Of course, if you prefer to have the court monitor the actions of your trustee, then you might be better off with a testamentary trust. Your attorney can help you evaluate your options.
Probate May Be Delayed by Hard-to-Find Heirs
As we discussed in What Happens to Your Property if You Don’t Have a Will? in Chapter 3, your legal heirs are those relatives who, under state law, would inherit your estate if you die without a Will. A legal heir who you don’t name as a beneficiary in your Will would be better off if your Will were declared invalid. Therefore, the law generally requires that your legal heirs be given notice of a probate proceeding so that if a legal heir has any reason to think your Will is not valid, then he or she can raise an objection in court.
Example
John has three children, Tom, Dick and Harry. When John writes his Will, he leaves his entire estate to Tom and Dick, but does not leave anything to Harry. Although Tom, Dick and Harry are all John’s legal heirs, only Tom and Dick are beneficiaries under John’s Will. Therefore, it would be better for Harry if the Will were declared invalid so that he could inherit under the intestacy laws.
Some states simply require your heirs to be notified, by regular mail, once your Will has been probated and your executor has been appointed. But beware if you live in a state that requires your legal heirs to be notified before the court will probate your Will and appoint your executor. If you have hard-to-find legal heirs, the resulting delay can be a problem if there are assets that need to be dealt with, such as financial securities that need to be sold right away. The court may appoint a “temporary” administrator to deal with these issues, but that adds another layer of bureaucratic expense and delay.
By avoiding probate, you may be able to eliminate the legal heir notification requirements.
Probate May Encourage Will Contests
As we saw in the last section, some states simply require your legal heirs to be notified by regular mail once your executor has been appointed. If a troublesome heir wants to contest your Will, he or she has to take the initiative to do so.
But beware if you live in a state that requires that your legal heirs sign a paper consenting to the probate, or be served with a legal summons, before your Will can be probated. Besides the obvious expense, delay and potential difficulty of such a process, it may give a troublesome heir the mistaken impression that he or she somehow has a right to inherit under your Will. In other words, it may encourage a legal heir to contest your Will, which is not desirable from your point of view.
By avoiding probate, you may be able to eliminate the legal heir notification requirements. Your attorney can also help you evaluate other ways an RLT can prevent problems if you have troublesome heirs.
Probate May Compromise Your Privacy
Generally speaking, a Will becomes a public document after probate. If you were so inclined, you could walk into most probate courts, sit down, and read any of the Wills that had been probated there over the years.
If your Will is complicated-that is, if it includes many different types of assets and/or makes many bequests to specific individuals or charities, or if you have an unusual or potentially embarrassing family situation-a public document is probably not what you want.
For example, let’s say you want to leave certain items of jewelry to specific individuals. In a Will, such items have to be described with specificity, so that there is no doubt as to which item is being bequeathed. The Will, therefore, might say something like, “I give and bequeath my two-carat emerald ring with 24 prong-set diamonds total weight 1.1 carats set in a white gold band to Jane.” You might not want the world to know that Jane now owns such a valuable piece of jewelry.
Or let’s say that you have three children. Your Will divides your estate equally among them, but one of your children is bad with money, has a drinking or drug problem, or has marital difficulties, or the like. That child’s share is to be held in trust during the child’s life. Is that something you want in a public document?
Finally, let’s just say that your Will is very long and complicated and goes on for pages and pages. That may be a case of “too much information” to reveal in a public document.
In addition, as part of the probate process, your executor is usually required to file a list of all the assets you owned at your death (an inventory) and an accounting that shows exactly what property and how much property each of your beneficiaries received from your estate. In some states these are also public documents. That is an even more frightening proposition than having the Will be public, and may be something you want to avoid.
What’s the alternative? You could instead establish an RLT which has the same provisions as a Will. The difference is that, generally speaking, an RLT remains a private document, not a public one. Depending on your state’s laws, merely creating the RLT may be enough to keep your wishes private. Or you may also need to fund the RLT and avoid probate altogether in order to maintain privacy. Your lawyer can give you more specific information about how the process works in your state.
Using a Revocable Living Trust
to Avoid Probate
How exactly does an RLT avoid probate? When you die, property owned in your RLT is transferred according to the terms of your RLT (no probate needed), not according to your Will (probate needed). Therefore, an RLT can be used to turn probate property into non-probate property!
In order for this to happen, you can’t simply create the RLT by a signed trust document. You have to go a step further and fund your RLT during your life. That means that you have to transfer ownership of the property to the trustee.
For example, let’s say you have a bank account in your sole name. Since that type of an asset passes by Will, then when you die, there will have to be a probate proceeding (or at least a small estate proceeding) in order to have the bank account transferred to the person you name in your Will.
If instead you create an RLT (step 1), and then transfer ownership of your bank account to the trustee (step 2), then when you die, the bank account will be distributed according to the terms of your RLT. It does not pass by Will and voilà, no probate!
You transfer different types of assets to an RLT in different ways. For example, you typically transfer real estate by signing a new deed; you typically transfer a financial account by changing the ownership of the account with the financial institution; you typically transfer a car at the DMV, and so on. In order to avoid probate, you need to be as thorough as possible in executing this step.
It can be quite an investment of time, energy, and money to transfer assets to an RLT, and that’s why I want you to be sure that avoiding probate is worth it, and that you have considered other options. Make sure you know what steps are involved for each of your assets. Many people get bogged down with this step and don’t follow through.
Do You Lose Control of Your Assets?
But if you transfer ownership of your assets to a trustee, doesn’t that mean you lose control of them during your lifetime?! No–typically you will be both the grantor and the trustee during your life. In addition, your RLT will typically provide that you can withdraw property from the trust at any time. Finally, your RLT is revocable, so that you can amend or revoke the whole thing at any time. Because it is revocable, it has no effect on your taxes and cannot be used to protect assets from your creditors.
So, generally speaking, if you transfer assets to your RLT, you will still be able to deal with those assets in every respect the way you could before. As a practical matter, the only difference will be in the name of the legal owner.
Example
John Doe creates an RLT. The document that creates the RLT says that during John Doe’s lifetime, he is both the grantor and the trustee of the RLT. John Doe has a bank account. When John Doe gets his bank statement, it shows that the owner of the account is “John Doe.” John Doe contacts his bank and has them transfer the ownership of the account to his RLT. The bank records will then show that the owner is “
John Doe, as Trustee of the John Doe Revocable Living Trust dated ____.” John Doe, as trustee, can continue to deal with the account in the same way he did before he transferred it into the RLT.
When John Doe dies, any money in the account will be transferred as specified in the RLT, regardless of what John Doe’s Will says (and so without probate).
You Still Need a Pourover Will
Even if you have an RLT, you still need to have a Will. Typically an RLT will be prepared along with a type of Will called a pourover Will. A pourover Will simply says that your entire probate estate should be paid over to the trustee of your RLT and distributed in accordance with the terms of your RLT.
For example, a pourover Will might say something like “I give, devise and bequeath all of my property, both real and personal, to the Trustee under a certain Revocable Living Trust dated _____, to hold, manage and control such property under the terms of said trust, and to distribute the proceeds to the beneficiaries therein named according to the terms and conditions of said Revocable Living Trust at the time of my death.”
If you are planning to fund your RLT with all of your assets so that at your death you have no probate assets, then why do you need a pourover Will? In short, you still need a pourover Will as a default measure to handle any unexpected probate assets or assets that must be probate assets (see You Need a Will Even if You Think You Don’t, and the examples in Chapter 3).
Using a Revocable Living Trust
in Case of Incapacity
Besides avoiding probate, you can also use an RLT in case you become incapacitated.
In Using a Power of Attorney for Finances in Chapter 4, we discussed using a power of attorney to give someone you appoint (your agent) the power to deal with your financial assets. You need a power of attorney to avoid a legal guardianship or other court proceeding if you become incapacitated.
An RLT is another way to plan for incapacity. Your RLT would state you are the trustee during your lifetime, but if you become incapacitated, the role of trustee is taken over by a successor trustee (who you name). If the RLT is funded, then the successor trustee can take over managing the assets in the RLT without a power of attorney.
An RLT also lets you define the circumstances under which you will be considered incapacitated. For example, it could say something like “The Grantor shall be considered incapacitated only if so declared by a court of competent jurisdiction or if by reason of illness or mental or physical disability is, in the opinion of two licensed physicians, unable properly to handle the Grantor’s own affairs.” Or it could say simply that you will be considered incapacitated just because the successor trustee declares it to be so–the determination does not necessarily have to involve physicians. Essentially you can provide any definition of incapacity you want, tailored to your specific comfort level.
Remember that in order to use your RLT successfully in planning for incapacity, it must be funded. In other words, upon your incapacity, the successor trustee will only have control over assets that you have transferred to the RLT.
In “Putting Someone’s Name” on Your Accounts in Chapter 4, we saw that a financial institution may be wary of a power of attorney which it thinks may not be valid, or may have been revoked without its knowledge. Financial institutions may be more willing to deal with a successor trustee than with an agent under a power of attorney. Of course, the financial institution may require that the successor trustee sign an affidavit to the effect that the conditions specified in the RLT have been met, and may have other requirements before permitting the successor trustee to take over as trustee.
Be aware that even if you use an RLT to plan for incapacity, you should still have a power of attorney as a default measure to handle any unexpected assets outside of the RLT. For example, there may be an asset you forgot to transfer to the RLT. It is also extremely important to have a power of attorney to handle assets which cannot be held within the RLT. Important examples of this are your IRAs and 401(k)s, which cannot be owned by your RLT.
Example
Let’s take the example of Jane and her daughter, Debby, which we discussed in “Putting Someone’s Name” on Your Accounts in Chapter 4. Jane was a widow who wanted her daughter, Debby, to be able to handle banking and bill paying chores for her without having to go to court to be appointed as guardian. We discussed two of the options available to Jane, either making Debby the joint owner of the account, or making Debby her agent under a power of attorney.
Another option would be for Jane to set up an RLT. The RLT document would name Jane as the initial trustee and Debby as the successor trustee. The successor trustee would take over as trustee in the event of Jane’s death or incapacity. Jane would then transfer ownership of her bank accounts from herself, as an individual, to herself as trustee of the RLT. The bank accounts would then be part of the assets of the RLT. If Jane became incapacitated, then Debby, as successor trustee, would be able to control and manage the assets for Jane.
However, Jane should still execute a power of attorney naming Debby as agent. Why?
After Jane becomes incapacitated, assets may be discovered which are not owned in the RLT, for example, a refund check made out to Jane in her sole name.
After Jane becomes incapacitated, Debby realizes that she is going to need to withdraw funds from her mother’s IRA or 401(k) in order to pay for her mother’s medical expenses. Debby will need a power of attorney in order to do this.
Remember
You might want a revocable living trust if you want to avoid probate or if you become incapacitated in the future.
You could save significant expense by avoiding probate, depending on where you live. Check the reasons to avoid probate in this chapter against the procedures in your probate court.
Having a revocable living trust allows you to name someone to take over managing your assets if you become incapacitated.
If you are using a revocable living trust to avoid probate or to plan for future incapacity, you should not only create the trust, but also fund it with your assets.
CHAPTER 7
Working With
an Attorney
ONE OF THE MOST important decisions you’ll make in setting up your estate plan is your choice of an attorney. In this chapter I’ll cover why you need an attorney and help you choose the right one.
Why You Need an Attorney
The job of an estate planning attorney is to help you plan your estate to minimize controversy and maximize benefits to your beneficiaries after your death. In other words, a good estate planning attorney will keep your estate and your beneficiaries out of court–both by minimizing probate court involvement and, even more importantly, by preventing Will contests and other expensive legal battles.
An estate plan that is ambiguous or confusing, that doesn’t make sense, or that encourages beneficiaries to contest your Will, may be in the best interests of the lawyers who will litigate the dispute, but it’s certainly not in the best interests of your estate and your beneficiaries.
As we’ve seen throughout this book, estate planning is technical, and laws and procedures vary greatly from place to place. If you do it yourself, you risk making mistakes that could cost your beneficiaries. In addition, having the wrong lawyer can create future problems or add unnecessary complexity to your plan.
You may think that your wishes are “simple” and that putting them into effect is no big deal. In fact, I have had very few clients who didn’t think their situation was “simple.” But many times situations may appear simple only because you haven’t considered the potential problems.
Let me give you a few examples to show you what I mean. These examples are not outlandish hypotheticals, but are based on actual situations:
Example #1
Mr. and Mrs. ABC want to leave everything to each other and, after the death of both of them, to their two adult children. They each prepare a Will which says something like, “I give, devise, and bequeath my entire estate to my spouse, but
if my spouse is not then living, to my children in equal shares.” They believe that this guarantees that upon the death of both of them, their children will receive whatever is left of their property. Seems simple enough-why do they need an estate planning attorney?
Their belief is mistaken. Whichever one of them dies first is leaving his or her property to the surviving spouse. The surviving spouse can change his or her Will and leave the property to anyone-from a second spouse to a scam artist. Without an attorney, Mr. and Mrs. ABC might not be aware of that possibility. They may still feel comfortable leaving everything to each other but, if not, an attorney can set up trusts to protect the children’s inheritance.
Example #2
Mr. XYZ wants to leave everything to charity-simple, right? He prepared his own Will and did an excellent job. Why does he need an estate planning attorney?
It turns out he is disinheriting an adult child. A disinherited child might be tempted to challenge the validity of the Will in court (because if the Will is invalid, the child might inherit by intestacy). If Mr. XYZ has an attorney assist him in preparing his Will, it makes it harder to invalidate for a number of reasons.
Estate Planning for the Savvy Client Page 6