Planning Your Estate
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LIVING TRUSTS

WILLS

YOUR ESTATE AND TAXES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
Planning Your Estate
Q.   Just what is probate?

  

 A.  Probate is the legal process of paying the deceased's debts and distributing the estate to the rightful heirs. This process usually entails:
  • The appointment of an individual by the court to act as "personal representative" or "executor" of the estate. This person is often named in the will. If there is no will, the court appoints a personal representative, usually the spouse.
  • Proving that the will is valid.
  • Informing creditors, heirs, and beneficiaries that the will is probated.
  • Disposing of the estate by the personal representative in accordance with the will or state law.

The spouse or personal representative named in the will must file a petition with the court after the death. There is a fee for the probate process.

Depending on the size and complexity of the probable assets, probating a will may require legal assistance.

Assets that are jointly owned by the deceased and someone else are not subject to probate. Proceeds from a life insurance policy or Individual Retirement Account (IRA) that are paid directly to a beneficiary are also not subject to probate.

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Planning Your Estate
Q.   What is a living trust?

  

 A.  A trust, like a corporation, is an entity that exists only on paper but is legally capable of owning property. A flesh-and-blood person, however, must actually be in charge of the property; that person is called the trustee. You can be the trustee of your own living trust, keeping full control over all property legally owned by the trust.

There are many kinds of trusts. A "living trust" (also called an "inter vivo" trust by lawyers who can't give up Latin) is simply a trust you create while you're alive, rather than one that is created at your death under the terms of your will.

All living trusts are designed to avoid probate. Some also help you save on death taxes, and others let you set up long-term property management.

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Planning Your Estate
Q.   Do I need a living trust?

  

 A.  You may want to consider a living trust as a way to avoid probate. If you don't take steps to avoid probate, after your death your property will probably have to detour through probate court before it reaches the people you want to inherit it. In a nutshell, probate is the court-supervised process of paying your debts and distributing your property to the people who inherit it.

For sizable estates, months can pass before full distribution is msde to inheritors. During the process, some of the property will be spent on lawyer, executor and court fees. The exact amount will depend on state law and local practices.

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Planning Your Estate
Q.   How does a living trust avoid probate?

  

 A.  Property you transfer into a living trust before your death doesn't go through probate. The successor trustee--the person you appointed to handle the trust after your death--simply transfers ownership to the beneficiaries you named in the trust. 

In many cases, the whole process takes only a few weeks, and there are no lawyer or court fees to pay. When the property has all been transferred to the beneficiaries, the living trust ceases to exist.

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Planning Your Estate
Q.   Is it expensive to create a living trust?

  

A.  The expense of a living trust comes up front. Many lawyers would charge relatively little for drafting your will, in hopes of getting your estate later as a client. They may charge more for a living trust.

Some people have chosen to use a self-help book or software program, to create a Declaration of Trust (the document that creates a trust) yourself. They may consult a lawyer if they have questions that the self-help publication doesn't answer. But there's always the danger of problems they don't see, that a lawyer could help avoid if consulted.

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Planning Your Estate
Q.   Is a trust document ever made public, like a will?

  

 A.  A will becomes a matter of public record when it is submitted to a probate court, as do all the other documents associated with probate--inventories of the deceased person's assets and debts, for example. The terms of a living trust, however, need not be made public.

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Planning Your Estate
Q.   Does a trust protect property from creditors?

  

 A.  Holding assets in a revocable trust doesn't shelter them from creditors. A creditor who wins a lawsuit against you can go after the trust property just as if you still owned it in your own name.

After your death, however, property in a living trust can be quickly and quietly distributed to the beneficiaries (unlike property that must go through probate). That complicates matters for creditors; by the time they find out about your death, your property may already be dispersed, and the creditors have no way of knowing exactly what you owned (except for real estate, which is always a matter of public record). It may not be worth the creditor's time and effort to try to track down the property and demand that the new owners use it to pay your debts.

On the other hand, probate can offer a kind of protection from creditors. During probate, known creditors must be notified of the death and given a chance to file claims. If they miss the deadline to file, they're out of luck forever.

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Planning Your Estate
Q.   Do I need a trust if I'm young and healthy?

  

 A.  Probably not. At this stage in your life, your main estate planning goals are probably making sure that in the unlikely event of your early death, your property is distributed how you want it to be and, if you have young children, that they are cared for. You don't need a trust to accomplish those ends; writing a will, and perhaps buying some life insurance, would be simpler.

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Planning Your Estate
Q.   Can a living trust save taxes?

  

 A.  A simple probate-avoidance living trust has no effect on either income or estate taxes. More complicated living trusts, however, can greatly reduce your federal estate tax bill if you expect your estate to owe estate tax at your death. Professional guidance is needed to set up such trusts.

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Planning Your Estate
Q.   What happens if I die without a will?
  A.  If you don't make a will or use some other legal method to transfer your property when you die, state law will determine what happens to your property. (This process is called "intestate succession.") Your property will be distributed to your spouse and children or, if you have neither, to other relatives according to a statutory formula. 

If no relatives can be found to inherit your property, it will go into your state's coffers. Also, in the absence of a will, a court will determine who will care for your young children and their property if the other parent is unavailable or unfit.

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Planning Your Estate
Q. Can I just make a handwritten will if I don't have much property?

  

 A.  Handwritten wills, called "holographic" wills, are legal in about 25 states. To be valid, a holographic will must be written, dated and signed in the handwriting of the person making the will. Some states allow will writers to use a fill-in-the-blanks form if the rest of the will is handwritten and the will is properly dated and signed.

If you have very little property, and you want to make just a few specific bequests, a holographic will is better than nothing if it's valid in your state. But generally, we don't recommend them. Unlike regular wills, holographic wills are not usually witnessed, so if your will goes before a probate court, the court may be unusually strict when examining it to be sure it's legitimate. It's better to take a little extra time to write a will that will easily pass muster when the time comes.

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Planning Your Estate
Q.   Do I need to file my will with a court or in public records somewhere?

  

 A.  No. A will doesn't need to be recorded or filed with any government agency, although it can be in a few states. Just keep your will in a safe, accessible place and be sure the person in charge of winding up your affairs (your executor) knows where it is.

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Planning Your Estate
Q.   Can I use my will to name somebody to care for my young children
in case my spouse and I both die suddenly?

  

 A.  Yes. If both parents of a child die while the child is still a minor, another adult--called a "personal guardian"--must step in. You and the child's other parent can use your wills to nominate someone to fill this position. To avert conflicts, you should each name the same person. If a guardian is needed, a judge will appoint your nominee as long as he or she agrees that it is in the best interest of your children.

The personal guardian will be responsible for raising your children until they become legal adults. Of course, you should have complete confidence in the person you nominate, and you should be certain that your nominee is willing to accept the responsibility of raising your children should the need actually arise.

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Planning Your Estate
Q.   What happens to my will when I die?

  

 A.  After you die, your executor (the person you appointed in your will) is responsible for seeing that your wishes are carried out as directed by your will. He or she may hire an attorney to help wind up your affairs, especially if probate court proceedings are required.

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Planning Your Estate
Q.   What if someone challenges my will after I die?

  

 A.  Very few wills are ever challenged in court. When they are, it's usually by a close relative who feels somehow cheated out of his or her rightful share of the deceased person's property.

Generally speaking, only spouses are legally entitled to a share of your property. Your children aren't entitled to anything unless you unintentionally overlooked them in your will.

To get an entire will invalidated, someone must go to court and prove that it suffers from a fatal flaw: the signature was forged, you weren't of sound mind when you made the will or you were unduly influenced by someone.

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Planning Your Estate
Q.   What instructions should I give my survivors about funeral ceremonies
and the disposition of my body?

  

 A.  Letting your survivors know your wishes saves them the difficulties of making these decisions at a painful time. And many family members and friends find that discussing these matters ahead of time is great relief -- especially if a person is elderly or in poor health and death is expected soon.

Planning some of these details in advance can also help save money. For many people, death goods and services cost more than anything they bought during their lives except homes and cars. Some wise comparison shopping in advance can help ensure that costs will be controlled or kept to a minimum.

If you die without leaving written instructions about your preferences, state law will determine who will have the right to decide how your remains will be handled. In most states, the right -- and the responsibility to pay for the reasonable costs of disposing of remains -- rests with the following people (in the order shown):

  • Spouse
  • Children
  • Parents
  • The next of kin, or
  • A public administrator (who is appointed by a court).

Disputes may arise if two or more people--the deceased person's children, for example--share responsibility for a fundamental decision, such as whether the body of a parent should be buried or cremated. But such disputes can be avoided if you are willing to do some planning and to put your wishes in writing.

What you choose to include is a personal matter, likely to be dictated by custom, religious preference or simply your own whims. A typical final arrangements document might include:

  • The name of the mortuary or other institution that will handle burial or cremation
  • Whether or not you wish to be embalmed
  • The type of casket or container in which your remains will be buried or cremated, including whether you want it present at any after-death ceremony
  • The details of any ceremony you want before the burial or cremation
  • Who your pallbearers will be if you wish to have some
  • How your remains will be transported to the cemetery and gravesite
  • Where your remains will be buried, stored or scattered
  • The details of any ceremony you want to accompany your burial, interment or scattering, and
  • The details of any marker you want to show where your remains are buried or interred.

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Planning Your Estate
Q.   Will my estate have to pay taxes after I die?

  

 A.  It depends. The federal government imposes estate taxes at your death only if your property is worth more than a certain amount based on the year of death—an amount rising from $675,000 in 2001 to $1 million after 2005. But there are a couple of important exceptions to the general rule. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And estate taxes won't be assessed on any property you leave to a tax-exempt charity.

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Planning Your Estate
Q.   Do states also impose death taxes?

  

A.  All states impose death taxes of some kind. In most cases, there's a state death tax only where a federal estate tax would apply. The state tax is credited dollar for dollar against the federal tax so the state tax is not an extra tax. Such states are therefore sometimes said to have "no" death tax.

However, some states impose taxes that operate as extra taxes. These taxes are of two types: inheritance taxes and estate taxes.

Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you. For example, Nebraska imposes a tax on a sliding scale up to 15% tax if you leave $25,000 to a friend, but only 1% if you leave the money to your child. But tax rates vary from state to state. If you live in Connecticut, your child wouldn't owe any taxes on a $25,000 inheritance, but your friend would owe a tax.

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Planning Your Estate
Q.   How can I minimize federal estate taxes?

  

 A.  There are various ways. One way is to leave your children, directly or in trust, an amount up to the estate tax exemption amount ($675,000 in 2001) and the balance to your spouse.

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Planning Your Estate
Q.   Can I avoid paying state death taxes?

  

A.  In most states that base their death taxes on the federal estate tax, steps that avoid federal tax also avoid state tax. If your state imposes some other kind of death tax, your professional advisor can help minimize the state tax by actions specifically adapted to that tax.

If you live in two states—winter here, summer there—your inheritors may save on death taxes if you can make your legal residence in the state with lower death taxes or no death taxes beyond the federal tax.

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Planning Your Estate
Q.   Can I just give all my property away before I die and avoid
estate taxes?

  

 A.  No. The government long anticipated this one. If you give away more than $10,000 per year to any one person or non-charitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax.

There are, however, a few exceptions to this rule. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $100,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.

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