This is a tale of two estates.
The Estate of Lisa: Lisa was a well-respected estate planning attorney who knew the benefit of a trust-based estate plan, which includes a Revocable Living Trust “Trust.” Lisa left behind a very simple and very old Last Will and Testament because she thought revising her estate plan to adequately address her multiple properties in various states would upset her second husband. Her out-of-state and grieving family now must wrestle with the cost, hassle, time and uncertainty of multiple probates in various states, and her second husband is understandably upset.
The Estate of Susan: In stark contrast, Susan had a very small estate; but she knew the importance of planning and easing the burden on her grieving family. Susan hired an attorney who created and funded her Trust. Susan’s devastated family was grateful to Susan and impressed by the ease with which her assets passed to her intended beneficiaries. Susan spent less on her Trust-based estate plan than her family would have on probate.
There is a misunderstanding that people who “do not have enough money” do not need a Trust. This cannot be farther from the truth. Money is not the sole factor when determining the appropriateness of a Trust. Often clients express that they absolutely do not need a Trust because their estate is worth less than the amount they have determined would necessitate a Trust and, therefore, a Last Will and Testament will suffice. Not having the wealth of Jeffrey Bezos, founder and CEO of Amazon, does not mean that you and your family would not benefit from a Trust as part of your estate plan.
Here are a few reasons why even a small estate could benefit from a Trust:
1. Avoidance of Probate
Probate is a costly, time consuming and uncertain process required to transfer your property to the extent it is in your name when you die. Probate can be required to determine an estate’s heirs, as opposed to those who you would like to receive inheritance, confirm that a Will is valid, or oversee its administration, among other things. Additionally, avoiding probate may be a significant benefit if you own real estate in multiple states, because you avoid multiple probate proceedings and their associated costs (imagine that cabin property in Colorado or the time share in Hawaii). Establishing and funding a Trust allows transfer of assets to beneficiaries with much greater speed and ease.
The probate process is a public proceeding. Therefore, a person’s Will is available for review by anyone at the courthouse and, with some exceptions, can make your estate an open book since probate documents become public record. By contrast, Trusts are a good option for those concerned with the privacy of their records and asset information after death. Only qualified beneficiaries of a Trust are entitled to receive information regarding assets, values or ultimate disposition.
3. Continuity of Management During Disability
Should you become physically or mentally incapable of managing your own affairs, having a properly prepared and funded Trust is likely the best way to ensure your property remains available to be used for your benefit. The person granted such control is a trusted individual or entity selected by you. Ultimately, a Trust will avoid a conservatorship (a type of probate that subjects you, while you are living, and your family to an expensive and lengthy court proceeding with annual requirements).
Additionally, once the court appoints a conservator, continued court supervision over the management of investments and disbursements is usually required. This often includes annual bond fees, annual accounts and additional legal and accounting fees. Note that a guardian is responsible for the care of an incapacitated person’s health, personal care, and living arrangements while a conservator is responsible for the person’s money and property.
4. Step-Up in Tax Basis
Property held between spouses as joint tenants will only qualify for half the “stepped-up” tax basis on the death of the first spouse. Couples can eliminate any tax on capital gains accruing between the original purchase of the assets and the death of the first spouse if their interests are held in Trust as community property. The fair market value of the assets on the date of death of the spouse is referred to as a “step up” in basis.
5. Estate Tax Minimization
If you have a large estate that exceeds the combined estate tax exclusion amounts, provisions can be included in the Trust to transfer wealth that helps to reduce estate taxes.
6. Availability of Assets at Death
Immediately after death of the grantor, assets in a Trust are available to pay estate taxes, administration expenses and debts, without waiting for a probate decree or issuance of preliminary letters. Further, such amounts can be immediately available for liquidation, should the need arise.