Essentials
Essentials of Wealth Transfer
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Understanding Probate, Wills, and Trusts

When people think of what happens to their property at death, they usually think of wills and probate. However, with more people using vehicles that aren’t subject to probate, such as life insurance and revocable living trusts and retirement plans, going through the probate process is not only optional, it sometimes doesn’t happen even when the decedent wants it to.

For certain property to be passed on at death, a person’s will must be “probated,” meaning it must go through a legal process to establish the validity of the will. Historically, the probate process was expensive and drawn out. While this perception continues, many states now have a much more streamlined probate process.

Advantages to the probate process:

  1. The probate process provides a ready legal forum in which to test the will’s validity.
  2. If the decedent died with outstanding creditor issues, probate offers a clearly defined process for addressing them.

If a person dies without a will or trust, much single-ownership property still passes under the probate process. But in this situation, it passes according to “intestacy,” the state law that dictates where property passes if a person dies without a will (and if the property does not pass through some other means, such as by survivorship). Many state laws provide that intestate property generally passes to your close relatives, beginning with a surviving spouse, then to children, then to parents, and so on. Consult with your estate planning attorney to understand the state laws that may impact you.

Infographic outlining the basics of probate, wills, and trusts. For details, click "view text alternative."

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Understanding Probate, Wills, and Trusts

What is probate?

Probate is a court-supervised process that verifies the will’s authenticity, pays off any outstanding bills, and distributes the estate’s assets.

What are the drawbacks?

Probate can be long and expensive; here are some things to keep in mind:

  • Probate proceedings are a matter of public record
  • Property in different states requires individual probate processes, which may require multiple probate court proceedings in different states

What is a will?

Foremost, it is a legal instrument. A will permits a person—the testator—to direct how his or her estate will be managed and distributed after his or her death.

Why choose a will?

  • Simplicity during your lifetime
  • Choice in guardians for your children
  • Control over how your assets are distributed
  • Typically less expensive to establish than a trust
  • You anticipate a challenge to your estate and want to make your intentions clear
  • You prefer not to use trusts

What is a trust?

A trust is a legal arrangement that involves three parties: the grantor of the trust, the trustee, and the beneficiaries.

Why choose a trust?

  • Assets are owned by the trust, not your estate
  • If you become unable to handle your affairs, a co- or successor trustee can take control
  • Upon your death, the property passes according to the trust terms, without going through probate

Revocable Living Trusts and Funding Them

A trust is a legal arrangement involving three parties. The grantor places assets in a trust, which is administered by a trustee for the benefit of the beneficiary. One person can play all three roles, depending on the trust.

A revocable living trust, created during the grantor’s lifetime, can be revoked, meaning the grantor still has control over the assets.

In the case of revocable living trusts, the grantor is often the trustee and the beneficiary. In other words, the grantor gives property to himself or herself as trustee and agrees to administer it for his or her own benefit as beneficiary.

A revocable living trust is frequently a suitable choice for a person concerned about losing the ability to manage his or her assets. Simply stated, if you become incapacitated, the provisions in a revocable living trust could allow the person named as successor trustee to take over custody of all the trust assets, managing them on your behalf. This would ensure that the owner’s bills are paid, and legal obligations met.

There are a few drawbacks:

  1. The grantor of the trust may forget over time to transfer assets to the trust, resulting in the successor trustee having no authority to manage those assets.
  2. Some assets — such as qualified retirement accounts — cannot be transferred to a revocable trust for management by the successor trustee without triggering tax or other penalties. Be sure to confer with your wealth and tax advisors before retitling assets to fund the trust.

Other options:

If all assets were held as single-ownership property, there are two alternatives for managing those assets:

  1. If the property owner executed a durable power of attorney, then the agent under that power may be able to manage the assets on behalf of the property owner.
  2. If the property owner does not have a power of attorney that is accepted by the institution, then a guardian or conservator must be appointed for the property owner. This is typically an expensive, time-consuming procedure, requiring supervision and reporting to court on a regular basis.

Many of these assets may also be subject to probate upon the owner’s death.

Trusts May Help Protect Beneficiaries From:

Self icon

Self

Protection against lack of financial experience; or for a disabled beneficiary, either as a result of an accident or genetics.

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Common Trust Provisions

  • Terminate at a pre-determined age or incremental age attainment
  • Last for a lifetime, as the case for a disabled beneficiary
  • Influence beneficiary behavior toward personal growth and financial development

Beneficiary Considerations

  • Assess distributions beyond age attainment and in terms of inflation-adjusted dollar amounts or other applicable economic benchmark
  • Educate beneficiaries about financial markets and other factors affecting their beneficial interest
  • Prepare beneficiaries for wealth transition by introducing them to financial advisors
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Others

Protection from others, such as asset division in a divorce settlement.

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Common Trust Provisions

  • Address potential undue influence
  • Mitigate history of poor financial judgement
  • Pay creditors from other sources available to disabled beneficiary

Beneficiary Considerations

  • Grant control, as appropriate, to include right to request regular information from acting trustee, ability to remove and replace trustees, and serve as trustee along with professional trustee
  • Include health and education as important provisions that should be discussed in detail
Each Other icon

Each Other

Protection from beneficiaries, such as siblings who may not be on good terms now or in the future. A trust may also help a trustor with issues surrounding blended families.

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Common Trust Provisions

  • Draft for remaining funds to pass strictly to trustor’s heirs upon survivor’s death
  • Extend oversight when unified asset management is required
  • Keep assets separate to avoid division in a divorce action

Beneficiary Considerations

  • Share estate plan design with heirs, if not comfortable sharing specific amounts and timing of bequests
  • Communicate clear trust purpose and intent
  • Explain distribution priority for beneficiary classes

Infographic of wills and trusts plus how to use revocable living trust. For details, click "view text alternative."

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Using a Revocable Living Trust

Top of graphic shows the “life cycle” of a living trust: A grantor leaves assets; a trustee oversees the trust; upon grantor’s death, trustee makes distributions to beneficiary or beneficiaries.

Benefits

  • Trusts are generally easier than a will to administer at death, especially if the grantor has property in multiple states.
  • Trusts may offer advantages that durable powers of attorney can’t in case of incapacity.
  • Trusts may offer privacy that probate can’t.

Drawbacks

  • Trusts are generally more expensive to establish than a will.
  • Cost savings are not as great in states that have a streamlined probate process.
  • Trusts can be confusing or unsettling because the legal language can be complex and hard to understand.

Why Do I Fund a Trust?

There are many benefits to using a trust to hold assets, including privacy, tax efficiency, and protection for both your assets and beneficiaries. Trusts have evolved from simply being a way to restrict access to funds. Now they are designed to inspire and reward beneficiaries, whether it’s pursuing higher education, becoming financially independent or starting a business.

Often, an independent trustee will be selected to play a critical role as a steward, guide and protector of a well-drafted trust structure. How trusts are administered can reinforce best practices learned from a family whose values are the motivating force behind tax planning and investment decisions.

Trusts typically focus on protection. And it is this more traditional “protection” aspect that is often cited by those who emphasize extensive use of trusts in estate planning.

Funding Trusts

Drawing up trust provisions to provide for heirs is just the first step. Where many people fall short is in actually funding the trust by transferring assets to the trust.

You can use a variety of assets to fund trusts – from liquid assets such as deposit and savings accounts to more variable assets such as investments, real estate, and business holdings. In addition, a trust may be designated as a beneficiary of properties that pass by beneficiary designation, such as an IRA or 401(k) or even an insurance policy, if that meets your needs for wealth transfer.

Most assets are owned by individuals, or jointly if married. The assets designated for the trust must be retitled to the name of the trust before provisions of the trust can control them. Otherwise, the original ownership remains in place.

Properly retitling assets enables one potential benefit of trusts: to avoid probate at death or court intervention if incapacitated. It is important to work with your estate attorney and other advisors to decide what assets you will transfer to your trust and to complete this key step while still possible.

Other Trust Considerations

Choosing the right wealth transfer tool for your needs can be complicated, so be sure to consult with qualified professionals who can help you evaluate options available to you.

For example, if you want to provide for your grandchildren, you may want to consider whether a family pot trust makes more sense than individual trusts. With a pot trust, you set up a single trust, and your trustee can decide when and how much money to distribute to each of your grandchildren or other descendants for their specific, ongoing needs.

In addition, if you have a child or other dependent who is living with special needs, your long-term plan may involve creating a special needs trust to help manage the funds you are leaving for your child’s care. Your child will continue to need a variety of services and support, such as caregiving and recreational opportunities. Work with your wealth advisor to find a special needs trust attorney who can help you determine whether such a trust is advisable to preserve eligibility for current or future public benefits.

You can learn more about pot trusts in this related resource.

One more consideration: In many states, trust assets become “marital” assets. This can create tension that, at a minimum, you should discuss thoroughly with your attorney. One possible approach might be to require that a beneficiary, before getting married, enter into a premarital agreement as a prerequisite to receiving trust distributions. It may also make sense that legal fees for setting up such an agreement be paid from trust assets.