Not only do people wrongly assume that estate planning mostly concerns the writing of a Will, they also assume that only the wealthy need estate planning due to taxation issues. Although minimizing taxes should be one goal of your estate plan, it certainly should not be the only goal.
1. Estate planning plans for your potential disability. If you were to become disabled, what would your family do? Instead of having to go to court to have you declared incompetent and appoint a guardian, a Living Trust provides for this possibility without involving the court.
2. Estate planning can help you avoid Probate. Probate is the court process that proves the Will, if any, is valid and carries out the instructions of the Will. Probate can be costly and time-consuming. It is also a public process that allows anyone to know of your financial affairs and subjects your heirs to possible predators. Having a Living Trust keeps your assets out of Probate and provides a seamless transition of the Trust’s assets to your heirs upon your death.
3. Estate planning can protect your assets from creditors. If you plan to leave property to a child through a Will, any creditor of that child will have the ability to take their share during the Probate process. If, however, the assets are transferred through a Living Trust, creditors may not be involved in the process.
4. Estate planning instills your values in your descendants. This is one aspect of estate planning that many people do not even consider, yet it is very valuable. Even though you are gone, a Living Trust can provide a way to keep your values alive. For instance, if you want your children, grandchildren, or even great-grandchildren, to receive a college education, you can provide assets for this purpose. You can also allow them to receive their inheritance upon completion of their education or deny them their inheritance without a college degree.
5. Estate planning helps to minimize taxation. In New Jersey, the low threshold for estate tax impacts many middle class families.
Are these the only issues estate planning addresses? Certainly not! Estate planning can also plan for nursing home stays, provide for special needs children, ensure that your estate lasts long enough to make it to your grandchildren, create specific inheritances based on the specific needs of the individuals involved, and so much more.
A Will is a legal document that becomes effective at your death. It allows the court to:
• Distribute your property in a way that you direct in the Will.
• Appoint the executor you name in the Will—a person who will make sure that your wishes are followed.
• Allows you to designate a guardian for minor children—although the court will have the final say in this matter, they typically accept the person you designate.
Additionally, a Will can be created quickly and easily. In fact, in some states, including New Jersey, creating a Will is as simple as writing down your instructions in your own handwriting, known as a “holographic” Will.
Although better than dying intestate, a Will still has to go through the Probate process. Only this time, your chosen executor will be part of the process and your wishes for beneficiaries will be known.
Like a Will, a Trust can be changed during your lifetime and, like a Will, it keeps you from dying intestate, thus allowing you to determine the beneficiaries of your assets. This is where the similarities end.
A Living Trust is a document that takes effect during your lifetime. This document helps you manage your assets before you die as well as after you die. There are many good reasons to consider a Living Trust. Let’s look at a few of them:
1. All the issues of Probate—time, expense, privacy, access, and contesting—are eliminated when you use a Trust instead of a Will.
2. A Trust will take care of you and your assets should you become disabled and unable to make decisions regarding your health or your finances.
3. A Trust helps to reduce the financial burden of estate taxes.
4. A Trust allows you to control your assets even after you’ve died.
5. A Trust can keep your heirs from losing your assets to their creditors.
How does a Trust do all of this? A Trust is the owner all of your assets. You are the Trustee and the Beneficiary. This means that, in reality, you own nothing. It is your Trust that owns everything. You have total control as the Trustee and you can make changes, invest, buy, and sell your assets as you see fit. From your standpoint, it will feel exactly like owning the assets in your own name like you did before.
However, upon death, since you didn’t actually own anything, there is nothing to Probate. Your Successor Trustee will distribute the property in the Trust according to your instructions. There is no court, no need for approval, no extra expenses, and no publicity.
Power of Attorney. We’ve all heard of it. TV shows and movies portray the Power of Attorney as a way to take control of someone’s assets once they are declared incompetent. Although this is one function of a Power of Attorney, it encompasses far more. Rather than seeing the Power of Attorney as a way for someone to take control of your assets, you would be more correct in seeing it as a way to give someone the ability to manage your assets the same as you can.
A Power of Attorney is a legal instrument that is used to delegate legal authority to another. The person who signs (executes) a Power of Attorney is called the Principal. The Power of Attorney gives legal authority to another person (called an Agent or Attorney-in-Fact) to make property, financial, and other legal decisions for the Principal.
Probate is the court process that proves the Will, if any, is valid and carries out the instructions of the Will. Through this process, title is transferred from the name of the person who died to the beneficiaries named in the Will or the intestate heirs.
Once you die, your chosen executor will file your Will with the court. The court then decides if the executor you chose will remain your executor or if they will appoint someone else. After publishing the notification of your death, all of your creditors are contacted. They can then submit claims against your estate. During this same period of time, all your valuables are inventoried. Even if you have a very straightforward estate, the Probate process can take more than a year. For those estates that are more complex, the process can run several years!
Probate, due to its many laws and regulations can be a costly affair. It is quite possible that your executor will need to hire a lawyer. It is also conceivable they will have to hire an appraiser to get an accurate value of your assets. All of this costs money. The typical fees for Probate lawyers nationally are 1.5 percent to 4 percent of the value of your estate. I have found this to be true in my practice. In New Jersey, the executor also gets paid a fee that ranges from 1 to 5 percent. Then you have court fees, and appraiser fees. All of these fees combined can reduce your estate value by up to 15 percent.
If you are leaving your worldly goods to your spouse and children, it is obvious that you want them to benefit from those assets. However, while in Probate, your heirs will not be able to use those assets. Except for a family allowance, they simply have to wait until the final disposition of your estate.
This is even true for investments. The executor will be able to do very little in terms of buying or selling any investments in your portfolio. Although done to “protect” the assets, these rules keep your executor from making wise decisions based on the current market. If your estate holds stocks in a company that is falling while still in Probate, it is quite likely that your estate will lose money. The same is true in reverse. If it is a good time to buy, your executor may be constrained from doing that, thus causing your heirs to lose out on potential profits.
There is nothing private about Probate. Everything that you have and everything that you owe can be found at your local courthouse. Once the Will is Probated with the surrogate court anyone can view your Will and other personal information. Opportunists have been known to scour over recently probated estates looking for people to con. Having your estate in Probate leaves your loved ones open to this kind of abuse.
Ability To Contest
Anyone can contest a Will that is in Probate—absolutely anyone. It can be a family member that is not happy with the way your assets were distributed, it can be a creditor claiming you owe more money, or it can just be someone who is hoping to con your heirs into selling off your assets cheaply. The cost of defending a contested Will can be quite expensive. The options for your loved ones are to either settle, thereby getting less than you intended, or fighting in court and getting less than you intended due to the additional lawyer fees and court costs.
Having a Will is far better than dying intestate and for some a Will is an effective estate planning tool, However, for many people, a Living Trust is a better option.