Estate Planning Basics: Wills and Trusts

Designing an effective estate plan is a very personalized process.  Many of the tools attorneys will use to help you transfer your assets on to your children and heirs have been around for centuries, but the way in which they are arranged can be different for every person or family.  You have probably already heard of and have some familiarity with Wills and Trust.  What follows below is a very basic sketch of these common estate planning tools.

Wills:

A will is a document that has no legal effect until you die.  For that reason, snooty lawyers refer to them as “Testamentary Instruments.”  Wills have been the traditional way in which property is transferred at death.  Increasingly, wills have taken a back seat to revocable living trust as the primary estate planning tool.  One of the reasons for this is that, at least in California, if you have more than $100,000 worth of assets pass via your will, your whole estate becomes “probated.”

Probate is a court-supervised administration of your estate.  This is generally disfavored because it takes a long time, costs more money, and can expose your assets to general public knowledge.  Alternatively, planning through a trust can be quicker and less expensive to administer at death, and is far more private.

This is not to say wills are not necessary.  Many estate planners use what is called a “pour over” will in conjunction with a revocable living trust.  What this means that is although a large portion of your estate is held in the trust; there will always be some assets and accounts you keep outside of the trust.  For instance, it would be too cumbersome to have your personal checking account be held in trust.  That is where the pour over will comes into play.  When you die, all of those miscellaneous assets outside of the trust get poured into the trust to be administered.

Trusts:

A trust is essentially an agreement whereby one person agrees to hold and own property for the benefit of another person.  It is a splitting of the ownership and enjoyment in an asset.  There are three major players in a trust: 1) a Settlor or Grantor; 2) a Trustee; and 3) a Beneficiary.  A Settlor or Grantor is the person who creates the trust, and who funds the assets into it.  The Trustee is the person who owns the assets in the name of the trust, and administers those assets for the benefit of the Beneficiaries.  Although these are legally distinct “offices”, the same person can be all three.

This is commonly the situation with a revocable living trust for a family.  Mom and Pop are the Settlors, who administer the trust during their lifetime as Trustees, for their own benefit as Beneficiaries.  The roles change when one or both of the parents die, but the principals remain the same.

There are many different varieties of trusts that perform a myriad of different functions.  One of the most widely-used trusts is a Revocable Living Trust.  Such trusts are “Living” because they are established by the Settlors during their lifetime, and not at death via a will (this is called a “Testamentary Trust”).  Such trusts are “Revocable” because, unsurprisingly, they can be fully revoked and cancelled by the Settlors (prior to death, at least…zombies cannot revoke trusts).

Revocable living trusts are popular because they can help avoid probate.  Any assets put into such trusts are not valued for probate purposes.  So if you have less than $100,000 outside the trust, even if you have millions inside, your estate can avoid probate.  Living trusts are also desirable for tax-planning.  If drafted properly, they can help you take full advantage of estate tax exemptions (especially if you are married).

All of these benefits of wills and trusts come with a serious element of danger, however.  If drafted incorrectly, or if improperly funded or administered, your estate can become exposed to significant tax liabilities.  Worse still, an improperly drafted estate plan that fails to anticipate contingencies can cause serious family turmoil.

Our law offices represent clients in Chico and Redding and the surrounding Northern California communities for their estate planning and asset protection needs.  If you have any questions or would like a consult, please contact our law firm at 530-345-2212 or info@ajstewartlaw.com.