When many folks think of getting their affairs in order, they imagine that a will is the centerpiece of estate planning. Probate laws throughout the United States reflect this thinking, too—when a person dies, it is either “testate” (with a will) or “intestate” (without a will), and state law determines what happens in the latter scenario.
Conventional wisdom has evolved to include trusts, a popular and useful estate-planning device, because a will might not be enough for your final affairs. The best estate-planning approach for you depends on your assets and goals.
You already have an estate plan.
Even if you have never thought about what happens to your assets after you die, you already have an estate plan. The state where you live has a set of laws that determines who receives your assets by default if you die without leaving instructions. State law determines your heirs based on whether you have a surviving spouse, children, parents, siblings, and other relatives. If you have a will that does not cover all your assets, any non-covered assets go to the default heirs under state law.
Default distribution, however, is not automatic. Someone will still have to ask a court to be named administrator of your estate so they can gather your assets, pay your liabilities, and then distribute any leftovers. Probate can be time-consuming and expensive, and it is generally unwise to attempt to navigate this process without the assistance of a qualified attorney.
Your “estate” is all the assets you own when you die.
Your “heirs” are the folks who receive (i.e., inherit) portions of your estate.
The “administrator” is the person who manages your estate. It is the same as an executor when there is a will. Some states may also use the term “personal representative.” All these terms are equivalent.
“Probate” is a court-supervised (and thus public!) process of marshaling assets, notifying creditors, paying liabilities, filing taxes, distributing any remaining assets, and otherwise winding up the affairs of a deceased person.
You should still probably have a will.
If you are fine with your state default plan, have no minor children, and do not mind saddling your loved ones with the burden of going through probate after you die, then you do not need a will. Otherwise, you do.
This means you should still probably have a will. First, you should not rely on your state default plan because state plans change based on the whims of your state legislature. Plus, specifying your wishes in writing will prevent your loved ones from wondering what you really intended or would have wanted if you had gotten around to organizing your affairs. Second, you need a will to designate intended guardians for your children in the event there is no surviving parent. Otherwise, relatives may have competing ideas about what is in the best interests of the children, and ultimately a judge will have to decide. Make those decisions yourself rather than leaving them to someone else. Finally, probate is much more streamlined if you die with a will. Just make sure someone can find it!
Besides nominating guardians for your children, the primary reason to have a will is deviating from the state default plan. With a will, you can generally leave your assets to whomever you wish in whatever fashion you choose. Want to disinherit (i.e., leave no money to) a child or other relative? Will. Want to leave money to your pet or a particular charity? Will. You get the idea.
Even if you have a will, some of your relatives may be entitled to a certain portion of your estate. However, you can generally disinherit anyone you wish, without needing their consent, other than a surviving spouse.
If you have a surviving spouse and/or children, it is best to name them in your will, even if you are disinheriting them. Naming them prevents any arguments that you simply forgot about them when writing the will and really intended to include them. Avoid the fight before it starts!
Do not list a bunch of relatives and give them $1 each—a popular gimmick to show that you intended to effectively disinherit them—because then your executor will need to go through the hassle of tracking them down. Simply list the people you wish to disinherit and say they get zero.
You generally do not need to specifically name anyone besides a spouse and children.
A will might not be enough.
With all the benefits of a will, there are still some important shortcomings to consider.
First and foremost, a will does not avoid probate. Even if your will is streamlined and airtight, your executor will still need to spend time and money following your instructions in a very public process. If you want to save time and money, and prevent your assets from becoming public knowledge, consider a trust. (More on that below.)
Second, a will does not cover assets with beneficiary designations. If your term life insurance policy, brokerage or bank account, or retirement plan specifies who will receive those funds after your death, they will pass according to those terms, not any terms of your will. This bears repeating: Your will does not override any beneficiary designations, regardless of timing, even if there has been an intervening death or divorce.
If you are going through a divorce, make sure your decree states you have the right to change beneficiary designations, and do so as soon as it becomes final.
If you want to distribute any of these accounts according to your will, simply designate your estate as the beneficiary or decline to designate beneficiaries altogether. But be aware of potential tax consequences for doing so. (Working with an attorney who is also a tax expert is a great choice when formulating your estate plan!)
While the notion that a will does not impact beneficiary designations sounds like a drawback, it can be a benefit. Writing a will is simple if most of your assets can automatically go to designated beneficiaries.
Assets that pass via beneficiary designation skip probate. The beneficiary simply presents a death certificate to the custodian (for example, a bank or brokerage) to receive the funds.
If enough assets pass via beneficiary designation, your “probate estate”—the portion of your estate that must go through the court-supervised probate process—may be very small. If it is small enough, it might even qualify for small-estate procedures, and your heirs could obtain the assets by filing affidavits rather than going to court.
Another corollary to the point about beneficiary designations is that some assets cannot pass that way. For example, transfer-on-death deeds for real estate are available in a growing number of states. They work just like pay-on-death beneficiary designations for bank and brokerage accounts but apply to real estate. However, they are not available in most states today. (Hopefully that will change!) Assets that cannot have a beneficiary designation, or can but do not, will need to pass some other way (i.e., by will or trust).
A trust is a powerful estate-planning device.
Even though you can use a will to specify your heirs in any manner you choose, you might not want to put your loved ones through the time and expense of probate. A revocable living trust is a great tool to accomplish the same objectives, but without the extra hurdle of probate.
With a revocable living trust, the trust itself actually owns the assets, and the trustee manages those assets according to the instructions contained in the declaration of trust.
The “grantor” or “settlor” is the person creating the trust. A trust can have more than one grantor; the most common example is when married couples create a joint trust.
A trust is created when the grantor signs a document called the “declaration of trust” (also known as the “trust instrument” or “trust agreement”) containing instructions for managing the trust.
The “trustee” is the person(s) or entity(ies) managing the trust. A grantor can, and often does, name themself as trustee. If the grantor is the trustee, a successor automatically assumes the role of trustee upon the grantor’s death—similar to an executor taking charge of an estate.
As the name suggests, a revocable living trust is created while the grantor is alive, and can be revoked or changed at any time. This type of trust allows the grantor to retain control over their property while they are alive. Once the grantor dies, the trust becomes irrevocable and cannot be amended, and the trustee then distributes the assets according to the terms of the trust.
Another benefit of a revocable living trust is potentially allowing someone else to manage your assets—for example, if you become incapacitated—even while you are still alive.
A power of attorney is another way to allow someone else to manage your affairs. These can be designed to be effective immediately, upon some future event such as incapacity, or both. There are many options available. Reach out to me for help!
If the main reason for having a trust is to allow someone else to manage your affairs, and there would not be probate anyway, a power of attorney is probably enough.
However, because a revocable living trust allows the grantor to maintain control over their assets, this type of trust does not protect assets from creditors or a potential Medicaid claw back after your death. There are other options available, including different types of trusts, for accomplishing those goals, but they all involve relinquishing control to various degrees and are beyond the scope of this article.
Because you maintain control over your assets when they are placed in a revocable living trust, for tax purposes (and all other practical purposes!) the trust is disregarded, and you are treated as if you own the assets directly.
You still need a will, even if you have a trust.
You still need a will, even if you have a trust, for one simple reason: some assets might not be part of your trust. Make sure that assets intended for trust treatment actually get “into” the trust! There are many different ways to make sure your assets are part of your trust, and those ways typically vary by the type of asset, so be sure to work with your estate planner.
My will is what is known as a “pour-over” will. It essentially states that all assets subject to my will (for whatever reason) go to my revocable living trust. That way, they become subject to my trust via my will. If any assets have to go through probate, all the court needs to know is that they go to my trust. Nobody besides the beneficiaries will know what happens afterwards.
Putting it all together.
You should have your own estate plan rather than simply following the state default scheme. A trust offers additional benefits—chief among them probate avoidance—beyond just a will. But even if you have a trust, you need a will to nominate guardians for your minor children and to serve as a backup to ensure that you get trust treatment for your assets. Finally, there are different planning devices available to accomplish other goals. Work with a trusted estate planner to develop an approach that will meet your needs and protect your loved ones!
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