Addressing your estate plan – a simple Q&A

Creating and maintaining an updated estate plan is among the most important gifts you can provide for your family and those who you care most about in life.  However, many find addressing the sensitive questions involved with legacy planning to be uncomfortable and, because of that, they may delay organizing the proper estate-related documents until it is too late. 

With the assistance of a qualified advisory team, including an experienced estate planning attorney, a customized estate plan that is tailored to address your needs based on your financial and family situation can easily be organized.  Prior to going through the estate planning process with your advisory team, take a moment to learn some of the basics of estate planning.

WHAT HAPPENS IF I DIE WITHOUT A WILL?

You die intestate.  If you are an Illinois resident, for example, your assets would be distributed according to the State of Illinois law, which is:

• SURVIVING SPOUSE AND CHILDREN: Half to spouse and half to children equally.

• SURVIVING SPOUSE BUT NO CHILDREN: All to the spouse.

• SURVIVING CHILDREN BUT NO SURVIVING SPOUSE: All to the children, equally.

• NO SPOUSE OR CHILDREN SURVIVING: All to parents, brothers, and sisters (and the descendants, collectively, of any deceased brother or sister) in equal parts, allowing to the surviving parent if one is deceased a double portion.  If no brothers or sisters or their descendants, all to parents in equal shares or, if only one parent is living, all to the surviving parent.  If no parent, then all to brothers and sisters, equally.

I HAVE A WILL. WHY WOULD I WANT A LIVING TRUST?

Contrary to what you’ve probably heard, a will may not be the best plan for you and your family – primarily because a will does not avoid probate when you die.  A will must be verified by the probate court before it can be enforced.

Also, because a will can only go into effect after you die, it provides no protection if you become physically or mentally incapacitated.  So the court could easily take control of your assets before you die – a concern of millions of older Americans and their families.

Fortunately, there is a simple and proven alternative to a will – the revocable living trust.  It avoids probate, and lets you keep control of your assets while you are living – even if you become incapacitated – and after you die.

WHAT IS PROBATE?

Probate is the legal process through which the court sees that, when you die, your debts are paid and your assets are distributed according to your will.  If you don’t have a valid will, your assets are distributed according to state law.

WHAT IS SO BAD ABOUT PROBATE?

• IT CAN BE EXPENSIVE.  Legal/executor fees and other costs must be paid before your assets can be fully distributed to your heirs.  Costs vary in each state, but are usually estimated at 3-8% of an estate’s value.  If you own property in other states, your family could face multiple probates, each one according to the laws in that state.

• IT TAKES TIME. Usually 9 months to 2 years.  During part of this time, assets are usually frozen so an accurate inventory can be taken.  Nothing can be distributed or sold without court and/or executor approval.  If your family needs money to live on, they must request a living allowance, which may be denied.

• YOUR FAMILY HAS NO PRIVACY.  Probate is a public process, so any “interested party” can see what you owned and whom you owed.  The process “invites” disgruntled heirs to contest your will and can expose your family to unscrupulous solicitors.

• YOUR FAMILY HAS NO CONTROL.  The probate process determines how much it will cost, how long it will take and what information is made public.

DOESN’T JOINT OWNERSHIP AVOID PROBATE?

Not really – it just postpones it. With most jointly owned assets, when one owner dies, full ownership does transfer to the surviving owner without probate.  But if that owner dies without adding a new joint owner, or if both owners die at the same time, the asset must be probated before it can go to the heirs.

Watch out for other problems.  When you add co-owners, you lose control.  Your chances of being named in a lawsuit and of losing the asset to a creditor are increased.  There could also be gift and/or income tax problems.  And since a will does not control most jointly owned assets, you could disinherit your family.

With some assets, especially real estate, all owners must sign to sell or refinance.  If a co-owner becomes incapacitated, you could find yourself with a new “co-owner” – the court - even if the ill owner is your spouse.

WHY WOULD THE COURT GET INVOLVED AT INCAPACITY?

If you can’t conduct business due to mental or physical incapacity (Alzheimers’ stroke, heart attack, etc.) only a court appointee can sign for you – even if you have a will.  (Remember, a will only goes into effect after you die!)

Once the court gets involved, it usually stays involved until you recover or die.  The court, not your family, controls how your assets are used to care for you.  This public process can be expensive, embarrassing, time consuming and difficult to end if you recover.  And it does not replace probate at death.  Your family could have to go through the court system twice!

DOES A DURABLE POWER OF ATTORNEY PREVENT THIS?

A durable power of attorney lets you name someone to manage your financial affairs if you are unable to.  However, many financial institutions won’t honor one unless it is on their form.  And, if accepted, it may work too well.  It can simply give someone a “blank check” to do whatever he/she wants with your assets.  It can be very effective when used with a living trust, but risky when used alone.

WHAT IS A LIVING TRUST?

A living trust is a legal document that, just like a will, contains your instructions for what you want to happen to your assets when you die.  But, unlike a will, a living trust avoids probate at death, can control all of your assets, and prevents the court from controlling your assets at incapacity.

HOW DOES A LIVING TRUST AVOID PROBATE AND PREVENT CONTROL OF ASSETS AT INCAPACITY?

When you set up a living trust, you transfer assets from your name to the name of your trust, which you control, such as from “Bob and Sue Smith, husband and wife” to “Bob Smith, trustee under trust dated 1/01/2023” or “Sue Smith, trustee under trust dated 1/01/2023”.

DO I LOSE CONTROL OF THE ASSETS IN MY TRUST?

Absolutely not!  You keep full control.  As trustee of your trust, you can do anything you could do before, buy/sell assets, change or even cancel your trust (that’s why it’s called a revocable living trust.)  You even file the same tax returns.  Nothing changes but the names on the titles. 

IS IT HARD TO TRANSFER ASSETS INTO MY TRUST?

No, your attorney, financial advisor, banker and insurance agent can help organize that for you.  You will need to change titles on real estate (in and out-of-state) and most likely on other titled assets (stocks, CDs, bank accounts, other investments, insurance, etc.).  Most living trusts will also include jewelry, clothes, art, furniture, and other assets that do not have titles.

Also, it might make sense to change the beneficiary designations on some assets (like insurance) to your trust so the court can’t control them if a beneficiary is incapacitated or no longer is living when you die.  (IRA, 401(k), etc. can be exceptions).

DOESN’T THIS TAKE A LOT OF TIME?

It will take some time, but you can do it now, or you can pay the courts and attorneys to do it for you later.  One of the benefits of a living trust is that all of your assets are brought together under one plan.  Once your estate plan has been prepared and the proper documents are in place, do not delay the process of “funding” your trust (i.e. re-titling your assets and accounts into your living trust).  Remember, your trust can only protect the assets that have been transferred into it.

IF SOMETHING HAPPENS TO ME, WHO HAS CONTROL

If you and your spouse are co-trustees, both can act and have instant control if one becomes incapacitated or dies.  If something happens to both of you, or if you are the only trustee, your handpicked successor trustee will step in.

WHAT DOES A SUCCESSOR TRUSTEE DO?

If you become incapacitated, your successor trustee manages your trust for as long as needed, using your assets to pay your expenses.  If you recover, you automatically resume control.  When you die, your successor trustee pays your debts and distributes your assets.  All of this can be done quickly and privately, according to instructions in your trust, without court interference.

WHO CAN BE SUCCESSOR TRUSTEES?

Successor trustees can be individuals (adult, children, other relatives, or trusted friends) and/or a corporate trustee.  If you choose an individual, you should name more than one in case your first choice is unable to act.

DOES MY TRUST END WHEN I DIE?

Unlike a will, a trust doesn’t have to die with you.  Assets can stay in your trust, managed by the person or advisory firm you have chosen, until beneficiaries (including minor children) reach the age(s) you want them to inherit,or to provide for a loved one with special needs.

DOESN’T A TRUST IN A WILL DO THE SAME?

Yes, you need a “pour-over’ will that acts as a safety net if you forget to transfer an asset into your trust.  When you die, this will “catches” the forgotten asset and sends it into your trust.  The asset may have to go through probate first, but it can then be distributed as part of your living trust plan.

IS A “LIVING WILL” THE SAME AS A LIVING TRUST?

No. A living trust is for financial affairs.  A living will is for medical affairs and it lets others know how you feel about life support in terminal situations.

WHO SHOULD HAVE A LIVING TRUST?

Age, marital status and wealth do not really matter when considering a living trust.  If you own titled assets and want your loved ones (spouse, children or parents) to avoid court interference at your death or incapacity, forming a living trust makes a lot of sense.  You may also want to encourage other family members to have a trust so that you will not have to deal with the courts at their incapacities or deaths.

BENEFITS OF A LIVING TRUST

• Avoids probate at death including multiple probates if you own property in other states.

• Prevents court control of assets at incapacity.

• Brings all your assets together under one plan.

• Provides maximum privacy.

• Quicker distribution of assets to beneficiaries.

• Assets can remain in trust until you want beneficiaries to inherit.

• Can reduce or eliminate estate taxes.

• Inexpensive, easy to set-up and maintain.

• Can be changed or cancelled at any time.

• Difficult to contest.

• Prevents court control of minors’ inheritances.

• Can protect dependents with special needs.

• Prevents unintentional disinheriting and other problems of joint ownership.

• Professional management of trust assets.

• Peace of mind.

HOW DO I MANAGE ALL OF THESE CONSIDERATIONS?

Proper estate planning and management is a cornerstone of sound wealth management.  Accordingly, it is an important area that we address with our clients at Clearwater Capital Partners.  Our advisors have the experience and expertise to address those legacy-related questions that are important for individuals and families.  Working closely with one’s estate planning attorney and accountant, we also help guide the process of creating a thorough and effective plan that can provide peace of mind for you and your loves ones.

If you are looking for some direction on setting up an estate plan, which contains wills and trusts as mentioned above, or if your current plan might be out of date and in need of attention, please give your Clearwater Capital Partners advisory team a call.