When it comes to the possessions you’ve worked hard to gain through the the course of your life, the old adage is true “You can’t take it with you when you go”.  But, you can determine what happens to your property after you die.  In fact a good estate plan can ensure that you have full control your assets from beyond the grave.

If you are married and leaving all of your assets to your spouse estate and gift tax law in the United States allows for an unlimited passing of assets to a spouse without incurring estate and gift tax penalties.  The problem with estate planning comes in when assets  pass from one generation to the next.

There are generally two modes by which property a decedent controls what happens to his estate, wills and trusts. But what’s the difference between the two?  How do they work?  And How do I determine which one works for me?

For the purpose of this article, we will discuss the types of estates that cover most situations.  For the wealthy (generally estates worth over $2million-$5million), a large estate creates a different set of considerations, and a future post will address these issues.

Wills

A will is a legally enforceable document that states how you want to settle your affairs when you die.  Wills often address how the decedent wishes to handle their funeral, their final remains, and their assets.  If the decedent has minor children, a Will also addresses guardianship of those minor children.  Most important for this article, a Will directs the appointment of the executor who is responsible for handling the estate, and provides instructions for the executor on how the estate is to be distributed.  However the appointment of an executor is subject to a judge’s approval.

Wills are generally very flexible, in that the decedent has a large amount of liberty as to how they wish the executor to handle their estate.  However, some state specific restrictions on how an estate may be distributed may hamper the situation.  For example, in most states if the decedent wishes to disinherit an heir, they must specifically do so in writing.  Furthermore, most states do not allow a husband to disinherit a spouse.

Anyone considering a Will based estate plan must consider several drawbacks.  With few exceptions,(Pour-through Wills into a trust, Wills on estate plans that are less than a certain value. ex- in Illinois estates less than $100,000.00 in value) Wills must go through the probate process.  Probate is a legal system where the local court monitors the distribution of an estate.  This creates a hassle for everyone administering the estate.  Furthermore, when putting an estate through probate, the heirs must hire an attorney to represent the estate.  The probate process is a matter of public record, allowing for anyone (especially possible creditors) access to information concerning the estate. Hiring an attorney to probate an estate can be very expensive, at minimum 2 to 4 percent of the total value of the estate.

Trusts

A trust is a document that creates a fiduciary relationship between a trustee and a beneficiary.  There are many types of trusts that are established for many reasons.  For the purpose of this article we will focus on the most common type of trust for estate planning, the revocable living trust.

A revocable living trust has two key qualities. The grantor has the full ability to revoke or modify the trust.  The grantor creates the trust while they are still alive.  A revocable trust has a large amount of flexibility and is used in the same manner as a will, to address how the decedent wishes their estate to be handled after they pass.  Unlike a Will, a trust can be used to disinherit a spouse of non-marital assets.  This is especially important in the case of second marriages, where children from first marriages are involved.

The key operational difference between a will and a trust is that a trust technically transfers assets to the trust while the grantor is still alive.  Meanwhile, the grantor remains in full control of all of the trust assets while he is alive, so in a practical sense, it is as if they were never transferred to begin with.  Because of this, an estate plan that is built on a trust avoids the estate from going through the probate process, meaning no need to get the courts involved or to hire an attorney to probate the estate.

Instead of an an executor approved by the court, a trust based estate plan is administered by a trustee appointed in the trust documents themselves.  Since the court is not involved, the process is entirely private and is handled internally amongst the parties.

How do I know which is best for me?

The most important reason to choose a trust based estate plan over a Will is to avoid probate.  Probate is an expensive and time consuming process, and decedents heirs may spend months organizing and reporting assets to the court before they can be approved by the judge for distribution.  Often times the process itself creates disputes amongst the heirs which further complicates the issues.

A trust based estate plan avoids those problems generally because that the trust document already transfers the assets to the trust.  As a result, no need to probate the estate.

Sometimes probate cannot be avoided even in a trust based estate plan, in particularly if one of the beneficiaries of the trust wishes to challenge how the trust distributes the estate’s assets.  If that happens, the heir can still file a probate action in court, however most courts give a heavy amount of deference to the trust.  The petitioner must show that the trust document was drafted under undue influence from someone who benefitted from the trust.

Another factor is the value of the estate plan.  In Illinois for example, an estate worth less than $100,000.00 does not need to be probated.  Property from the estate can be distributed through a small estate affidavit.  This size factor varies from state to state, so it is important to hire estate planning attorney  to make the determination as to whether the estate avoids probate by virtue of size.

Generally, in Illinois, estates where the value exceeds $100,000.00 should be put into a trust, particularly if children and real estate are involved.

Next Steps?

M2M Legal is the best tool you have to help put together your estate plan.  Through a conversation with Law Bot, our attorneys can best determine whether you need a revocable living trust, or if a Will based estate plan will suffice.  It only takes a few minutes to get the process started.