"You can't take it with you when you go." Familiar, isn't it? While this statement is true, you can and should do your best to control your assets from beyond the grave. If you're unable to do so, there may be obstacles in the management of your estate. Those obstacles may significantly reduce the benefits your heirs would otherwise enjoy.
Possessions and monies passing from one spouse to the other are generally not an issue. The unlimited marital deduction provision within the United States Estate and Gift Tax Law allows the passing of wealth to a surviving spouse without incurring gift or estate tax liabilities. The transfer process becomes much more involved, however, when wealth is passed to a subsequent generation. Provided that assets that are held individually are properly titled, this process should be seamless. Planners have, however, seen some significant mistakes on titling of assets held individually as well as beneficiary designations that would be sure to upset even the happiest of homes. (For a background understanding of this process, see "Estate Planning: Estate Planning Basics.")
For the purposes of this article, we will examine the transfer of assets to a subsequent generation – children, grandchildren, etc. Of the various situations dealt with in estate transfer conversations in planners' offices, some outstanding ones include the following: a case in which a person's ex-spouse was listed as a beneficiary on an account with significant assets held therein; the case of a multimillionaire who had no estate transfer plan in place; and the case of a multimillionaire with 23 accounts held at more than seven brokerages with eight different advisors with a trust that was funded only with property. What is certain is that a vast fortune could easily be imperiled if the holder of such wealth does not consider the dynamics of an estate transfer.
The Probate Problem
One stop you should avoid on the estate-transfer train is the probate court. This is where your heirs could be spending months sorting out your estate if your plans for transfer are not efficiently laid out. You could easily lose an additional 2% to 4% of your estate due to attorney fees and court costs.
Probate court is the section of the judicial system responsible for settling wills, trusts, conservatorships and guardianships. Part of that process might involve examination of a testamentary will (or just will), which is a legal document used to transfer your estate, appoint guardians for minor children, select executors of wills and set up trusts for your survivors.
Your executor would still be responsible for sorting out the estate, which could take next six to 18 months depending on the intricacies. Imagine your eldest child spending the next year and a half traveling back and forth to court hearings when he or she should be mourning your passing. It doesn't sound fun, but it's a possibility if you're not prepared for this life-altering moment. (For related reading, see "Property Titling and Transfer: Probate Strategies.")
If you have minor children at home, consider a will that appoints guardianship of your children. If a guardian is not appointed at the time of death, your surviving family will have to seek help in a probate court to have a guardian appointed for your children. The person appointed may not be whom you would have wanted to be entrusted with your kids.
Something else to consider is how you'll pass a portion of your estate to a minor child through a will. A will places your decisions in the hands of the judge presiding over your estate transfer. Your testamentary will carries out your wishes from beyond the grave. A will also allows you to give insight and direction over the handling of assets your beneficiaries will be receiving. (For related reading, see "Estate Planning: Introduction to Wills.")
Within reason, you can address how you would like them to use what you have left them. While children, natural or adopted, have a statutory right to inherit, a will allows you to disinherit a child if necessary (check your state laws for the specific details about this). A person can disinherit a spouse as well, under certain circumstances. However, you will need to be aware of the laws governing your state, whether it be a common law state, community property state or an equitable distribution state; a person may only disinherit a spouse in a community property state. Each has a different set of stipulations on what and how much can be disinherited. It must also be noted that a person can only disinherit a spouse or a child through a will.
Seek legal counsel in the creation of a will. A will can be effective in estate transfer and other legal proceedings after death, but there are drawbacks you should be aware of. For instance, your estate will become part of public record, and anything left by a will MUST go through probate court. Also, probate attorneys can be expensive and cannot be avoided, with the exception of California and Wisconsin. (For more, see "Skipping out on Probate Costs.")
There is another method of estate transfer produced by means of the creation of a trust. A trust is created for a variety of functions, and there are many types of trusts. There are, overall, however, two categories: living and testamentary. A will can be used to create a testamentary trust. You can also create a trust for the primary purpose of avoiding probate court called a living revocable trust.
Now, let's focus on a living revocable trust for the purpose of estate transfer. Like a will, a trust will require you to transfer property after death to loved ones. It's called a living trust because it's created while the property owner, or trustor, is alive. It is revocable, as it may be changed during the life of the trustor. The trustor maintains ownership of the property held by the trust while the trustor is alive. The trust becomes operational at the trustor's death. Unlike a will, a living trust passes property outside of probate court. There are no court or attorney fees after the trust is established. Your property can be passed immediately and directly to your named beneficiaries.
Trusts are fairly inexpensive to create. A person called a trustee will be named in the document to control the distribution of assets according to the wishes of the trustor in accordance with the trust document and its mandates. This is also an effective way to control the passing of your estate beyond the grave. To be valid a trust must identify the following: the trustor, the trustee, the successor trustee, and the trust beneficiaries.
A declaration of trust will also provide the basic terms of the trust. Your estate stays private and passes directly to your heirs; you don't pay a probate attorney or court costs, and your loved ones won't potentially be tied up in probate court for what may be a year or more. From this planner's perspective, a trust can be a fantastic choice for estate transfer. (For related reading, see "Estate Planning: Marital and Non-Marital Trusts.")
The Bottom Line
Whether you choose a will or a trust, you should seek the advice of your trusted professional advisors (tax, investment and legal). Please explore which is right for you. If you don't have an estate transfer plan, the state in which you live and the federal government will have one for you. So making this a priority now can save money and precious time later.