplicity, we refer to a single grantor here, but a trust can have co-grantors, such as spouses.)
The nutshell definition of the common family living trust is pretty simple:
A trust is a legal arrangement—an abstraction we cannot see or feel. To visualize it, think of a trust as a big barrel into which the grantor pours their assets. The trustee takes care of the barrel and controls the spigot to dispense funds according to the trust’s terms, all for the benefit of the beneficiaries.
With a standard family living trust, you are typically the grantor, the trustee, and the beneficiary all at once while you are alive. You keep total control over your own barrel until you pass away or become incapacitated.
The “Three Hats” Involved in a Living Trust
In a typical family revocable living trust, the grantor is often the primary beneficiary during their lifetime. The grantor may also serve as their own initial trustee.
In other words, while the grantor is alive and well, they simultaneously wear all three “hats”: grantor, trustee, and beneficiary.
Wearing multiple hats can obscure the fact that these three roles are entirely distinct. This distinction usually does not matter while the grantor is alive. They retain total control over the trust property.
However, understanding that these roles are separate becomes important once the grantor becomes incapacitated or passes away. Upon the grantor’s death or incapacity, a successor trustee – a backup named in the trust document – takes over.
Understanding the moving parts of trusts is essential to appreciating the flexibility and utility of trusts in planning for a wide variety of family situations. We’ll look at some of them later on, as well as trusts designed to meet specialized family needs. But first, let’s look more closely at the basic concepts and jargon.
The grantor.
The grantor is the person who creates the trust by signing a written trust document prepared by an attorney or an online service. (Please consider my cautionary note on document preparation services in the Introduction.)
The grantor decides the goals of the trust and sets forth what the trustee should do. (There can be more than one grantor, as often happens with married couples.)
For example, if the plan is to send Noah (the grantor’s son and a trust beneficiary) to college, the trust document would instruct the trustee to pay for it. Alternatively, the trustee might be given discretionary authority to do so, depending on the situation when the boy turned 18.
The grantor also funds the trust by contributing property, such as money or real estate, to the trust (technically, by transferring it to the trustee to be held under the trust).
The trustee.
The trustee has a fiduciary duty – the highest of legal responsibilities – to manage the trust property, keep it safe, and see that the trust property is used only for the purposes defined by the grantor and the trust documents. Of course, a trustee cannot do anything with assets that have never been formally transferred to the trust.
(Note: For simplicity, we refer to a single trustee here, but a trust can have co-trustees. This is usually the case when two spouses create a family trust. In other words, they serve as both the initial co-grantors and co-trustees.)
At some point, assets intended to be owned by the trust must be formally transferred to the trustee; the trustee’s name should be used in the documents of ownership, even when somebody is serving as their own trustee. Real estate deeds and financial accounts must be retitled in order to be owned and controlled by the trust.
For example, let’s assume your name is Jane Doe. To place your mutual fund accounts in a living trust, you would have to change the legal name of the account owner to something like “Jane Doe, trustee of the Jane Doe Living Trust under declaration of trust, dated _____.”
The name of each account reflects that you, Jane Doe, own it as trustee. In addition, financial institutions should require authorization, in the form of the trust document itself, before they will accept instructions from a trustee.
Making these document changes involves a little time, but it does not require a lawyer. Financial institutions do this every day. Just make an appointment at your financial institution(s) and you should be done fairly quickly.
For real estate, you’ll need an attorney to prepare a new deed with the trustee as the new owner – even if the trustee is you. This makes some people nervous. But keep in mind that you are still controlling the trust for your own benefit. So nothing in your life really changes.
Remember, you are wearing multiple legal “hats.” In planning and document preparation, we’re focused on the hat someone is wearing.
In the typical family trust, you and your spouse, if any, would be the primary beneficiaries. So as a practical matter, you would continue to manage your property and spend your money as you wish.
What if you are in poor health and you ask your adult child to serve as your successor (backup) trustee? Should you worry that by titling your property in their name, you’ll be giving it away?
No. You have merely taken off the trustee’s hat and given it to your child as your backup trustee. The trustee has only legal ownership of trust property. You would still be the primary beneficiary.
The law prohibits a trustee (in this example, your child) from using the property for anything but the welfare of the beneficiary (you) and other business of the trust.
The trustee cannot treat the property as their own or use it for their personal benefit. In a family trust, however, an adult child might be a beneficiary while also serving as trustee. In other words, they would be wearing two hats.
So if the trust allowed it, the trustee could make a distribution to themselves, wearing their beneficiary hat.
Clearly, however, when choosing a backup (successor) trustee, the bottom line is that you want somebody who will do what you would have done if you were available to do it. That crucial choice might be a very tall order in your family.
But if – if – you have a good backup trustee – it’s wise not to tie their hands too tightly.
You don’t want overly rigid requirements that don’t allow the flexibility you would have yourself. In other words, it’s usually a mistake to try to rule from the grave.
But yes, you are giving your backup trustee tremendous authority over the hard-earned money and property you have transferred into the trust. That’s why it is so important to make sure your backup trustee is totally competent and trustworthy.
You want someone you can rely on to act prudently, as you would.
Many people choose a close relative who can consult with your financial advisors or lawyer if necessary. (Professional fees are legitimate trust expenses.) Some people with larger estates use a financial institution – maybe their bank – to serve as their backup trustee.
The bank will assign a person or set up a committee to manage your trust, and they’re always under a fiduciary duty to the trust and its beneficiaries (usually you). But institutions have high minimum trust sizes (often $1,000,000), and of course they charge an annual fee. They have asset management expertise – but they don’t know your family.
The beneficiaries.
The beneficiary’s role can be pretty easy. At a minimum all they need to do is accept whatever the trust provides them. In many instances, however, strings are attached: the beneficiary must do something to qualify for their benefit.
That’s the motivation behind many trusts. For example, the trust could stipulate that $25,000 be paid to a beneficiary only if they quit smoking for a year or graduate from college or trade school.
Some attorneys have become quite creative in drafting trusts that give the beneficiaries themselves broad authority over how trust assets will be managed and distributed.
For many, second (or subsequent) spouses present multiple estate and financial planning issues. They may result in combined – “blended” – families with two sets of children. This can present conflicting family priorities that must be addressed. There are an unlimited variety of these scenarios.
For now, just be aware that trusts can be designed very creatively by your attorney to deal with these issues.
How are Typical Family Living Trusts Taxed?
To address one common question: The type of family revocable living trust we are talking about here will not save any money in tax.
The IRS ignores these trusts. There is no separate trust tax ID number. Trust income will be reported using your own Social Security Number. So the typical family trust offers no tax advantages and offers no real protection from creditors. (At best, such a trust will create a minor speed bump for creditors going after your money.)
Why You Still Need a Will, Even if You Have a Trust.
A typical revocable living Trust should be accompanied by a “pour-over” will. This document sends (“pours over”) into the trust “barrel” any assets that were intended to go there, but have not, for whatever reason, been formally transferred to it during the decedent’s life.
As such, they become part of the trust principal and subject to its rules. (E.g., maybe you opened an account years later and just forgot to put it in the trust.)
Note, however, that “pour-over” is just a descriptive name. A pour-over will does nothing more or less than any other will. It deals only with probate property. It does not, for example, override transfer on death (TOD) account beneficiary designations or any other non-probate means of transferring property.
Again, you should always be thinking of how each asset you own fits into the larger, overall plan.
Unfortunately, property designated in a pour-over Will has to go through probate. True, we wanted to avoid this in creating the trust, but at least that property eventually winds up there. (Hopefully, there isn’t much property you have simply forgotten to transfer to the trust, so an expedited procedure will be available.)
Pour-over wills are very simple, and their cost should be included in the price of your trust, whether done by a lawyer or a document preparation service.
Comparing Wills and Trusts – A Few Issues
Resolving Your Post-Death Affairs
There are always a number of post-death obligations that don’t disappear just because you have a trust. So avoiding probate with a trust does not mean avoiding these chores.
A variety of legal, personal, financial, and other very mundane affairs must still be taken care of by your survivors. A certain amount of time and estate money still has to be spent. So for most people in most states, the benefits of a simple living trust are often overstated, as are the problems experienced in the probate process.
But this is a generalization. Many attorneys would disagree with me. Based on their experiences in their states, they’d advise using a trust to avoid probate at all costs.
They might point out that – if your property is already in the name of your trust at the time of death – your successor (backup) trustee will have an easier time than they would have without a trust. This new trustee can step right in and use trust funds to pay bills and make other property distributions directly. There would be no need to go to Probate Court to get formal authority to do so.
That’s why I recommend consulting with someone who will evaluate your situation.
Putting Strings on a Beneficiary’s Inheritance
This is often the biggest factor for people in deciding to create a trust. With a will alone, your probate property is distributed to whoever you choose all at once, within months of your passing.
The will has no control over the money or other property after that. Your beneficiaries are free to do what they want with it. It’s the same for accounts with beneficiary designations, like IRAs, 401(k)s and Transfer On Death accounts – except that these transfers don’t take months – they can happen as soon as the ink is dry on your death certificate.
True, anything given to a minor is subject to oversight by his or her guardian – but only until the child turns 18. Then the kid can take the money and run. We might be talking about tens or even hundreds of thousands of dollars. A lot of people have a problem with that.
For all sorts of reasons, it might also be unwise to give an adult child immediate access to a large amount of cash. Alcohol or drug abuse is one such reason; substance abusers are frequently spendthrifts.
A large inheritance might remove a child’s incentive to work and achieve on their own. A trust, on the other hand, can create rewards for work and achievement by calling for distributions upon graduation from college or trade school, for example.
You can use a trust distribution to reward or pay for any worthy pursuits or life accomplishments you want.
Avoiding the unwanted influence of the child’s spouse is yet another reason to create a trust rather than give an adult child immediate access to money. Even though an inheritance is legally your child’s sole and separate property, as a practical matter, it often doesn’t work out that way.
Instead, an adult child’s inheritance money is often put into a marital household bank account or investment. In that case, it becomes “co-mingled.” It might very well end up passing to your son or daughter-in-law if your child dies before their spouse or split 50-50 upon divorce.
The chance of that outcome can be minimized if you dole out the inheritance in smaller chunks over a period of years – perhaps at certain age intervals (e.g., 25, 30, 35, etc.). You can easily do this with a trust but not with a will.
There are a variety of techniques to keep your money in your family. If that’s a concern, an experienced lawyer will know how to deal with your situation.
You can also protect a child’s future trust payments from their (but not your own) creditors by including a “spendthrift clause.” Such a clause in your trust restricts your child from selling or pledging their interest in the trust. It prevents creditors from seizing trust assets before the trustee distributes them.
It keeps your child (or any beneficiary) from recklessly spending (or selling the rights to) their future inheritance. After someone receives a trust payout, however, their creditors can go after it.
Comparing Costs
A big and legitimate selling point of trusts is that they avoid the costs of probate. Yes, the upfront cost of preparing a trust is greater than that of preparing a will. But people thinking about using a living trust to avoid probate also want to avoid future legal fees.
In many places, probate attorneys may charge a percentage of the probate estate’s value. In a few states, the law even provides a fee schedule.
Even though the percentage is small, this can result in a very large fee for handling a very simple estate. Consider, for example, the attorney’s fee where the Decedent owned just one large bank CD – and failed to designate it as Pay On Death. It would be part of their probate estate, which might pay a hefty fee to a lawyer for doing very little.
If you use a professional or institutional Trustee (a bank, for example) there will be ongoing management fees, however. So, that ongoing Trust expense must be taken into account when Mom and Dad (or other family members) are not serving as Trustees.
Disposition and Ongoing Management of Property
With a will, the executor’s management usually ends soon after completion of their legal duties with a final report to the court. The administration of the decedent’s estate in probate occurs under court authority.
The degree of supervision varies by state, but parties with a legal interest generally have a mechanism for bringing objections about the administration of the probate estate before the court.
This can cut two ways. On the one hand, it makes it easier for “troublemakers” in the family to bicker and make baseless objections in the Probate Court. This wastes the executor’s time and the estate’s money. It worsens family tensions, even if the executor is doing everything right and the objections are silly.
On the other hand, court oversight – even if it’s loose – can be a powerful tool for a will-maker concerned about possible misconduct in the handling of their property after death. Sure, ideally, in choosing either an executor or a backup trustee, you’re looking for trustworthiness and reliability in fulfilling your wishes once you’re gone. But sometimes people’s choices are limited by practical family realities.
The “ideal” person might not be available to serve. If you go with an ordinary living trust, the court won’t be getting any reports from the trustee.
With that in mind, consider whether a will – and the supervision of the Probate Court over your executor – might be a good idea after all.
If the executor is acting unfairly or committing outright misconduct, there is already a Probate Court judge assigned to the case. A complaint can be lodged and dealt with right there.
We have already discussed in Chapter One another option when the perfect executor or trustee is not available: Use non-probate transfers (e.g., TOD and POD accounts) to the greatest extent practical. That way there will be no “middleman” between your money and the person(s) you intend to pass it to.
(Of course, this is still a bad idea if the beneficiaries are young children or irresponsible adults. And remain mindful of the pitfalls of these accounts we discussed.)
With a living trust, on the other hand, there is little or no court involvement upon the grantor’s death unless legal action is taken against the trustee. This is often a much slower and less practical remedy for a beneficiary with a legitimate grievance than they would have in Probate Court.
One consideration in deciding between a will and a trust is this: The point of estate planning is to settle your affairs and transfer your property as desired. You want this to go as quickly and smoothly as possible. Will the Probate Court be a necessary watchdog against possible misconduct or just a time-consuming obstacle?
Everyone’s situation is different, but this issue should be kept in mind when you (hopefully) discuss your estate planning with a lawyer. You can help your lawyer by identifying any possible problem situations or family members in advance.
Ownership of Property in Multiple States
If you own out-of-state vacation, farm or rental real estate, consider a living trust for that reason alone. If that property has already been transferred (by a deed) into your trust, it can be sold or distributed upon your death much more easily than if it is titled in your individual name.
In the latter case, your real estate must go through Probate Court in the state where it is located. This process is called ancillary probate, and it is in addition to the probate in your home state. Even though that process is not a huge problem in most places, it can become an expensive hassle if nobody is living in the ancillary probate state to handle it.
But remember the growing trend mentioned earlier: A Transfer on Death deed might be available in that state. If so, re-doing your deed so that it’s TOD will also save your beneficiaries a trip to Probate Court in that state. So that’s something to check.
Time and Privacy
The process of probating a will takes time and at least a couple of trips to court. Three to six months is a common delay mandated by state law before the decedent’s probate assets may be doled out according to the will. The executor is required in many states to give written notice to known creditors of the decedent.
Notice of the decedent’s death will also be published in public legal notices – in print and online. Creditors and debt collectors regularly check the legal notice section.
During this several-month waiting period, anyone with any sort of claim against the decedent must come forward or be cut off. After this cut-off date, the executor may distribute your property, and it becomes extremely difficult for a would-be creditor to assert a claim against your estate.
That precise cut-off date gives the executor comfort that they can move forward, wrap everything up, and ask the court to formally close the estate.
Meanwhile, the backup trustee of your trust is free to begin distributing property immediately after your death. Some people view this as a big advantage of trusts. Of course, a huge legal mess will unfold if your backup trustee distributes everything and leaves the trust empty before paying all the decedent’s debts or other valid claims against them.
The possibility of a lawsuit against you – perhaps based on a car accident a few months before your death – is a good example of something to keep in mind.
Good luck if the trustee has paid out all the cash and later has to hire a defense lawyer. An absolute nightmare will result.
Note that a few states have laws allowing trustees to publish creditor notices to trigger a similar creditor cut-off clock. If your state authorizes a trust cut-off clock, make sure your backup trustee is instructed to use it upon your death.
Since probate is a public proceeding, however, some of the decedent’s personal and financial information could be discovered by someone nosy enough to look for it. (E.g., your real estate, next of kin, etc.)
The rich and famous might be concerned about this. They often use trusts and other legal structures that don’t have to be revealed to anyone. Their financial situation remains private. But in the typical family case, does anyone really care?
How many of us have ever gone to the local Probate Court clerk’s office to look up somebody’s will or estate inventory out of pure nosiness? In my experience, privacy alone is seldom much of a motivating factor in the decision to use a living trust.
(Note that states do have procedures for redacting personal information like Social Security numbers from publicly filed documents.)
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