Conniving attorneys and bankers discussing million-dollar trusts for numerous individuals and deciding which restrictions to impose on a gift to a ne’er-do-well relative come to mind when one thinks about estate planning. However, this is not always the case. Even persons with modest wealth may save their loved ones a lot of grief by preparing an estate plan and will that specify what happens to their possessions after they die.
What constitutes your estate?
Your “estate” includes everything you possess, including all of your property and property rights, as well as assets that have debts against them. They do not perish when you do. Because a deceased cannot possess property, they must be transferred to the ownership of a surviving beneficiary.
Who Has a Will? Statistics
According to a 2020 poll conducted by Caring.com, the number of individuals who have wills has been progressively falling since the millennium. In 2020, over 25% fewer American people had wills than in 2017. Even the elderly are less likely to have wills. Their number fell by 20% in 2019, and there were 25% fewer middle-aged persons with wills during same time period. 1
Living Trusts: Revocable vs. Irrevocable
Living trusts may be revocable or irrevocable.
Once assets are put into an irrevocable trust, they cannot be modified. They cannot be cancelled or reversed—the asset transfer is irreversible. However, irrevocable trusts often have the best estate tax effects.
As the trustee of a revocable trust, you maintain authority over the assets you transfer into it throughout your lifetime. This sort of trust may provide you a lot of freedom over the course of your life, including the opportunity to revoke or dissolve the trust as your requirements change. You may name a successor trustee to take over in the event of your incapacity or death.
When You Pass Away With a Will
In your will, you will name an executor. The executor is the person in charge of managing your estate through the probate procedure and ensuring that your intentions are followed out.
Leaving a will guarantees that your preferences, if feasible, are carried out and that your property is dispersed in the manner you choose. It may also make estate probate considerably simpler.
Wills vs. No Wills
In most jurisdictions, surviving spouses come first, followed by the decedent’s children, then parents, siblings, and ultimately more distant relatives. Individuals who are not connected to the dead are completely excluded.
If you die intestate—without a will—your loved ones will face a judicial case. Intestate estates still need probate, but since you did not leave a will, state law is used to decide who receives your property.
Specific Purpose Trusts
There are several sorts of trusts, and your state’s laws will decide which of them are recognized. Trusts are subject to several federal rules as well, notably in terms of how they are taxed for estate tax reasons. Federal estate taxes may be levied if the property’s value reaches a specified threshold.
- A spendthrift trust may be used to protect your assets by allocating bequests slowly and under specified conditions to heirs who are less than fiscally prudent.
- A special needs trust guarantees that an heir with special needs has enough assets to meet those requirements without risking government assistance.
- A life insurance trust collects and distributes insurance on the grantor’s life to beneficiaries. It is permanent and may be utilized to avoid estate taxes.
- A QTIP trust provides income for a spouse and then distributes the remaining assets to other heirs.
If there is no need to legally transfer title to the property, certain assets may pass immediately to an heir. Personal property, such as furniture and jewelry, seldom has paperwork to prove ownership.
Assets Transferred Outside of Probate
Even if you leave a will, certain assets will transfer immediately to your heirs outside of the probate procedure.
- If you are married and reside in one of the community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Wisconsin, or Washington), your spouse will assume sole ownership of at least their share of community property.
- Some assets transfer automatically because they are contractual in nature—you named a beneficiary who will inherit your estate when you die. Life insurance profits, annuities with death payouts, and many retirement funds are examples.
- Bank accounts sometimes have “payable on death” terms that enable you to choose a successor.
In each situation, there is no need for a probate court to intervene since the account already has a legal mechanism of transferring to your beneficiary or successor.
Trusts’ Role in Estate Planning
Trusts are often used in estate planning to benefit from advantageous tax treatment, to impose constraints on the use or distribution of assets, or to enable heirs to take control of assets without going through probate.
A trust is a legal body or arrangement that enables you, the grantor or donor, to transfer property to someone known as the trustee for the benefit of a third person known as the beneficiary.
The assets are held in trust by the trustee. They have a great deal of responsibility for ensuring that the assets are kept for the beneficiaries.
A living trust is established throughout your lifetime and allows you to protect and keep control of your assets even if you become disabled. If you are unable to make choices on your own, it may eliminate the need for a guardianship or conservatorship.
Administration of Intestate Probate
Every state has its own plan that governs the processes of intestate administration, although the normal procedure is as follows:
Someone files a probate court lawsuit.
- When there is no will, the court chooses an administrator rather than an executor, who is frequently a family member or heir.
- The administrator collects the deceased’s assets, names heirs, and informs creditors.
- The administrator liquidates estate assets to settle the deceased’s obligations, taxes, and estate administration charges, such as attorney’s and accountant’s fees.
- The administrator distributes the remaining money and assets in accordance with the state laws governing intestate succession.
Because the administrator is normally obliged to gain approval from the court for each of these steps, intestate administration is sometimes a long, inefficient, and costly affair. The administrator will devote a significant amount of time to getting court orders and attending hearings. An intestate administration might take up to two years.
Wills and trusts may be used to achieve a variety of aims and are as adaptable as your requirements and preferences need. Ensuring that your needs and intentions are met requires meticulous preparation in terms of selecting the proper trusts or provisions for your will.