The Importance of Estate Planning
It is important for every person to have a proper estate plan in place, but, for a number of reasons, people often have no estate plan at all or, if they have one, it is inadequate. A proper estate plan should allow you to control your property while you are alive and well, take care of yourself and your loved ones if you become disabled, and then at your death allow your property to go to those you want, when you want, and in the way you want, while saving as many tax dollars, court costs and professional fees as you can.
If you make no plans at all, then you will die “intestate.” State statutes exist for those who die intestate, and the “decedent's” property is distributed according to the dictates of these statutes. Obviously, dying intestate means that the decedent has no control over who gets his/her property or how the property is distributed. The decedent's property may be divided up among people the decedent did not intend. Or, even if property does go to those that the decedent intended, they may receive the property in amounts or in ways that the decedent did not want.
For those who do have estate plans, their estate plans may not be adequate because their plans are fixated only on death taxes and the distribution of property at death. Proper estate planning is much more than just death and tax planning. Proper estate planning also includes life planning for one's self and one's loved ones. This does not mean that death and tax planning are not critical components of a proper estate plan, but they should not make up the plan's entire focus.
Many people plan their estates using a last will and testament (“will”). A will can be drafted to minimize the effect of death taxes on your estate and to eventually distribute your property to your beneficiaries. However, the major shortcomings of a will are that it requires probate administration, compromises privacy, and has no usefulness during life.
Once there is a death, for it to have any effect, the will must be filed with a court and undergo formal court proceedings called “probate administration.” The administration of a will is handled by a personal representative, who is the person or entity appointed in the will and approved by a court to carry out the tasks of winding up the decedent's affairs, collecting all of the decedent's property, paying claims and expenses, and then distributing the remaining property to the beneficiaries named in the will.
There are several disadvantages to probate administration. Probate administration can take from many months to several years to complete. Added to the delay of probate is the cost of probate. Probate administration is a legal proceeding, and like all legal proceedings, the estate will incur attorney fees and court costs. If one dies owning real estate in more than one state, then the will must be probated not only in the state where the decedent last resided, but also in each state where the decedent owned real estate (“ancillary probate”), thereby adding to the delay, complexity and cost of probate. Probate administration is open to the public, and anyone may examine the court records to learn about the contents of the will, the property owned by the decedent, the decedent's beneficiaries and what they inherit, and the decedent's last debts.
A much more efficient and cost effective alternative to a “will based estate plan” is a “trust based estate plan” using a revocable living trust. A trust based estate plan is not suitable for everyone, but for many estates a trust offers great advantages.
A revocable living trust is an arrangement between the person who creates the trust (called a grantor, settlor or trustmaker) and a trustee who holds legal title to all of the property that is put into the trust. The trustee follows the directions put in the trust agreement by the trustmaker and administers the trust property for the benefit of the trust's beneficiary / beneficiaries. Revocable living trusts normally start out with the trustmaker, trustee, and beneficiary all being the same person. A husband and a wife can create a joint revocable living trust, and thus serve together as the trustmakers, trustees, and beneficiaries.
During the life of the trustmaker, the trust can be amended or revoked at any time and property can be freely put in and taken out of the trust at the discretion of the trustmaker. Therefore, a revocable living trust allows a person to keep complete control of his property while alive and well.
Unlike a will, a living trust can perform a critical lifetime function: it can provide a plan for care upon a trustmaker's incapacity. When a revocable living trust is created, the trustmaker can choose his/her successor trustees. A spouse or other family members, close friends or trusted advisers can be chosen as successor trustees. When the trustmaker becomes incapacitated, the person selected as the successor trustee takes over the administration of the trust and begins administering the trust property for the benefit of the incapacitated trustmaker and his/her dependents. There is no need to open a guardianship for the purpose handling the trustmaker's financial affairs. The trust is private, and no one other than the trustee and the trust beneficiaries need know about the terms of the trust or the property held by the trust.
In contrast, a will provides no assistance in incapacity planning. A guardianship often becomes necessary for the handling of the incapacitated person's financial affairs. Guardianship proceedings are a form of probate proceedings and can be thought of as “living probate”. A petition to open a guardianship is filed with a court. Notices are sent by the court to the nearest relatives and a hearing is held before a judge for the purpose of appointing the guardian. The judge decides who is the appropriate guardian and may order the guardian to post a bond. After the guardian is appointed, the guardian must file an inventory of all of the incapacitated person's property with the court and then must administer the guardian's financial affairs with the court's supervision and approval. Guardianships can last for a substantial time and may become very expensive.
With a revocable living trust, when the trustmaker dies, there is no need for probate administration for trust property. Like in the case of a trustmaker's incapacity, the successor trustee takes over the administration of the trust property and, without court involvement, winds up the deceased trustmaker's affairs, pays his/her debts and taxes, and distributes the property according to the directions left by the trustmaker in his/her trust. There is no need for ancillary probate for real estate owned by a trust. There is no requirement to file the trust with any court, thereby allowing the trust to remain private. Privacy can be maintained as to what property is in the trust, who the beneficiaries are, and what the beneficiaries receive by way of property distributions. A trust can be designed not only to minimize death taxes but to allow the trustmaker to give his/her property to those he/she wants, when he/she wants, and in the way he/she wants.
The revocable living trust is powerful for both life and death planning.
SOURCE: LawWarsaw.com
