Wills and Trusts

Thinking about our own demise is probably not one of those things that’s at the top of our to-do list. But by drawing up a will, we can control what happens to our children and possessions when we are gone. Otherwise, if you don't have a will in place before your death, state law will determine who gets your property and a judge may decide who will care for your children. So while some treat drawing up a will with trepidation, it’s actually not that hard to put together. And once it’s in place, you’ll be comforted with the notion that you have made these decisions yourself.

Basic Wills

For the most part, if you are under age 50, are in good health and don't expect to leave assets valuable enough to be subject to estate taxes (approximately $1.5 million in assets), a basic will may be all you need. For example, let’s say you are a husband and wife that want to leave your property to each other or, if you both die together, to your children in equal shares. And let’s say that you want to name a personal guardian for your children. In this situation, you can make a will yourself without hiring a costly expert.

The Probate Process

If you leave anything more than a small amount of property in a will, probate court will probably be necessary after your death. Probate is the process of proving the validity of the will in the court and managing the administering and distribution to the heirs. While the actual process varies by state, probate can take up to year or more, and eat up three to five percent of your estate in lawyers' and court fees. The beneficiaries of your will normally get little or nothing until probate is complete.

If you've got a life partner but no marriage certificate, a will is a must-have document. Without a will, state law will dictate where your property goes after your death, and unmarried partners get nothing. (The only exceptions are California, Hawaii, Maine, and Vermont, where surviving registered domestic partners can inherit just like surviving spouses.) Instead, your closest relatives will inherit everything.

Another option to make sure that your partner isn't left out in the cold after your death is to own big-ticket items, such as houses and cars, together in "joint tenancy" with right of survivorship. Then, if one of you dies, the survivor will automatically own 100% of the property.

Having children makes things a bit more complicated. You should have a basic will that documents who will get your property and who will be a guardian for your children. The guardian will take over if both you and your spouse are unavailable. While that's an unlikely scenario, it’s worth addressing. Without a named guardian, a court will appoint someone, possibly one of your parents. The other big reason to write a will is that if you don't, some of your property may go not to your spouse, but directly to your children. The problem with the children inheriting directly is that the surviving parent may need to get court permission to spend or invest the money.

As you acquire more assets, you may want to put in place more sophisticated planning.  If one of the following applies to your situation, then you probably need something more than a basic will:

• You expect to owe estate taxes when you or your spouse dies.
• You have a child with a disability or other special need
• You have children from a prior marriage and you fear conflict between them and your current spouse.

If you've accumulated some wealth, you will probably want to take some time to determine who you will leave your possessions to. To save your family the cost (and hassles) of probate court proceedings, think about creating a revocable living trust. It's as easy to put together as a will, and lets everything go directly to your heirs after your death without taking the expensive and time consuming process of probate. While you're alive, the trust has no effect, and you can revoke it or change its terms at any time. But after your death, trust property can be transferred quickly, according to the directions you left in the trust document.

If you have enough property to worry about federal estate taxes, think about tax avoidance as well. Currently, estates worth more than $2 million are taxed and for the largest estates, the marginal rate can be as high as 46%.

Trusts can be used to reduce taxes. Many couples use an AB trust to leave property to each other for life, and then to their children. The surviving spouse can spend trust income and, in some circumstances, principal. An AB trust can shield up to twice the exempt amount from estate tax.

A trust is an arrangement under which one person, called a trustee, holds legal title to property for another person, called the beneficiary. You can be the trustee of your own living trust, keeping full control over all property held in trust. A "living trust" is a trust you create while you're alive. Living trusts help you avoid probate and/or reduce estate taxes. The big advantage is that property left through the trust doesn't have to go through probate court. Instead, the successor trustee (the person you appoint to handle the trust after your death) transfers ownership to the beneficiaries named in the trust. In many cases, the whole process takes only a few weeks, and there are no lawyers or court fees. When all of the property has been transferred to the beneficiaries, the living trust terminates.

While it is possible to create a basic living trust yourself, lawyers can draw up a basic trust  for about $1,500 or so. This is money well spent, as they can help you navigate the waters and get all the appropriate paperwork put in place.

Does a Living Trust Replace a Will?

A will is essentially a back-up device for property that you don't transfer to yourself as trustee. For example, if you acquire property shortly before you die, you may not have had time to transfer ownership of it to your trust. But in your back-up will, you can include a clause that names someone to get any property that you haven't left to a particular person or entity.

If you don't have a will, any property that isn't transferred by your living trust will go to your closest relatives in an order determined by state law, which may be different than you would have chosen.

A simple living trust has no effect on taxes. More complicated living trusts, however, can greatly reduce the federal estate tax bill for people who own a lot of valuable assets. One common tax-saving living trust is called an AB trust, (also called "credit shelter trust," or "marital bypass trust.”) Each spouse leaves property, in trust, to the other for life, and then to the children. This type of trust can save up to hundreds of thousands of dollars in estate taxes, money that will be passed on to the couple's heirs.

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