Most people understand that having an estate plan benefits them and their loved ones. However, many individuals do not initiate the estate planning process because they do not fully understand the nuances of foundational estate planning tools such as a will and a trust and the full implications of dying intestate - without either in place.
Here are three scenarios illustrating what will generally happen when you die, whether you pass away intestate (without a will or trust), with a will, or with a revocable living trust (sometimes referred to simply as a trust). For this discussion, let’s assume you have two children but no spouse:
Dying Intestate
- Intestate. If you die intestate, your accounts and property will go through a court process known as probate. The entire probate process is reflected in court records so anyone can access information about your own, what you owe, and who will receive your money and property. However, because you have not legally specified who will receive your money and property, the probate court makes that determination using your state’s laws. Intestacy laws vary by state, but generally speaking, money and property go first to a surviving spouse, then to descendants (children or grandchildren), and then to parents, siblings, and siblings’ children, in that order, depending on who survives you.
Once the probate has been opened by an interested person (usually a family member, but maybe a creditor) and debts, taxes, and expenses have been taken care of, the court applies state law to determine where your remaining assets will go.
- If your only heirs are your two children, state law will typically mandate dividing your money and property equally between your children.
- If your children are adults (at least 18 or 21 years old, depending on state law), they will receive their inheritance immediately with no strings or protections attached.
- If your children are minors, the court will appoint a guardian or conservator (depending on the term used in your state for a person who manages money on behalf of a minor) to manage the money for your minor children until they become adults. When the children reach adulthood, they will receive their inheritance immediately with no strings or protections attached. The judge will also use state law to determine whom to appoint as guardian or conservator. This could be your ex-spouse or another closely related family member.
- The court-supervised guardianship or conservatorship process can be time-consuming and costly. Most expenditures for the benefit of the children require a formal process that includes court filings and, ultimately, authorization by the court before acting. In most states, guardians or conservators and the attorney representing these parties can charge for their time, which can be substantial.
- The court, not you, will decide who raises your minor children. The court will look to state law to see who has priority in being appointed as the guardian. This may be a person you would never have wanted to raise your child. Because you do not have a will or other official document nominating a guardian, the judge can assess the situation only according to their information, which may be insufficient. However, if your children’s other legal parent is still living, they will most likely obtain sole custody of the children.
The bottom line? Dying intestate results in state law and the court making many important decisions on your behalf—regardless of what your wishes might have been. In addition, public disclosure of the intimate details of your life (finances, debts, and who will receive your money and property) is guaranteed.
dying with a Will
- Will. If you die with a valid will, accounts, and property in your sole name at your death will still go through the probate process. However, after creditors have been paid, the remaining accounts and property will go to whom you have named in your will, in whatever way you have directed rather than per state law.
- If you want to leave your money and property to your children, you can name a trusted decision-maker to manage the funds and provide them when needed or at stated ages. In many cases, this means creating a testamentary trust in your will and naming someone as trustee to manage the funds, allowing you to put restrictions in place to ensure that the money and property are used to meet your wishes. Because these terms are in a legally enforceable will, the court will abide by your wishes.
- The same considerations hold if you specify that you want to give money to a charity, your Aunt Betty, or your neighbor.
- Your will is also where you can nominate a guardian to raise your minor children. Note that the court will still need to approve the nomination, but this is your way of ensuring that your wishes are considered when the court appoints a guardian.
The bottom line? While a court oversees the process, having a will allows you to tell the court exactly how you want your affairs handled. However, a public probate process is still guaranteed.
Dying With A Trust
- Trust. For a trust to work correctly, you must change the title or beneficiary designation of all your accounts and property to the trust’s name. Accounts and property owned by the trust are not subject to the probate process. One of the most important benefits of a trust is that the details and process of transferring accounts and property to the intended individuals are private.
When the trust is initially created, you serve in various roles. First, you are the trustmaker who creates the trust and transfers your accounts and property to it so that the trust becomes the new owner. You are also the trustee of the trust, which means that you manage the trust’s accounts and property, make investment decisions, and distribute money to the beneficiaries. You are also a beneficiary. Although the trust is now the technical owner of the accounts and property, you can still benefit from them as you did when they were in your name because there may come a time when you are unable to manage the trust and the property it owns, whether because you are mentally unable or have passed away, you will name a trusted individual to step in as trustee when you can no longer act. This person is sometimes referred to as the successor trustee. They will then be responsible for managing the trust’s accounts and property. They will be required to use the money and property for your (if you are still alive) and the other named beneficiaries’ benefit according to the terms you have provided in the trust agreement.
- One word of caution—to bypass probate, a trust must be funded appropriately. Suppose you die owning any accounts or property in your sole name without a beneficiary designation. Those items may have to go through the probate process to get to their appropriate new owner.
- Funding a trust means that ownership of your accounts and property has been changed from your individual name to your trust’s name. It may also mean naming your trust as the beneficiary if you cannot change the ownership of the account or property, as with a retirement account.
- Think of your trust as a basket. Like putting apples into a basket, you must put your accounts and property into the trust for either to have real value or control.
Even if you have a trust, you should still have a will to ensure that any accounts or property inadvertently or intentionally left out of your trust are retitled (funded) in the name of the trust after your death. This special type of will, referred to as a pour-over will, directs that anything going through probate is to be given to the successor trustee of your trust, who will then manage the account or property as part of the trust. The pour-over will also allows you to name guardians for your minor children.
The bottom line? A trust allows you to maintain control of your accounts and property through your chosen trustee, avoid probate, and leave specific instructions so that your children are cared for—without receiving a lump sum of money at an age where they are more likely to squander it or have it seized from them by potential creditors or predators.
Do not let the will-versus-trust controversy slow you down. Having any plan in place is often better than the one the state has created for you. Book a Call today; we will assemble an estate plan that works for you and your loved ones—whether it be a will, a trust, or both.
