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. There are plenty of attorneys who act as if anyone without a Living Trust is crazy. (In some states and situations, they’re probably right.)
On the other side are some who say that a Will is all anyone needs 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. 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 with respect to your property?
Wills and Trusts are just tools and nothing more. They are not unrelated or mutually exclusive options.
An issue we all share is that our affairs will have to be wrapped up – something that 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 Trustee – the person in charge – can be the “wrapper-upper.” (We’ll look at Trusts shortly in more detail.)
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 he or she is strictly forbidden from giving themselves preferential treatment or taking advantage of their position.
As for Trusts, in most family Trusts, 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. Usually – but not always – they are also serving as their own Trustees. So, as a practical matter, they can do whatever they want with the property they have transferred into the Trust.
They don’t have to be concerned about not giving themselves “preferential treatment;” It was their money to begin with.
Whoever else you might pick as Trustee or Successor (an alternate – a “backup”) Trustee, has 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 come to your rescue. (Some police departments, however, do have a unit dedicated to investigating financial exploitation of elders.)
Many people choose a close relative as Executor or Successor (backup) Trustee who can consult with your financial advisors or lawyer if necessary. (Professional fees are legitimate expenses in wrapping up your affairs.) Failing to name an Executor or Trustee to make decisions – even seemingly minor ones – often leads to resentment and family discord.
That’s because the judge will have to choose somebody in the family if you do not. That person might not be the best choice, for all sorts of reasons.
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.
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. 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. Some or all of the following information will be required:
- Your Social Security number
- Your username, passwords and any other login information to access your online financial and social media accounts. (This is vital to avoid losing cryptocurrency assets forever!)
- 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
- Checkbooks 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 Trust
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 use of the formal non-probate techniques 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 he or she is not a psychic, 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 in your Will. (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).
(Note 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 social media accounts. Most states have laws that automatically give Executors some form of this authority. But check on exactly what your state laws says about this.
Again, your Executor is your “wrapper-upper,” so he or she 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 Executor should also be named in case your first choice becomes unable or unwilling to do the job.
Make Specific Bequests to Beneficiaries XXXXXXXXXXX
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.”
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.
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.
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 generally disfavor testamentary Trusts, but many lawyers routinely use them. I prefer Living Trusts, which we will examine shortly. But there can be advantages to a testamentary Trust and some clients feel more comfortable with them.
A lot depends on your state and circumstances. This is yet another reason why 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. 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, however, they have priority in seeking Guardianship and custody of the kids – 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 ends at age 18. The child will then have full access to any money you have left them. In almost all cases, it’s a bad idea to leave much money to a young person with no strings attached. But you know your family and I do not.
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 (in a few states, three) witnesses.
Such a Will is said to be “self-proving” if it contains a notarized blurb 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. 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, knows he or she is signing their Will and has asked the witnesses to so affirm. A beneficiary under the Will should absolutely not be one of the witnesses.
If you call ahead, your bank will be happy to round up a couple of warm bodies to serve as witnesses and provide a notary, all at no charge. 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.
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 (almost) Will 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 reason or go into details. 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 popular belief, 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 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 arise after death: Did the Decedent-Testator make their Will with sound mind to repay the kindness of their caretaker – or were they coerced or persuaded – “unduly influenced” – by the caretaker?
Did the relationship between the Testator and the person accused of undue influence develop only recently or was it a long one? Did this person try to limit or obstruct contact and communication between the Testator and others, especially family? Was this person involved in the actual writing of the Will?
With the Testator no longer around to resolve these questions, the court is in a very difficult position trying to make a decision when the children very often challenge 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.
Allegations of undue influence are among the most common basis 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, “it won’t be my problem,” then so be it. But many people feel unease at the end of life knowing that they are leaving behind a likely family war in court.
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. Some states allow them, but I consider them a very bad idea as a practical matter. They might not be clear or 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 “Renounce” a Will
You’re not obliged to leave anything to anybody in your Will. But 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 not satisfied with a deceased mate’s Will (or Trust), they can renounce it.
Rather than accept whatever, if any, inheritance the Will or Trust specifies, the surviving spouse can elect to take a share of the estate that is spelled out by law in every state. 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, but one-third to one-half the estate is the usual range. A spouse cannot get around this requirement simply by having all assets in his or her name and transferring them to someone else. If they try this, the spouse who is shortchanged would win a legal challenge. 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.
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. Unlike spouses, 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 her minor children until they reach legal adulthood.
Understanding Trusts
What Is a Trust? Introducing the Roles That Make It Work
This discussion is focused on the common, plain vanilla family Trust of interest to most readers here. The biggest advantage of a Trust is arguably that the property it holds avoids going through Probate Court.
For many, second (or subsequent) spouses present multiple estate and financial planning issues, such as conflicting family priorities that must be addressed. There are too many to deal with here. Just be aware that a Trust can be used very creatively to deal with these issues.
Trusts address different present and anticipated personal life situations. That is why they are so useful and important. Remember the obvious – a Will doesn’t do anything for you and your family while you’re still alive.
To understand what a Trust is and how it operates, it’s useful to break down the roles (i.e., “hats”) of the people associated with it and the things it owns. Because the roles are intertwined, explaining them involves a certain amount of “circularity.” But bear with me, it’s really not that complicated. A Trust is simply a legal relationship among three parties:
The Grantor (often called the Settlor or Trustor) establishes the Trust. That’s you and your spouse, in the typical family Trust scenario.
The Trustee administers it, according to the terms of the Trust document. The Trustee is also usually you – while you’re able to handle it. If you become disabled or upon your death, a Successor Trustee – your backup – steps in and (hopefully) the Trust keeps rolling without a hitch. More below.
A Trust can also be used to deal with your future disability or incapacity – You can simply step aside and let your Successor Trustee manage things. (There is another way to do this, as well, for those who don’t have Trusts – the Power of Attorney. We’ll examine that shortly.)
The Trust is administered for the benefit of one or more beneficiaries (again, you and your family or a charity).
For a mental image, think of a Trust as a big barrel into which the Grantor pours (formally transfers) their assets – which may be of any kind.
The Trustee takes care of the barrel and its contents and controls the spigot to dispense property as the Trust document directs – e.g., at specified ages or for specified uses, like college. All Trust distributions are for the exclusive benefit of the beneficiaries.
Since the same person(s) can play multiple roles (i.e., wear multiple hats) in a Trust, sometimes this seems confusing. In most family Trusts, the Grantor(s) – spouses – are also the Trust beneficiaries until death. They often also wear the hat of Trustee, at least while healthy and able. That’s all three hats!
But wearing these multiple hats can obscure the fact that the three roles – Grantor, Trustee and beneficiary are quite distinct. (Many clients forget all about the various “hats” as soon as I explain them. After all, normal people don’t think like lawyers.)
Again, note that this Crash Course deals almost exclusively with revocable living Trusts. They are created by the Grantor(s) while alive – not upon death by the Grantor’s Will. So they can be ripped up – revoked – anytime the Grantor feels like it.
There are also irrevocable Trusts, which are distinct entities for tax purposes and cannot just be ripped up. The Grantor has very limited control over it after signing it. Obviously, testamentary Trusts (created in a Will) are irrevocable because the Will-maker is no longer with us. (But you can, of course, change your Will and any testamentary Trust in it while still alive.)
There are other specialized Trusts which are irrevocable. Many of these are used for estate tax planning. We won’t deal with them here.
Let’s dig a little deeper into the basics – things that all Trusts share.
One point at the outset: Any Trust you control will not save any money in tax.
The IRS ignores them. 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.)
The Grantor(s)
The Grantor is the person who prepares the Trust document – usually with the help of an attorney. The Grantor decides the goals of the Trust and sets forth what the Trustee’s legal duties are. (Depending on those goals, that might or might not be possible with online services. Document preparation software or websites can be fine for simple, straightforward Trusts. Just be sure you know that’s what you need.)
For example, if the Grantor’s plan is to send little Olivia and Noah to college, the Trust document would instruct the Trustee to pay for it. Alternatively, the Trustee might be given discretion to do so, depending on the situation when each child turned 18.
The Grantor(s) also contribute property, such as money or real estate, to the Trustee, to be managed and used solely on behalf of the Trust beneficiaries – who usually are you and your family. That contribution is called the Trust principal or corpus. The Grantor should create one or more Trust financial accounts and fund them by transferring cash, stock, etc.
This means that accounts and other documents of ownership must be formally re-done. For example, the new owner might be “John and Jane Doe, as Trustees of the Doe Family Trust, UDT January 2, 2026.” (UDT stands for “Under Declaration of Trust.”)
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 in an hour.
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.
Again, this arrangement can be somewhat confusing, because the “transfer” of funds or real estate is from two human beings – Mom and Dad – to themselves! But remember, Mom and Dad, in this example, are wearing multiple legal “hats.” Remember, in planning and document preparation we’re focused on the “hat(s)” someone is wearing.
The Trustee(s)
The Trustee has a fiduciary responsibility – the highest duty under the law – to do two things: First, the Trustee must manage the Trust property and keep it safe.
Secondly the Trustee must see that the Trust property is used only for the purposes stated by the Grantor in the Trust document. Self-dealing is basically just stealing, and it is strictly forbidden by law.
Again, the initial Trustees are almost always Mom and Dad, doing exactly what they’d be doing anyway, without a Trust. But broadly speaking, a family creates a Trust to provide for ongoing property management and to put “strings” (conditions) on distributions.
That’s because Mom and Dad won’t be around forever. They might be planning for premature death by tragic accident or illness, especially if they have young children. And in some families, later in life, Mom and Dad become disabled or just don’t want to manage things. In any of these scenarios, the Successor (alternate) Trustee takes over. That Successor is named in the Trust document.
In choosing a 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’s why – if you have a good Successor Trustee – it’s wise not to tie their hands too tightly with overly rigid requirements that don’t allow the flexibility you would have yourself. In other words, don’t try to rule from the grave.
So it’s worth repeating: Make sure your Successor Trustee is trusty. You are giving that person a lot of authority over the hard-earned money and property you have transferred into the Trust. 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 to serve as the Successor Trustee.
They’ll designate a person or set up a committee to manage your Trust, and they’re always under a legal duty to keep them honest. But institutions have high minimum Trust sizes (usually at least $500,000) and of course they charge an annual fee. They have asset management expertise – but they don’t know your family.
The Beneficiaries
In most family Trusts, Mom and Dad are the initial beneficiaries. So if they are also serving as their own Trustees, they can do whatever they want with property they have transferred into the Trust.
Being a Trust beneficiary is a great gig if you can get it. At a minimum, all a beneficiary needs to do is accept whatever the Trust provides them. The Trust might specify ages at which all or part of the Trust funds should be distributed, e.g., at 25 or 30 years old.
Alternatively, it might give the Trustee (or Successor) discretion as to those distributions. In some cases, other strings are attached:
The beneficiary must do something to qualify for their benefit; His or her gift from the Trust is designed to serve as motivation. For example, a Trust could stipulate that $25,000 will be paid to a beneficiary only if they quit smoking for a year or graduates from college or trade school, with all the costs to be paid by the Trust.
A typical revocable living Trust should be accompanied by a “pour-over” Will. This document sends (“pours over”) into the Trust any assets that 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.)
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 one has simply forgotten to transfer to the Trust.)
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 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 a professional 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 whomever 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 use 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” and might very well end up passing to your son or daughter-in-law if your child dies before their spouse.
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.
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 charge a percentage of the probate estate’s value. (Five percent is common.)
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 huge 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 cost has to 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 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 level of supervision varies among states, but the court always has jurisdiction to hear objections from beneficiaries regarding the handling of the probate estate.
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 supervision can be a powerful tool for a Will-maker concerned about possible misconduct in the handling of his or her property after death. Sure, ideally, in choosing either an Executor or a Successor 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 a Trust, the court won’t be watching 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 or Administrator 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 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.)
With a Living Trust, on the other hand, there is little or no court involvement upon the Grantor’s death unless a lawsuit is filed against the Trustee. This is 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 recent development mentioned earlier; A Transfer on Death deed might be an 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 the newspaper – 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. 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.
Since probate is a public proceeding, however, some of the Decedent’s personal and financial information could be discovered by someone nosey 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, who cares?
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.)
Meanwhile, the Successor Trustee of your Trust can begin distributing property immediately after your death. Of course, a huge legal mess will unfold if the Successor 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 the Decedent – perhaps based on a car accident a few months ago – 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.