Hands from the Grave? Is a Will sufficient? New to Estate Planning? (Updated)

Photo by JJ Jordan on Unsplash

Author: Andrew Lee
About 3 minute read.

The first impression of Estate Planning most people think about are:

• Leaving properties, bank accounts, retirement accounts, some assets, etc. to their heirs with or without a will.
• Thinking a "Will" will satisfy the Probate court; or
• I don't need it because I don't own a house or I don't have anything for my heirs
• I don't need it when I am alive

However, estate planning is not only about your Will and passing assets to heirs, but also involving decisions when you cannot decide if you are incapacitated and still alive, tax planning (not to mention that estate tax is 40% now as of 2020) and more. Even you think you are leaving all of the assets to your heirs, have you thought about how much do they really receive after all the fees and taxes? and when (maybe 1+ year)? they will receive if it goes through Probate court? and not to mention the intangible emotional burden and stress.

What if I have a Will? That is only the first step to show your intent how you want to address your assets. The Will needs to be recorded, otherwise, court needs to validate the validity of the Will first. Once validated, the court will need to carry out the Will in subsequent orders. These orders involves attorney fees and time such as collecting all the assets from the deceased, selling the property and split the proceeds if necessary, and determining how many heirs and who gets what at what percentage, etc.? perhaps create a Trust to payout the assets to minors, or to fund your grandchildren's education, etc. and the list goes on. You do want to think about the emotion stress on the surviving spouse or heirs, and the potential drama that could occur in the family, and with a proper estate planning, you can mitigate these.

Although, you may heard the term Estate Planning from time to time, and what accompanies with it as some sort of Trust. "A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary" (Investopedia). There are many forms of Trust and the followings are some of the most frequently created ones such as Revocable or irrevocable, testamentary or living, the A-B trust, A-B-C trust, family limited partnership trusts (FLIP), charitable lead trust, charitable remainder unitrust, or annuity trust. 

"The most common trust for an individual with estate under $600,000, or a couple with an estate under $1,200,000 is the revocable living (inter vivos) trust." (Walt Huber and Kim Tyler, J.D. California Real Estate Law, 8th Edition, 150). A living trust has also replaced Life estate with a number of advantages. If you are wondering why $600,000 or $1,200,000 for these living trust? That is because during 1987-1997, the exemption for estate tax was $600,000 single, and $1,200,000 for couple. But wait! This is 2021, property values have skyrocketed, and the estate tax exemption is now at $11.58 million for single, and $23.16 million for couple till 2026! It is time to review your estate planning if you have one setup long time ago. It is also a good practice to review them from time to time, because estate tax do change overtime, and so does your assets (e.g. inflation) and situation.

Advantages of utilizing Trust to hold title and estate planning includes but not limited to allowing the trustor to keep control of the property/assets, keeping the family secrets private since Trust is not recorded to public and you use a Certificate of Trust to open bank accounts or hold titles to your property without revealing the content in your Trust, eliminating the time and expense of the probate, and eliminating estate taxes with tax planning. Some also establish trust as known as the hands from the grave to control the property/assets after trustor's death or run their corporation and empire perpetually. These are just some advantages but not limited to for setting up a trust or multiple trusts.

• Avoid Probate and still have full control as the Trustee of your Trust
• Asset protection, beneficiary gets it and not taken away due to creditors or divorce
• Tax reduction with proper tax planning
• Incapacity protection, designate someone to make decisions on your behalf for finance and health
• A Silent Trust to hide assets from beneficiary
• Avoid conservatorship headache with pre-appointed guardians (ever watched the movie 'I Care a Lot' directed by J Blakeson?)
• Separate Trust for each heir customized for their own condition (e.g. potential divorce, creditor protection, rehab concerns, etc.)

For those that are setting up their trust, here are some gotchas to look out.

• Avoid the following words in your Trust - e.g. Distribution as-is.
• Don't just have one Trustee. Create a list of Successor Trustee so you have an order who will take over if the current Trustee deceased or incapacitated.
• Disability Panel for incapacitated situation, and define clear language how "Incapacitated" is defined to remove/replace Trustee are critical, and when Springing Power of Attorney (PoA) takes effect. Springing PoA may not meet your expectation due to HIPAA privacy rules and policies, and how to prove one's incapacitated.*
• Make sure you cover Conservatorship and situations like re-marriage (after divorce) with a prenuptial in mind in your estate plan.
• Power of Attorney (PoA) is only as good as the principle is alive. Bank doesn't like PoA over a Trust account. PoA cannot do anything if the principle passes away.
• If you refinance and moved the property out of the Trust, make sure you come back and update your Trust since the Deed of Trust on your property has changed due to the refinance.

I hope this little article inspires you to think about it, and hopefully it will motivate you to do some research. If you have decided to setup a trust, there are also online services today to create trust online. For more information and to accommodate your own situation, please consult with an estate attorney.

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References

The estate tax, ninety years and counting - https://www.irs.gov/pub/irs-soi/ninetyestate.pdf

*https://www.nolo.com/legal-encyclopedia/the-problem-springing-powers-attorney.html